USD has made broadly based gains and US rates are higher across the curve; this backdrop sees the NZD push back down to the 0.67 mark, retreating from a 3-month high; oil prices are down around 3%

The USD has made broadly based gains and US rates are higher across the curve, supported by stronger economic data, even as Chair Powell reiterated the risks about the outlook.  This backdrop sees the NZD push back down to the 0.67 mark, retreating from a 3-month high.

US economic data released overnight were on the stronger side of expectations. US retail sales were strong in June with upward revisions. The “control group” component which feeds into GDP rose by an annualised 7.5% for the June quarter, which will lead to upgrades to GDP estimates.  The data suggest that real consumer spending bounced back strongly over the quarter (4%+) and raises the question of why the Fed should stoke up the economy further with lower rates.  Industrial production was flat in June, weighed down by the utilities sector, with manufacturing production stronger than expected. The NAHB housing market index continued to trend higher, supported by lower mortgage rates.

Speaking in Paris this morning, Fed Chair Powell reiterated his message from last week’s testimony, that the central bank is “carefully monitoring” downside risks to US growth and “will act as appropriate to sustain the expansion”. He added that FOMC participants “have also raised concerns about a more prolonged shortfall in inflation below our 2% target”.

The USD was bid higher from the London open and has trended higher since, with the stronger economic data supporting the move.  USD indices are up 0.4-0.5% as a result, with GBP the biggest casualty, falling to the 1.24 mark.  The market is pricing in a rising chance of a no-deal Brexit, with PM candidates Johnson and Hunt not helping sentiment. Earlier in the week, both ruled out any compromise on the Irish backstop issue, the main stumbling block for a Brexit deal. This remains the key issue for GBP, with the market largely ignoring UK data. UK’s unemployment rate remained at a 44-year low of 3.8% while wage inflation rose at the fastest pace in more than a decade, with average weekly earnings excluding bonuses up 3.6% y/y, well above the pace of CPI inflation. If not for Brexit risks, the Bank of England would be hiking interest rates.

Against a backdrop of a stronger USD, the NZD has trended down to 0.67, after again meeting some technical resistance in the 0.6730-0.6740 zone. NZ inflation data had no impact on the market yesterday. NZ annual CPI inflation picked up to 1.7% y/y, in line with market and RBNZ expectations. All of the four key core measures published by Statistics NZ picked up, with the average of them rising from 1.8% to 2.0%. However, the RBNZ’s core CPI measure based on a sectoral factor model remained unchanged at 1.7%. With growth slowing, and global risks in the background, the general view is that inflation pressures will remain well contained and the market continues to place a high weight on another rate cut next month, still priced at around 21bps. The data had little impact on the rates market, with lower global rates the bigger force yesterday, seeing rates down 3-5bps across the curve.

Overnight, the GDT dairy auction was better than expected, with the price index up 2.7%, the first increase since early May. Whole milk powder prices rose by 3.6%.  The recovery breaks the downturn in pricing, but we’d be hesitant to suggest that it marks the start of a fresh upward trend.  Our bias remains for flat to lower pricing over coming months.

The RBA minutes of its early-July meeting repeated that the RBA stands ready to provide further support “if needed” as it continues to “closely monitor” the labour market. The AUD has edged down to 0.7015 and NZD/AUD is hovering around 0.9550 after touching 0.9575 early yesterday evening. On the other crosses, we’d note the soft GBP sees NZD/GBP up through 0.54.

Oil prices are down around 3% as drillers got back to work following the passing of Hurricane Barry in the Gulf of Mexico, while US Secretary of State Pompeo said that Iran had signalled an openness to talks.  This followed a softening in rhetoric by Iran’s foreign minister and might suggest a thawing of US-Iran relations. Lower oil prices have weighed on US equities, with the S&P500 down 0.3%, led by falls in the energy sector. A number of earnings reports have been released, with the banking sector doing it tough against the backdrop of lower interest rates.

Finally, the US-China trade war remains forefront of mind. At a cabinet meeting Trump said that he could impose more tariffs on China if he wanted and that tariffs were having a positive impact on the US.  This didn’t help market sentiment.  Yesterday, remarks by China's Commerce Minister suggested China is preparing for a protracted trade spat and is in no hurry to reach a deal at the expense of losing face. He said that “…the US has started this economic and trade dispute with us in violation of the principles of World Trade Organisation" and "…we must make the best of the spirit of struggle, and stand firm in defending the interests of our country and the people, as well as the multilateral trading system."

In the day ahead, there is little economic data during the NZ trading time zone. UK and Canada CPI data and some second-tier US housing market data are released tonight.