Wednesday, November 27, 2019

RBA officials sends slightly hawkish signals during Tuesday’s speeches; will consumer spending data in the US disappoint?

  • Dollar
  • Gold
  • Yen
  • Pound
  • Stocks

US equities gained for the third straight day on Tuesday after US President Trump made upbeat comments on the progress of the phase one US-China trade deal. Trump said that the US and China are close to an agreement on Tuesday after high level negotiators from both from both counties spoke via telephone. The DJIA gained 0.20%, the S&P500 advanced 0.22% and the Nasdaq inched 0.18% higher.

Safe haven assets closed mixed on Tuesday. The Dollar Index fell 0.07%, after consumer confidence in the US fell short of expectations (of 127.0), falling to 125.5 from a previous of 125.9. The cheaper dollar likely influenced gold prices as gold gained 0.42% to 1461.39. But the yen weakened 0.11% against the dollar, as markets remain cautious on Trump’s comments. US Treasury yields fell across the board. Two-year yields fell 3bps to 1.58% and 10-year yields fell 1bp to 1.74%.

Gains in the US stock market extended into Asia on Wednesday morning, as the Nikkei, Hang Seng Index and Straits Times Index started Wednesday’s trading session 0.34%, 0.11% and 0.17% higher respectively.

The Reserve Bank of Australia’s (RBA) Governor Philip Lowe and Deputy Governor Guy Debelle both sounded less than dovish on monetary policy in each of their speeches on Tuesday. Debelle hinted that wage growth in Australia is likely to normalize at a slower pace than before 2012. During Lowe’s speech on unconventional monetary policy, he signalled that while quantitative easing is an option, he doesn’t expect the RBA to use it in the near future. The Australian dollar gained 0.13% against the dollar as a result of the slightly hawkish comments from both key officials.

Today’s Analysis: Expect today’s US economic data to affect the greenback today

A slew of economic data from the US is due to be released later today. October's durable goods orders and Q3's GDP data (second estimate) will be released at 5.30pm (GMT +4) while the Bureau of Economics Analysis’ (BEA) Personal Consumption Expenditure (PCE) report for October is set to be released at 7pm (GMT +4).

Economists expect slower contraction in the US economy from Wednesday’s data






GDP (Second Estimate for Q3)




Durable Goods Orders (Month-on-Month)




Initial Jobless Claims




Personal Income (Month-on-Month)




PCE (Month-on-Month)




Core PCE (Year-on-Year)



*Source: ADSS

The highlight of the day will likely be durable goods orders and PCE data. Recent economic data has signalled that the US economy is contracting slower than expected and that domestic consumption in the US is expected to continue to stay resilient. This is likely an effect of the three consecutive rate cuts earlier this year. But Fed Chair Jerome Powell has signalled that the central bank is likely to put monetary policy on hold in the near future and allow the earlier rate cuts to reflect in the US economy before re-evaluating monetary policy again. Fed Fund futures indicate that the next rate cut is only likely from June 2020 onwards, as probabilities of a rate cut is only above 50% for June 2020 and after.

Durable goods orders contracted 1.2% in September after the US manufacturing sector unexpectedly contracted. Economists forecast durable orders to contract slower in October at 0.9%. It is unlikely that durable goods orders data later today will largely deviate from expectations as the Institute for Supply Management's (ISM) manufacturing Purchasing Managers' Index (PMI) for rose from 47.8 in September to 48.3 in October. But ISM’s manufacturing PMI report shows that production in the manufacturing sector is contracting at a faster rate in October, while new orders contracted at a slower rate, signalling that durable goods orders (that also comprises of production or manufacturing equipment) is likely to contract at a slower speed than September.

Data that markets are likely to be focused on in the PCE report include personal income, PCE and core PCE. Economists expect core PCE (also an inflationary measure that is favoured by the Fed) to remain constant at 1.7% year-on-year for October. It is likely that Core PCE will fall within expectations, or possibly slightly improve as the earlier rate cuts this year come into effect. PCE is expected to grow faster at 0.3% from September, while personal income is forecasted to remain consistent with September’s growth of 0.3%.

It is likely today's data will be within expectations or skew positive, as the US economy continues to reflect the effect of the Fed's rate cuts this year and as the US and China continue to progress towards a partial trade deal. As a result, the dollar is likely to continue strengthening against major currencies, with the Dollar Index rising towards 98.40’s level. But the market is likely to focus on any disappointing data especially since consumer confidence in the US fell short of expectations on Tuesday. If durable goods orders fall short of economists’ forecast, then the Dollar Index may fall slightly toward 98.20. But if PCE data signals that consumer spending is worse than expected, then the Dollar Index may break the 98.20 support level.



Effect on Dollar Index


PCE data and durable goods orders fall within expectations

Remains little changed


PCE data disappoints, durable goods orders fall within expectations

Falls below 98.20


Durable goods orders disappoint, PCE data falls within expectations

Falls toward 98.20


PCE data and durable goods orders beat expectations

Rises towards 98.40

*Source: ADSS