Morning comment: FOMC, UK & Aussie PMIs & house prices

Chris Scicluna
Emily Nicol
Mantas Vanagas

Ahead of today’s policy announcement from the Federal Reserve, US equities made little further headway yesterday, with the S&P500 closing up just 0.1% on the day. An upbeat revenue forecast from Apple, however, saw its shares rally in late trading. In the bond markets, early losses – related to yesterday’s upside surprises in euro area GDP and German inflation which likely reflected temporary factors – were reversed later on leaving USTs and Bunds little changed on the day (10Y UST yields around 2.50% and 10Y Bund yields just 0.01%). While most markets in Asia were on holiday today, Australia was at work, and its main equity market made gains (ASX up 0.8%). But ACGBs made gains at the longer end of the curve as the latest economic data highlighted the ongoing marked adjustments in the Aussie housing market. Perhaps inevitably, forex markets saw limited moves.

Looking ahead, most European markets are shut for May Day today and so the economic newsflow from the euro area will be negligible. But, in the UK, the April manufacturing PMIs will be watched for signs of renewed weakness, while Brexit will be back in the spotlight as PM Theresa May makes her first public utterances for a couple of weeks, most notably before the House of Commons Liaison Committee. And in the US, ahead of the FOMC announcement and Jay Powell press conference – which are widely expected to be relatively uneventful – the manufacturing ISM and ADP employment reports will be scrutinsed with Friday’s payroll figures in mind.

While all eyes today should be on the conclusion of the latest FOMC meeting, there seems virtually no prospect of a change in policy settings while the Bank’s ‘patient’ stance is very unlikely to have changed either. Despite the upside surprise to Q1 US GDP (3.2%Q/Q ann.) and strong showing of stock markets since the start of the year, among other things the weaker showing for private consumption and continued restrained nature of inflation (with the core PCE deflator at just 1.6%Y/Y in March) means that the FOMC can take its time to ponder its next moves. Having in March set out its plans for balance sheet normalization – with the pace of reduction of its holdings of USTs slowing from this month and process of reducing its aggregate securities holdings set to come to an end in September – there should certainly be no amendment to its plans in this respect either. But Chair Powell might well be asked about the recent upwards move in the effective fed funds rate, now up to 2.45%, and hence FOMC thinking about the IOER. And certainly, the post-meeting press conference will be watched closely for any hints on the likelihood of near-term policy adjustments.

With respect to US economic releases, after data last week showed GDP growth accelerating more than expected in Q1, attention today will be on various April indicators to assess conditions at the start of the second quarter. Despite yesterday’s steep drop in the Chicago PMI to a more than two-year low of 52.6, the manufacturing ISM is expected to have remained broadly stable at 55.3 in April, broadly in line with the average in Q1 and consistent with ongoing expansion in the sector, albeit below the average in 2018. The final Markit manufacturing PMI report, however, is likely to confirm that the headline index indicated a softer pace of growth, with the flash index having come in at 52.4. April’s auto sales and – ahead of Friday’s official labour market report – ADP employment report will also be watched, with the latter expected to show an increase in private sector payrolls of 180k, a step up from March but just below the average for the year-to-date.

Ahead of next week’s RBA meeting (Tuesday) and monetary policy statement (Friday) today brought the latest monthly house price indices for April, as well as the twin manufacturing PMIs. With respect to the former, CoreLogic suggested that the monthly decline in the median house price across Australia’s capital cities moderated for the fifth consecutive month in April, by 0.2ppt to 0.5%M/M. Nevertheless, this still represented the eighteenth consecutive drop to leave prices down a whopping 8.4%Y/Y. House prices in Sydney were down 10.9%Y/Y, the same pace as in March, and the pace of decline in Melbourne accelerated to 10.0%Y/Y. And with the exception of Canberra, house prices were down on the month in every capital city. Indeed, house prices in Hobart fell for the first time in April, having previously remained remarkably robust during the recent downturn. So, while today’s release might tentatively suggest that overall conditions are starting to move past their worst, there is clearly still ongoing substantial adjustment in the housing market, with CoreLogic indicating that any recovery will no doubt be long-winded. And that continued weakness – and the impact on certain household balance sheets – will no doubt continue to weigh on private consumption for some time to come.

Meanwhile, the message from the twin manufacturing surveys was mixed at the start of the second quarter. For example, the final CBA PMI was nudged down by 0.1pt from the flash estimate to just 50.9, more than 1pt lower than March and its lowest reading in the short time series (starting in May 2016). And the output component fell into contractionary territory (49.7) for the first time since the series began too, with a notable slowdown in order growth too. However, this contrasted markedly with the AiG manufacturing PMI – a longer-standing but highly volatile series – which showed the headline index rising 3.9pts to 54.8, a seven-month high. And the output and new orders components were also up by more than 5pts in April, with the former at its highest level for a year. A better guide to recent business conditions should be provided by the monthly NAB survey due 14 May.

Turning to the UK, following yesterday’s subdued consumer and business sentiment indicators, today will provide more insights into business activity in April with the release of the manufacturing PMIs. In March, the headline manufacturing PMI rose by 3pts to a thirteen-month high of 55.1 as many companies increased production in order to accumulate more stocks ahead of a possible disorderly Brexit. With Article 50 extended until the end of October and companies likely readjusting their production back to more normal levels, the survey will most likely suggest a notable slowdown this month.

Among other economic data, the BoE will release its lending figures for March. Consumer credit growth has eased gradually in recent years and it remains to be seen if that trend gets extended. But the mortgage data seem bound to remain consistent with subdued momentum in the housing market.

According to the BRC Shop Price index released overnight, UK retail prices rose at a softer pace last month. Having been on an upward trajectory since around the middle of last year, the survey reported a drop in inflation in April, from 0.9%Y/Y, which was the highest level in six years, to 0.4%Y/Y. Food inflation eased by 0.3ppt to 2.3%Y/Y, a level still notably higher compared to recent averages, while non-food inflation returned to negative territory, dropping 0.6ppt from zero in March. Against the backdrop of consumers’ reluctance to spend and intense competition among retailers, the survey highlighted a sharp pick up in promotional activity, with a number of discounted product lines more than doubling from the previous month. With yesterday’s GfK survey having shown no improvement in consumer sentiment, retailers are unlikely to see a pickup in demand in the coming months, so we think that increased promotional activity is likely to extend into coming months putting some further downward pressure on retail price inflation.

Meanwhile, the Nationwide house price index, also released this morning, showed a rise of 0.4%M/M in house prices last month leaving them almost 1% higher compared to a year earlier. On an annual basis, house prices at the national level have narrowly avoided deflation in recent months, having slowed to just 0.1%Y/Y in January. Since then growth has inched gradually higher. And with the Article 50 extension having reduced near-term Brexit risks, we might see a little more recovery in housing market activity over the key spring and summer months. However, against the backdrop of continued dysfunctional politics, the end-October Brexit cliff-edge represents a continued source of uncertainty, which is likely to deter many market participants. And while at the national level prices might on average continue to rise, prices in London seem likely to remain in reverse for a while yet.

Euro area:
With many member states celebrating national holidays for May Day, today will be very quiet for economic news with no top-tier data due. However, ECB Vice President Luis de Guindos will speak publicly in London.

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