Markets zero in on June rate hike
Political factors grabbed the focus again after Theresa May attacked Brussels bureaucrats, increasing market concerns of antagonistic negotiations. A tough bargaining stance from the EU would make it much more difficult to secure an acceptable deal which could undermine the economy.
UK construction PMI’s rose to 53.1 for April, up from 52.2 in March and beating consensus forecasts, although the impact was limited. Sterling failed to break the 1.2950 mark against the Dollar, dipped below 1.2900 following the Fed statement while the Euro edged above 1.1830.
Political tensions are likely to be overshadowed today given UK local elections. The services-sector PMI data will be important for sentiment surrounding the economic outlook.
US ADP employment data increased to 177,000 for April, as expected, but was accompanied by a modest downward revision for March. There was upward revision to the US PMI services-sector reading to 53.1 from 52.5 the previous month, although the employment data was at the weakest level for over six years. ISM non-manufacturing index printed stronger than expected at 57.5 for April from 55.2 while the weak employment component added to labour-market uncertainty.
As expected, the Fed left interest rates on hold last night. The FOMC downplayed the first-quarter GDP slowdown as “transitory” and the committee remained optimistic over the labour market. The overall economic outlook was considered as roughly balanced. Underlying inflation was still below 2.0%, but had been close to this level over the past 12 months. The overall tone was relatively optimistic and suggested a preference to continue policy normalisation next month. Futures markets indicated that the chances of a June hike had increased to near 74% from 67% previously.
Overall, the Dollar advanced after the statement with the trade-weighted index gained over 0.3% on the day as the Euro dipped below 1.0900. Markets await further data to assess whether the Fed will act in June.
Euro-zone GDP rose 0.5% for the first quarter of 2017 according to the flash estimate, in line with consensus forecasts. While the Eurozone appears to be on solid footing, economic growth is not likely to break out any time soon.
Politically, there was no significant shift to Macron’s 20 point lead in the French Presidential election opinion polls ahead of the latest TV debate. A comfortable win for Macron looks to be largely priced in according to CFTC positioning data.
Data to Watch:
4:10am AUD RBA’s Governor Philip Lowe Speech. 8:15am EUR SPA Markit Services PMI (Apr). 9:00am EUR Markit PMI Composite (Apr), Markit Services PMI (Apr). 9:30am Consumer Credit (Mar), Mortgage Approvals (Mar). 1:30pm USD Trade Balance (Mar), Initial Jobless Claims (Apr 28), Nonfarm Productivity (Q1), Unit Labor Costs (Q1). 3:00pm USD Factory Orders (MoM) (Mar). 5:30pm EUR ECB President Draghi’s Speech.