September 2, 2014

End of Summer complete with snooze

It was particularly quiet overnight, with the US on holidays. The poor European and UK data didn’t worry markets much, which, in the main, were taking a little nap

It was particularly quiet overnight, with the US on holidays. The poor European and UK data didn’t worry markets much, which, in the main, were taking a little nap. We won’t get much direction from the small upside in European equities. Yields were fractionally lower and the USD was higher. The NZD was the outperformer, and JPY underperformed. It was even predominantly quiet on the geopolitics front.

It’s now back to work for US markets, as the Labour Day holiday marks the end of the Northern Hemisphere summer season. That raises hopes for a pick-up in market activity and an implementation of fresh ideas and positions. We can live in hope anyway.

It is the low volatility environment which has led to our revision of the AUD forecasts in the Global FX Strategist publication yesterday. We now forecast AUD/USD at 0.88 by year-end, rather than 0.85. We have also revised lower the EUR/USD forecasts to 1.30 by year-end from 1.32. Additionally, yesterday saw the inaugural publication of NAB’s Essential Asia publication; a look at Asian macro themes, economies and strategy from Christy Tan. Please ask if you would like a copy.

German final GDP was unchanged in Q2 at -0.2%, driven by soft domestic demand and countered by higher net exports; but it was the soft final PMIs which captured most of the attention. The final manufacturing PMI was the lowest since July 2013, and Italy’s outcome was a net contraction, the first since June 2013. The prices component was also subdued. There was an increase in chatter yesterday with regards to the ECB not only cutting interest rates this week, but possibly even starting an ABS purchasing program. More on that to come no doubt as we head into Thursday’s meeting.

The UK PMI was also soft, raising concerns about a slump in growth, which had been doing so well. The prior month was also revised lower. At least the credit numbers were better than expected; providing some support for the economy.

Yesterday, the domestic data showed a pickup in inventories but poor company profits. These inputs did not change our Q2 GDP forecast of 0.2%qoq.

The disappointing China PMI outcomes did nothing to hold back the AUD. The soft PMIs this month in the major economies, including China, are likely one factor that continues to weigh on the iron ore price.

Coming Up

The run-up to the Australian GDP outcome continues, with the balance of payments released today. The deficit is anticipated to deteriorate to 3.6% of GDP from 1.7%. This comes about from the reversal of Q1’s pickup in exports. It is the net export component that goes into the GDP outcome, and that too is expected to be a net detractor for GDP. This is fully expected however, and should not unduly weigh on the RBA’s decision process nor the AUD; unless it is widely out of line. Building approvals are also released, but are likely to be less market moving. NAB are expecting an out of consensus decline.

The RBA do meet today, but no change is expected. A mention of the improved investment outlook could be warranted, and may provide some support for the AUD. The RBA Governor was relatively comfortable about the on hold outlook at the Government Economics Committee hearing last week, and it would be a surprise for there to be much new information at today’s meeting and statement.

The US holiday has delayed the ISM report, which is out tonight. US production indicators have increased sharply of late and it may not be a big surprise for some pull-back here, particularly in the very strong prices component. A stronger than expected outcome would be the bigger surprise.


On global stock markets, the S&P 500 was closed; UK’s FTSE rose 0.08%.. US Bond markets were closed (10 year at 2.34%). On commodity markets, Brent crude oil -0.40% to $103.17, gold was +0.1% to $1,287, iron ore -0.9% to $87.10. AUD is at 0.9333.

• German final GDP -0.2%qoqA, E, P

• EU manufacturing PMI 50.7A, 50.8E, 50.8P.

• UK manufacturing PMI 52.5A, 55.1E, 54.8P rev from 55.4.

• UK Net consumer credit , 1.1bnA, 0.6E, 0.7P rev from 0.4.