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Mild risk-off session overnight - equities lower, USD stronger. US retail sales better than expected but jobless claims level off. NZD falls overnight but remains rangebound for now. EU leaders' summit this weekend the focus

Currencies
Mild risk-off session overnight - equities lower, USD stronger. US retail sales better than expected but jobless claims level off. NZD falls overnight but remains rangebound for now. EU leaders' summit this weekend the focus

It has been a mild risk-off session overnight, with equities falling, the USD appreciating and bond yields declining slightly.  The NZD has fallen overnight but remains rangebound.  The market’s main focus in the coming session is likely to be the EU leaders’ summit tonight and tomorrow, where countries are trying to broker agreement on the proposed EU recovery fund.  

There has been a lot of data released over the past 24 hours (as per the lengthy data list above and summary below), mostly positive, but the market has largely ignored it.  The S&P500 is down 0.8% overnight while tech stocks, which are a favoured position amongst investors, have underperformed again – the NASDAQ is down about 1%.  Both indices are still near their recent highs.  

A large 5% fall in China’s CSI300 equity market yesterday has weighed on risk sentiment.  The sharp fall in Chinese equities follows a disappointing Chinese retail sales release, which points to ongoing caution among consumers, and a critical article from the state-owned People’s Daily over Moutai, a large liquor maker and bellwether stock in the index (its share price fell 8%).  The People’s Daily article is the latest from state-owned media that appear designed to temper optimism in the Chinese market.  Chinese Q2 GDP was much stronger than consensus, rising by 11.5% q/q after the previous quarter’s 10% fall, but this was seemingly looked-through by the market.  The bounce-back in Chinese growth in Q2 was driven by the industrial side of the economy.  

In the US, retail sales increased by more than expected in June, following the record rise in May, leaving overall retail sales close to their pre-COVID levels.  The NAHB housing market index also jumped much more than expected, and is back to near its cyclical highs, supported by strong demand off the back of low interest rates.  US agency Freddie Mac reported that the average 30-year mortgage rate fell below 3% for the first time since records began in 1971.  Less encouragingly, US initial jobless claims were essentially unchanged last week, suggesting that the improvement seen in the job market over recent months is starting to plateau.  That, along with high frequency data pointing to a slowdown in economic activity amidst the re-imposition of restrictions in several Southern and Western US states the past month, casts some doubts over the pace of the recovery.  

There’s not too much to report on COVID-19.  The daily number of US cases remains high, in the mid-60,000s but is showing tentative signs of stabilising.  Florida remains the current epicentre, reporting almost 14,000 new cases itself overnight.  Elsewhere, the Australian state of Victoria saw a daily record 317 new cases yesterday while there were also new daily records in Hong Kong (67 new cases) and Tokyo (286 new cases yesterday).  The re-emergence of COVID-19 in places that were previously thought to have the virus under control, illustrates the difficulty in stamping it out, in the absence of a vaccine or effective treatment.  AstraZenica and Oxford are due to report results from their phase one trials on their experimental vaccine on Monday.  ITV reported yesterday that these were expected to show “positive results.”

As universally expected, the ECB kept all its policy settings unchanged at its meeting overnight (including the deposit rate at -0.5% and pandemic bond buying programme at €1.35t).  President Lagarde pushed back against talk that the ECB might dial back its bond buying in the face of recent data pointing to a quicker-than-expected recovery.  Lagarde said the economic risks remained to the downside and it would require “significant upside surprises” for the ECB to stop short of its €1.35t target for bond purchases.  Lagarde added that the ECB would continue to skew purchases towards the more vulnerable countries in the region, such as Italy.  

There hasn’t been much market movement on the back of the ECB meeting, with investors more focused on the upcoming EU leaders’ summit, which starts tonight.  EU countries are trying to reach agreement on a €750b recovery fund, most of which is proposed to be distributed as grants (rather than loans) to vulnerable countries.  Several fiscally-cautious Northern European countries need to be won over, but if agreement can be reached, it will boost the EUR and, by implication, weaken the USD.  The EUR is down 0.25% over the past 24 hours and trades this morning just below 1.14, still near its highest level in three months.  

The USD has strengthened overnight amidst more cautious risk appetite.  The Bloomberg USD index (BBDXY) is up 0.3%, albeit from what was a one-month low.  Commodity currencies have been the worst performers over the past 24 hours, with the NZD at the bottom of the currency leader-board, down 0.6% to 0.6530.   We expect the NZD to remain in consolidation-mode in the coming months.  

NZ CPI was a little higher than both market and RBNZ expectations, with quarterly inflation in Q2 falling by -0.5% (market: -0.6%, RBNZ -0.7%), taking the annual rate of inflation into the lower half of the RBNZ’s target range, at 1.5%.  Most of the core measures of inflation moved lower as well although, interestingly, not the RBNZ’s favoured Sectoral Factor Model, which remained at 1.8%.  We expect CPI inflation to keep easing in the coming quarters, with the annual rate falling below the bottom of the band by the end of the year before recovering in 2021.  

There was no market reaction to the CPI release, with investors more focused on the outlook for activity, both in NZ and offshore.  The NZ government bond curve flattened slightly yesterday (10-year yield -2bps to 0.93%), although this has more to do with the passing of the 20-year bond syndication from earlier in the week.  NZ government bond yields increased relative to other countries in the lead-up to the syndication and have partially reversed those moves since it priced.  The 10-year swap rate continues to drift sideways within an exceptionally tight trading range.  Global rates have fallen by 1 to 2bps overnight but, they too, remain tightly rangebound.  

Finally, the Australian labour market report was stronger than expected, with employment rising by 211k in June, reversing some of the 870k job losses from the preceding two months, and hours worked rising by 4%.  Going forward, our NAB colleagues expect employment growth to slow, and possibly even fall again, amidst the renewed lockdowns in Melbourne.   There was little immediate market reaction from the AUD, which trades this morning around 0.6970.

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Source: CoinDesk

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