A lot of things have happened since our last report before Easter. What moved the market most was US inflation data due last Friday, as core CPI fell for the first time in 7 years. China's GDP grew more than expected in 1Q17 while other activity data also strengthened in March. On geopolitical tensions, North Korea's launched another missile test over the weekend. Despite the failure, the attempt signaled escalation of the Korean peninsula problem. How the US and China handle the problem, and how this would change US-China trade relations, are under the radar screen. With less than a week to go, concerns over two euro-sceptic candidates, far-right Marine Le Pen and far-left Jean-Luc Melenchon, entering the run-off have clearly escalated. Support for Melenchon has surged since the second debate held earlier this month. While our base remains than Macron and Macron would be entering the second and final round, market volatility, especially in French stock and Treasury markets, would remain elevated as we approach the first Election Day on April 23. Reflection of all these events on the financial markets was a rebound in US equities from Thursday's losses, mixed US Treasury market and decline in US dollar. Note that the weakness in US dollar was driven by comments about execution of Trump's policy.
Confidence over Trump's pro-growth policy faltered. In an interview with the Financial Tims, Treasury Secretary Steve Mnuchin told the Financial Times noted that it was "probably fair to say" that tax reform would be delayed beyond the initial target of August this year. Meanwhile, Financial Times cited "senior administration officials" suggesting that the proposal for a border adjustment tax (BAT) is unlikely to survive. Staying in the US, headline CPI slipped -0.3% m/m in March, after gaining +0.1% in February and +0.6% in January. Food prices rose +0.3%, following a +0.2% gain in February, while energy CPI dropped -3.2% in March, worsening from -1% drop a month ago. Excluding food and energy, core CPI dropped -0.1%. From a year ago, headline CPI eased to +2.4% from +2.8% in February, while core CPI moderated to +2% in March from +2.2% in the prior month. Disappointing inflation report tamed rate hike expectations. CME's 30-day Fed funds futures now price in a 48.5% chance of rate hike in June as of April, down from 57.8% last week.
In China, GDP expanded +6.9% y/y in 1Q17, beating consensus of, and 4Q16's, +6.8%.Economic activities in March also strengthened more than expected. Retail sales expanded +10.9%, accelerating from +9.5% in the combined January to February period. IP growth improved to +7.6%, the fastest pace since end-2014, from +6.3% in February, The market had anticipated a mild drop to +6.2%. Fixed asset investment (FAI) increased 9.2% y/y to March, up from 8.9% in the January-February period. Over the weekend, US Donald Trump noted in Tweeter that his government would not call China a currency manipulator when China works with the US on the North Korean problem. Prior to that, Trump indicated that he would be more tolerant on US' trade deficit against China if the latter helps on the North Korean conflict. The attempt to increase concessions on trade in exchange for action on North Korea not only marks a break with the long-term US-China policy, but also would cause turbulence on the relations between the US and its allies.
Later today, US housing starts probably show a -0.78% drop to 1.258M in March. Building permits might have gained +3.87% to 1.26M last month. US industrial production probably gained +0.5% m/m in March, following a flat reading a month ago. Separately, the RBA minutes for the April meeting released earlier in Asia session unveiled that policymakers had turned more dovish than before. As suggested in the last sentence of the concluding statement, "the Board judged that developments in the labour and housing markets warranted careful monitoring over coming months".