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Spot gold added another 1.8% overnight, and the yen strengthened 0.4%. Better US data increases the likelihood of Fed rate hikes in the second half of the year, which should impact demand for both these two assets. Despite the rally, investors are clearly still happy to pay up for hedges in case we see another unwind.
Investors will have breathed a sigh of relief after the ISM non-manufacturing PMI was almost unchanged at 53.4 from 53.5 in January. The ISM is far more established and reliable, and the Markit Services PMI, which had a final read of 49.7, was very much at odds with the strong employment growth and retail sales that we’ve seen. The pattern we are seeing in the two ISM PMIs is looking increasingly similar to that of 1998, where the manufacturing PMI fell away on USD strength associated with the Fed rate hiking cycle and safe-haven flows associated with the Asian Financial Crisis, but domestically-focussed services held up. In prior recessions, as in 2001 and 2008, the manufacturing and non-manufacturing PMIs declined in conjunction, which looks unlikely to occur at this juncture. At least one rate hike by the Fed, maybe even two, before the year is out seems increasingly likely. The dollar index and US government bond yields both look set to end the year higher. This should lead to an outperformance for US and Australian banks against their European and Japanese counterparts that are struggling under negative interest rates.
Markets will still be waiting for the all-important non-farm payrolls number this evening, but a number above 150,000 should be enough for a clean sweep of non-recessionary US data this week.
Australian retail sales are out today, and given the strong performance by consumption in Q4, GDP figures will be analysed quite carefully to see if the gains will continue into 1Q. The Aussie dollar is now trading at its highest level for 2016 and even a miss on the retail sales number today is unlikely to halt its rise. When we look back over the past couple of months, big falls in the Aussie dollar have largely been precipitated by China concerns. The quiet market reaction to disappointing Chinese data is good for the Aussie in the short term, but markets are unlikely to forget that the second biggest economy in the world is slowing and dramatically battling a very delicate deleveraging.
Nonetheless, it is looking like another positive day in Asia. With a strong performance by BHP’s ADR overnight, the ASX 200 is looking to open in positive territory, driven by gains in financials and materials. The buying in the yen is weighing down the Nikkei ahead of the open, but a similar scenario was reversed during trade yesterday. Chinese markets look to open in positive territory, and no doubt expectations will be quite high for an announcement of significant further fiscal spending from China’s National Party Congress over the weekend.