Daily Commentary BY THE CURVE TEAM –

Huge 24 Hours: Data, Brexit, Rate Hike and Beige Book

18th of January, 2018

It has been a rather big 24 hours with some solid domestic data getting the ball rolling yesterday. This was followed by more talk of a soft Brexit and growing concerns over the Euro rally. Rounding out the night was the Fed’s beige book, which knocked currency markets around.

The local data yesterday was largely positive with consumer sentiment looking on the up as we enter the new year. The overall confidence index was up in January, with consumer’s expectations over the outlook for the economy the main driving force. While there are still concerns over family finances, consumers are growing more optimistic about job security and employment.

The other major release was the monthly lending statistics, where recent trends continued. Investor lending was up a touch but remains in a solid downtrend as regulatory restrictions continue to weigh. Owner occupier remains around recent highs as government incentives and the pull back in investor activity have seen first home owner activity reach a 5 year high.

There are growing signs that the UK will end up with a soft exit from the EU with comments from an EU official overnight suggesting that the door for re-entry will remain open after they leave.

Still in Europe and the concern over the EUR rally is growing. ECB vice-president Constacio said overnight that “as it is known, we don’t target the exchange rate. But I am concerned about sudden movements which don’t reflect changes in fundamentals.” He then went a little further, saying “We see no inflation risks. We should not choke off growth too soon.”

Despite the comments from Europe, the USD was still on the back foot all night until the release of the Beige book at 6am local time this morning. It saw the USD bid and pulled the rug out from under the other major currencies, including the AUD.

The Bank of Canada was up next, hiking rates a further 25bp, making it the third in the past 12 months. While the hike was expected, the outlook from here is a little less certain as the ongoing NAFTA negotiations are starting to weigh on sentiment.

Finally the tone of the Beige book, which looks at economic activity, employment and inflationary conditions across the 12 Fed districts remained positive. It suggests the Fed’s current dot plot projection of three hikes this year remains in tact. It was also followed by hawkish comments from a number of Fed officials after the release.

The news keeps rolling this morning with the latest employment numbers in Australia due for release. The range of expectations is a little wider than normal with the median sitting at 15,000 new jobs with the unemployment rate expected to remain unchanged at 5.4%

David Flanagan

Director - Interest Rate Markets