Market overly pessimistic on US data

Brent crude’s failure to hold above the US$50 level and weak capital goods orders from the US appear to have halted US markets and the dollar overnight.

Source: Bloomberg

Ahead of the open this does not look likely to be a major impediment to the Asian session with most markets set to edge slightly higher at the open. News that Japan’s Prime Minister, Shinzo Abe, has decided to definitively delay the introduction of an April 2017 tax hike is likely to help Japanese markets, with the Nikkei already set to open 0.7% higher despite a slight overnight strengthening of the yen.

The ASX is set to open relatively flat as it looks to achieve seven consecutive weeks of gains. Although BHP’s ADR lost 1% in the US session, while CBA edged 0.2% higher. The iron ore price dropped back below US$50 as well last night. And despite the 0.2% drop in the DXY US dollar index, the materials and energy spaces look in for a difficult day after a very strong performance this week.

The US economic data released overnight was definitely better than the market reaction suggested, both US bond yields and the dollar declined. Certainly, the capital goods orders and the Kansas City regional manufacturing gauge were both disappointing. But pending home sales surged 5.1% month-on-month underlining just how widespread the April strength in the housing market was. Durable goods orders also jumped 3.4% MoM off aircraft orders. The Atlanta Fed’s GDPNow forecast for 2Q lifted to 2.9%.

With the risks from Brexit receding before our eyes, a mid-June hike from the Fed may actually be far higher than the 29% probability the market is currently giving it. The market has a July hike set at a 51% probability. Although a rate hike in June could actually be a reasonable decision as the market has seen plenty of warnings from Fed speakers of late, and the market hasn’t had time to tie itself in knots over the possible implications.

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