There has been a deluge of economic data to digest. The net result has been surprisingly little net reaction in the currency and bond market, while equity markets seem to have taken more of an impact.
Risk appetite is weaker on the day with global equities mostly lower, including an 0.8% fall in the S&P500 after the Euro Stoxx 600 index closed 0.9% lower and the FTSE100 index fell 1.6%. All S&P500 sectors are currently down on the day, with broadly based losses, led by banking stocks after Fitch Ratings warned that it might be forced into downgrading major US banks. An analyst from the ratings agency interviewed on CNBC said that an industry health downgrade for the US banking sector, if proceeded, would spill over into lower ratings for top-rated lenders like JP Morgan and Bank of America.
Adding to the weaker sentiment, China’s stuttering economy has been cited as a reason as well as much stronger than expected US retail sales data, which is likely to keep the Fed in an inflation-fighting mood, but the bond market reaction has been well-contained. Earlier in the day, stronger UK wage inflation data put upward pressure on global yields and immediately after the strong US retail sales report, the US 10-year rate spiked as high as 4.27%, a fresh high for the year. Rates fell thereafter and the 10-year rate currently sits at 4.21%, only slightly higher from the NZ close and for the day overall. The 2-year rate spiked to 5.02% and is now 4.95%, down 2bps on the day. The fall in rates after such a strong US economic report is good news for the bond market to the extent that current high yields might already reflect the economic backdrop.
One of the most hawkish FOMC members, Kashkari, didn’t seem particularly hawkish as he espoused a view that would probably sit close to the median view on the committee, viz “I’m not ready to say that we’re done” on raising rates, but he was seeing positive signs and “we can take a little bit more time to see”.
Focusing on the data, US retail sales rose for a fourth straight month, up 0.7% m/m in July while the ex-autos and gas measure was even stronger at 1.0% m/m, both much higher than the 0.4% expected and with upside revisions to boot. Strength was broadly-based and the data painted a picture of a still-resilient US consumer even if the figures might have been artificially boosted by Amazon’s Prime Day event. The second-tier NAHB housing market index and Empire manufacturing index both came in much weaker than expected, the former falling 6pts to 50 after its recent strong recovery and the latter too noisy of late to rely on as providing much signal about anything.
UK labour market data showed some underlying weakness, with the unemployment rate up two-tenths to 4.2% but easier conditions didn’t feed through into lower wage inflation, with the headline increase in weekly earnings rising to a record 8.2% y/y, or 7.8% excluding bonuses. These figures are utterly incompatible with a CPI inflation target of 2% and maintain pressure on the BoE to keep tightening policy. The figures also put pressure on the fiscal accounts, with the state pension increase next year linked to wages growth. The strong data saw the market build in more rate hikes, with close to 75bps now priced, which would take the policy rate to 6%.
Canada CPI was three-tenths stronger than expected, picking up to 3.3% y/y in July but the core measures were in line, and the average of the two key ones nudging down to 3.65%. The data resulted in the market pricing in slightly more chance of one more rate hike this cycle.
Yesterday, Japan GDP surged by a much stronger than expected 1.5% q/q in Q2, earning it bragging rights as the strongest major developed country in the world over the first half of the year. However, the detail showed weak domestic demand and with growth fuelled by net exports, so not likely to sway the BoJ into ending its ultra-easy policy stance and there was little market reaction to the news.
The PBoC unexpectedly cut the rate on one-year loans by 15bps to 2.5%, although there was an outside chance of another rate cut, following the recent poor run of economic data. On cue, another set of monthly indicators were weaker than market expectations, with retail sales growth of only 2.5% y/y of particular concern. It is well acknowledged that the government needs to deliver a major fiscal stimulus package if it wants to support growth, but policy measures delivered so far have been tepid.
Australian wages rose by “only” 0.8% q/q, but our NAB colleagues see it jumping near 1½% in Q3, boosted by the significant award wage increase already announced and other factors. For now, the data won’t likely trigger the RBA to hike again as soon as next month, and the RBA minutes revealed the central bank seeing a “credible path” to return inflation to the 2-3% target with the cash rate staying at the present level of 4.1%.
Turning to currency markets, despite all the economic news, net reactions have been modest. The yuan has been most affected, with the rate cut and poor Chinese data adding to downside pressure, seeing it fall to a fresh low for the year against the USD. USD/CNH has traded as high as 7.33 overnight and is currently up 0.6% on the day to just over 7.32.
The NZD has showed some resilience to the weaker yuan, lower risk appetite and yet another poor dairy auction. The GDT dairy auction was ugly, with a 7.4% plunge in the price index driven by a 10.9% fall in whole milk powder and 5.2% fall in skim milk powder. Expectations were poor, heading into the auction, with one commentator anticipating a “bloodbath” after Fonterra increased the WMP product on offer and signs of weak Chinese demand. Downward pressure remains on Fonterra’s milk payout, even after it recently slashed a dollar off it to $7. Falling dairy prices have already been a factor in sending the ASB export commodity index down to a three-year low and, combined with the recent lift in oil prices, NZ’s terms of trade have really taken a big hit.
Despite the barrage of poor news, the NZD has traded largely sideways in a narrow range and currently sits at 0.5960, perhaps a sign that recent selling pressure has been exhausted. The soft wages print had little long-lasting impact on the AUD. It managed to regain the 0.65 handle in the hours after the release but has fallen back down to 0.6465, with NZD/AUD hovering around 0.9220.
GBP has been the strongest of the majors overnight and for the day, following the strong UK wage data, but as a sign of well-contained currency moves, GBP is still up only 0.3% from this time yesterday to 1.2710. NZD/GBP is down to a fresh 3-year low around 0.4690. NZD/EUR has also traded at a fresh 3-year low and sits around 0.5460.
Global forces continued to apply upside pressure to NZ rates, with NZGBs up 3-5bps across the curve and the 10-year rate closing at 4.95%, its highest level since 2011. Short-end swaps were well anchored ahead of today’s RBNZ MPS, with the 2-year rate steady at 5.52% against a 3-4bps lift in 5 and 10-year swap rates.
On domestic news, REINZ housing market data continued to show signs of consolidation, with sales activity in a bottoming-out phase and prices nudging higher after their extended fall. Of more interest was the continuing steady decline in the SEEK job ads series, now seeing them down 26% y/y and conveying a message of much easier labour market conditions. The number of job applications per job ad has been surging higher this year and is now at a record high, portending a sharp lift in the unemployment rate.
In the day ahead, domestic focus will be on the RBNZ’s MPS, where there is a strong consensus of “nothing to see here”, with the RBNZ on hold at 5.5% (again) and expected to convey a similar message to previously. Scope for any sustained market reaction should be limited. Tonight sees the release of UK CPI inflation, expected to fall further, and an update on Euro area Q2 GDP, expected to show a modest 0.3% q/q lift. There are only second-tier US economic releases, alongside the minutes of the Fed’s July meeting.
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