It has been a quiet start to the week, with the NZD and AUD pushing higher, supported by positive monthly China activity indicators. US equities are flat after posting a record high at the end of last week while global rates have nudged lower after rising last week.
The dump of China economic data released yesterday afternoon showed GDP growth of 6.2% yoy in Q2, the weakest growth recorded since quarterly data have been published since 1992, although bang in line with market expectations. Of course, China’s economy is now significantly larger than more than a decade ago so a 6+% increase is a more meaningful contribution to the global economy than when it was growing at double digit rates. The market was more focused on the monthly investment, retail sales and industrial production indicators, which were all stronger than expected, perhaps a sign that stimulus measures are working their way through. Still, there’s an air of caution about China’s economy and the rest of Asia, as US import tariffs were only ramped up in May. Further easing in monetary and fiscal policy will be required to stem downward economic momentum.
The NZD was pushing higher early yesterday on NZD/AUD buying pressure and the positive monthly China indicators supported both currencies. The NZD met some technical resistance at 0.6735 last night and currently sits around 0.6720, back to the level prevailing at the NZ close. The AUD has met some resistance just under the 0.7040 mark. NZD/AUD broke up through 0.9570 last night, but the buying pressure has since subsided and it is back down to 0.9550.
Currency movements overall have been fairly modest, although GBP has shown some notable weakness after the England cricket team’s cheeky world cup win against NZ on a technicality. GBP is down almost 0.5% to 1.2520, although we presume it is more economic and Brexit concerns that predominate. NZD/GBP is up 0.75% to 0.5370, its highest level since January, so cheaper credit card bills might ease the pain for NZ supporters who travelled to the game. Our projections show the cross breaking up through 0.55 as we get closer to the 31-Oct Brexit deadline and with Johnson likely at the helm, causing all sorts of market jitters around that time.
There’s not much else to report, with a light economic calendar. The New York Fed’s Empire State index bounced back slightly more than expected to 4.3 in July after its record slump in June.
Global rates have begun the week trying to reverse some of last week’s hefty increase. US Treasury yields are down 1-3bps across the curve, with larger falls at the longer end. The 10-year rate is down to 2.09%. European rates are down even more, with Germany’s 10-year rate 4bps lower at minus 0.26%. NZ rates continued to push higher yesterday, with a 2bps increase across much of the swaps curve and 2-3bps across the government curve.
In the day ahead, the key local release will be Q2 CPI data. Most economists are picking 0.6% q/q and 1.7% y/y, in line with the RBNZ’s estimate published in May and our 0.5% estimate implies some downside risk to that. However, most will be focused on core measures of inflation and they look likely to remain subdued. We don’t see the data getting in the way of a likely RBNZ rate cut of 25bps next month, which is currently well priced at 21bps.
Tonight the key release is US retail sales data, while Fed Chair Powell speaks early tomorrow morning, but the narrative of uncertainty ahead is unlikely to be changed, greasing the wheels for a rate cut at the end of the month.