Below trend growth to continue
The Aussie and the Kiwi dollars have hit multi-year lows as the situation worsens in emerging markets.
The big dollar remains in the ascendancy from a triple whammy of more EM risk, this time from ZAR weakness, a new cycle high in the US ISM Manufacturing index for August and the uncertainty looming over the possible 25% tariffs on an additional $200bn of Chinese imports into the US. Yesterday’s steady hand from the RBA yesterday in leaving rates steady and not scaling back their outlook – repeated last night in the Governor’s post Board address in Perth – added some support, but only for a time. Note also that in his address last night (see his remarks here) he noted that a weaker AUD if it was to persist would help to hasten a further reduction in the unemployment rate and a move in inflation back into the target range.
My BNZ colleague has remarked this morning that we’re seeing some front-running of USD strength ahead of Trump moving ahead with additional tariffs on $200b of Chinese imports, possibly as soon as Friday APAC time, or into next week. Until the decision is made, the market will remain nervous about commodity and EM currencies. Despite AUD and NZD discounts ahead of any announcement, there’s still a good chance of further AUD and NZD weakness if Trump goes ahead with the plan as proposed. For the NZD, the overnight GDT dairy auction was slightly weaker than expected. It revealed only a small fall in average prices, but this had little impact on the market. (We would also call out our technical analyst David Coloretti’s lower targets for the AUD and NZD. Email me if you’d like a copy of his latest report.)
In the EM space, it was the Rand that was in the firing line, the USD up 3.4% against the rand in the aftermath of South Africa notching up a second quarter of negative growth of -0.7% for Q2, a big surprise against an expectation of a 0.6% rise, first quarter GDP revised down also from -2.2% to -2.6%. Annual growth faded further to 0.4% from 0.8%. AUD/ZAR is up to over 11 overnight, a rise of 3%.
Holding its ground against the USD in the past 24 hours has been a more stable GBP, for once. BoE Governor Mark Carney and his senior team have been testifying before a Parliamentary select committee, Carney indicating that he is prepared to stay on in his role to see through and support smooth Brexit transition. He was due to step down in June 2019, but presumably now to 2020-21 if given the official nod. A spokesman for PM May said that Carney has been doing a “very good job” and that there would be an announcement soon. With the AUD testing lows not seen since February 2016, the AUD/GBP has drifted back below 0.56 again overnight after testing above 0.56 yesterday.
The first of the cornerstone monthly releases out of the US this week was a blockbuster in several respects. The ISM Manufacturing in August printed at a stellar 61.3, the highest since May 2004 and clearly well above market expectations of 57.6. On the back of this release, the Atlanta Fed increased their running estimate for US GDPNow from an already solid 4.1% to 4.7%. The result came with solid component readings on New Orders (65.1), Employment (58.5) and Prices Paid (72.1), all signs of the cycle extending.
Respondents to the survey are understandably worried about the tariff issue with costs already under pressure, but appear to be taking these pressures in their stride with the demand side of US manufacturing still performing strongly. While the USD is now acting to tighten US financial conditions somewhat, consumer inflation remains moderate and the Fed has not deviated from its gradual removal of policy accommodation approach and not braking the economic expansion. So far, so good.
There has been some better news out of Italy, the Italian government seeking to hose down expectations of a budget blow out and not testing the fiscal patience of the EU. Italian bonds rallied, 10 year yields down 14 bps to 3.017% with German 10 year bund yields up 2bps to 0.357%.
With the USD in the ascendancy, highly-traded commodities have been softer, including base metals, oil and gold, though iron ore, coal and steel rebar traded on the Chinese Dalian exchange have been supported, though again, currency movements might be the factor there too. Met coal futures did push higher, up 2.5%.
US Treasury yields have risen, 10 years up 3.8bps to 2.8985% and still within recent ranges. There’s two way risk, with strong US data but enough EM risk around with the tariff issue looming that could easily support a move back to risk-off. Equity markets have been softer overnight.
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