The US dollar was firmer against all the majors with a stronger than expected CPI and comments by Janet Yellen underpinning the greenback. Core CPI for April was a touch better than expectations, helped by a jump in medical care costs. Fed chair Janet Yellen said lift-off is still likely to be this year but she remained cautious on the economic recovery. Yellen wants to see further improvement in the labour market although she acknowledged it is approaching full strength. Concerns around Q1 were attributed to a variety of transitory factors that occurred at the same time including weather and disputes at ports on the West Coast. This helped calm some concerns the Q1 sluggishness will stick around for longer. Continued improvement in the labour market and confidence that inflation will move back to 2% over the medium term will be key to initiate policy normalisation. It’s also becoming clear that for us to get gradual tightening then perhaps the sooner this commences the better. Rapid normalisation would certainly be undesirable for markets.
Stronger USD underpins
Gains for the greenback against the yen and AUD have played a big role for equities in Asia. USD/JPY is making its way towards the ¥122.00 handle and this has helped the Nikkei extend its gains. A better than expected April trade balance reading also got some attention as Japan’s exports maintain an upward trajectory. While exports for other regional players like China, Korea and Taiwan have been dropping off, the weaker yen has seen Japan re-emerge as a power house. Exports were up 8% and that was much better than an expected +6%. No doubt this will be giving Japan’s corporates a nice tailwind. Meanwhile, it’s been one-way traffic for Chinese equities with gains of over 2% for the CSI and Shanghai Composite. The ASX 200 has also picked up on the positive sentiment across the region helped by renewed weakness in AUD/USD. Despite all the talk about diminishing payback ratios for the banks, investor confidence has been fairly strong today. A slight negative is volume hasn’t been great. An interesting point though is the fact three of the big four banks are now yielding close to 6% while one of them is just under 5%. As a result, at some point investors will be happy to buy these stocks, particularly heading into the end of the financial year. Any adverse changes to investment property lending could also be a factor driving investors towards yield plays. Iron ore plays have responded positively to a bounce in the commodity and to a weaker AUD.
Euro on Greece alert
Most of the major global markets are closed today for various holidays and the few that are trading are in for a lacklustre start. Data is also limited as a result. EUR/USD was one of the more interesting pairs to watch as a combination of a stronger greenback and weaker euro saw it drop to a one month low. There is plenty of talk around Greece at the moment and with €1.6 billion worth of payments over four tranches due in June, traders will be on high alert. A close below $1.1000 could encourage further selling pressure in the near term. Fresh euro weakness would likely encourage buying in equities.