Markets Today: It’s not so bad, it’s not so bad

Dido’s chorus to Eminem’s brilliant ‘Stan’ sums up last night’s US data and which was just about the only talking point in offshore markets last night.

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Dido’s chorus to Eminem’s brilliant ‘Stan’ sums up last night’s US data and which was just about the only talking point in offshore markets last night.

ADP’s estimate of private sector payroll growth in July came in at 179k, a shade above the 170k consensus, with the prior month surprisingly revised down by 4k to 172k despite the outsized gain reported by the BLS for June non-farm payrolls.  More importantly, the July non-manufacturing ISM survey reported a small drop in the headline index, to 55.5 from a (very strong) 56.5 in June and just beneath the 55.9 consensus, but under the hood the details were generally better than the headline. In particular, the new orders sub-series rose to 60.3 – the highest since October last year – whilst net export orders rose 2 ½ points to 55.5. Employment slipped 1.3 to 51.4 but four of the last five months have now been above the 50 threshold. On every one of these sub-indices, the July reading is higher than the average of the last 6 months although prices paid fell to a four month low of 51.9.

Fed speak was confined to Chicago Fed President Charles Evans, who told reporters that “I do think that perhaps one rate increase could be appropriate this year….I get there in the following way: I think the real economy is doing quite well in the U.S. especially given all the headwinds we’re facing and the uncertainty from abroad.” This from one of the traditionally most dovish FOMC members (currently a non-voter but who rotates back on to the voting roster next year).

As for markets, US equities have ground out small gains (S&P 500 closing +0.3%) led by energy stocks linked to a rebound in crude oil (WTI and Brent are both up over $1.50 despite a build in crude inventories reported by the EIA, though gasoline inventories dropped). This follows a fairly flat day in Europe in contrast to Tuesday’s sharp falls, despite more pressure on European bank shares and where the likes of Italy’s Unicredit were halted limit down for the third consecutive day.

US treasury yields were initially higher in the wake of the US data, but prices have since retreated to leave 10 year yields 1.4bps lower on the day and 2s down 1.2bps.

In currencies, the NZD is by far the biggest loser in the last 24 hours, extending the drop that began soon after yesterday’s labour market data, with assistance from a general stronger dollar. CAD is the only G10 currency up against the dollar thanks to oil, while the AUD is pretty much where we left it last night.

Coming Up

Today sees the release of retail sales for June, which we expect was boosted by winter sales of clothing following the (late) arrival of colder weather (NAB +0.5%, market +0.3%).  There has been little to no growth in the Department Stores category for the past two months and the Specialty Clothing, Footwear, and Personal Accessory store category was down a sizeable 1.2% in May, flat sales attributable in part to the late onset of winter. This month’s release comes with volumes for the June quarter, that we expect rose 0.6%, versus 0.5% in Q1 (market +0.5%).

Offshore this evening the main draw is the Bank of England, whose chief economist Andy Haldane spoke last month of the need for ‘muscular’ easing out of the August meeting. Two external MPC members had publicly proposed a more ‘wait and see’ (the hard data) approach before acting, but one of these, Martin Weale has already back-flipped following the very poor July purchasing managers data to say he now favours immediate action.  A 25bps cut to the current 0.5% Bank Rate is about 90% discounted and is what NAB expects to be delivered. Alongside, we see a fair chance of an addition to the current £375bn QE purchases of gilts, a total last increased back in July 2012. 20 of 44 analysts polled by Bloomberg expect an increase.

Other than the BoE, weekly U.S jobless claims and factory goods orders are the only things to note on the calendar.

Overnight

On global stock markets, the S&P 500 was +0.31%. Bond markets saw US 10-years -1.21bp to 1.54%. In commodities, Brent crude oil +3.88% to $43.42, gold-0.6% to $1,356, iron ore -0.4% to $61.67. AUD is at 0.7588 and the range since yesterday 5pm Sydney time is 0.7574 to 0.7598.

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