Originally published by Rivkin Securities
The US Dollar Index edged lower on Thursday, down just -0.05% as treasury yields declined as both the two-year and 10-year yield decreased -1.6 and -2 basis points respectively. US equity markets also pulled back from all-time highs as both the S&P 500 and Nasdaq 100 closed -0.22% and -0.13% lower respectively, although the S&P 500 managed to close well above the session lows having initially declined as much as -0.75%. Short-term strength is often followed by short-term weakness and it is likely that Thursday session saw some profit taking by investors after touching record highs.
On the data front US producer prices rose +2.5% (YoY Apr) compared with estimates for a +2.2% increase and +2.3% prior reading. A core measure which excludes food and energy rose +1.9% topping estimates to remain unchanged at +1.6%. Producer prices are a leading indicator for inflation, generally by around 1-2 months given the delay as changes at the factory gates take time to feed through to consumers. This relationship is highlighted on the first chart below which compares headline producer prices against the headline personal consumption expenditure index, which is the Fed’s preferred gauge of inflation.
The rise in producer prices is supportive that a slowdown in Q1 is likely temporary and bodes well for the FOMC as they look towards hiking rates at the June 14th meeting. Tonight we’ll get a look at consumer prices, weekly earnings and retail sales which are all due to be released at 10:30pm AEDT.
Also supportive for the FOMC continuing to gradually raise interest rates the U.S. labour market continues to tighten with the number of continuing jobless claims in the U.S. dropping to a 28 year low. The number decreased to 1.918 million from 1.979 for April 29th and initial claims were 236,000 for May 6th, remaining below the 300,000 which is considered consistent with full employment, for the 114th week straight.
The pound dropped after the Bank of England kept interest rates unchanged at +0.25% as widely forecast. The FTSE 100 index closed flat, up just +0.02% while the Pound decreased -0.43% and UK bond yields were little changed with both the two & ten-year down -1.5 & -0.5 basis points respectively.
In the accompanying quarterly inflation report the bank estimated inflation will rise to +2.7% for the second quarter of 2017, compared with the prior estimate of +2.4%. For Q2 2018 inflation projections were revised lower to +2.6% from +2.8% previously as was 2019 at +2.2% from +2.5% prior. The weakness in the Pound came as market implied expectations for a rate hike were pushed back to the final quarter of 2019 when compared with the February inflation report that implied a rate hike would occur by the first quarter of 2019.
Locally the S&P/ASX 200 index finished relatively unchanged, up just +0.05% and this morning we can expect to open on a slightly weaker note with ASX SPI200 futures down -9 points in overnight trading.
Data releases:
· German GDP (QoQ & YoY Q1) 4:00pm AEDT
· German CPI (MoM & YoY Apr) 4:00pm AEDT
· US CPI, Weekly Earnings, Advanced Retail Sales (MoM & YoY Apr) 10:30pm AEDT
· University of Michigan Confidence Survey (MoM May) 12:00am AEDT
Chart 1 – US PPI Vs. U.S. PCE Inflationart 2 – GBP/USD & UK Core Inflation
Source: Rivkin, RivkinTrader