Market wrap: more personnel turmoil in the US administration - Westpac

Analysts at Westpac noted that risk sentiment soured in US trade as President Trump fired Secretary of State Tillerson via tweet. 

Key Quotes:

"US Feb CPI matched expectations with a more moderate gain, both the headline and core rising 0.2% in the month. But the unrounded numbers were 0.150% and 0.182% respectively and Bloomberg’s “whisper” survey was 0.3%. The annual headline pace ticked up to 2.2% from 2.1% while the core rate was steady at 1.8%. The more moderate CPI comes on the heels last week’s softer than expected average hourly earnings, alleviating risks that the Fed might need to speed up the pace of interest rate hikes.

The US dollar was soft in the NY morning against a range of currencies, partly on CPI but also seemingly undermined by more personnel turmoil in the US administration, as President Trump announced via tweet that Rex Tillerson would be replaced as Secretary of State by Mike Pompeo, who has been CIA director for a little over a year but spent 6 years in the House of Representatives as a Tea Party stalwart.

The divisions between Tillerson and Trump were very clear so his removal is not very surprising, but perhaps markets are concerned by the scale of the turnover in the administration and by the prospect that Iran hawk Pompeo will ensure the US leaves the 2015 nuclear deal. This could mean a ripple effect on multinational companies that resumed business with Iran as sanctions were eased.

Equity sentiment might also have been undermined by reports that President Trump is planning large tariffs aimed directly at China, given that its steel and aluminium exports to the US are modest.

CAD was the day’s underperformer following dovish comments from BoC governor Poloz, bouncing from 1.2840 to 1.2975. EUR/USD rose from 1.2340 to 1.2400, responding mostly to the CPI data.

USD/JPY made a roundtrip from 106.50 to 107.29 and back. AUD/USD extended the two-week old rally to 0.7898 following the US CPI but later retraced to 0.7850, leaving it unchanged on the day, -0.2%. Outperformer NZD rose from 0.7310 to 0.7355 – a three-week high. AUD/NZD thus fell 0.6% over the day to 1.0720.

The US 10yr treasury yield fell from 2.88% to 2.84% following the US data and news, while 2yr yields held around 2.25%.  Fed fund futures continued to price three more hikes by end-2018 (and another hike in 2019.

The key factors from Chancellor Hammond’s relatively upbeat delivery of the UK’s Spring Statement were that current growth and government receipts were firmer than anticipated, but also that growth would remain sluggish and slightly lower than previously estimated over the forecast period. Therefore debt would only slowly come below 80% of GDP within that forecast period. The cost of Brexit was estimated to be GBP38bn. GBP/USD showed little reaction, instead rallying on the US CPI data.

Event risk: RBA Assistant Governor Kent speaks in Sydney at 9:05am but is expected to focus on debt markets than the economy or monetary policy.

New Zealand Q4 balance of payments data is due at 8:45am Syd, with the annual current account deficit estimated to remain at -2.6%/GDP.

At 10:30am Syd we see Australia March consumer sentiment from Westpac and the Melbourne Institute. The headline index rose to 105.1 in Jan, a high since 2013 though unremarkable in historical context. Feb saw a pullback to 102.7, in a survey conducted while equity markets were quite volatile. The March survey was taken last week so includes news such as the RBA meeting, Q4 GDP and US tariffs on steel and aluminium imports.

China releases combined Jan-Feb data on industrial production, retail sales and investment at 1pm Syd. Industrial production will be watched most closely and occasionally has a small impact on AUD.

The US data highlight is February retail sales. January’s report was unexpectedly weak (-0.3% overall), with December revised lower, but this followed a strong few months. Consensus this month is 0.3% m/m overall, 0.4% for the “control group” which excludes food, energy and building materials."