A further slowing in growth
The Euro is trading this morning at 1.1844, the best performing of the majors overnight, up 0.96%.
The pattern of a weaker USD has continued to play out overnight, the Bloomberg Spot Dollar index off another 0.29% and the DXY down a larger 0.48%. The Euro has been the largest beneficiary, EUR/USD up and over 1.18, levels not seen since January 2015. It’s been a combination of continued momentum appetite for the Euro, aided by somewhat better-than-expected data out of Europe, mixed data from the US, and over recent hours, more revolving doors at the White House.
Anthony Scaramucci has been shown the door after that recent venting tirade. Newly-appointed Chief Of Staff John Kelly has apparently been given carte blanche to make changes. And he did. Whether justified or not, it’s only added to the market’s perception that the wider tax reform, budget reform, and growth agenda is even further on the backburner. Adding to the market’s gloom over Washington, Fed Vice Chairman Fischer warned in a Brazil speech how political uncertainty can hurt economic growth. His speech was pondering why interest rates globally have remained so low for so long, including from weaker investment and demographics, evident even before the GFC.
The Euro is trading this morning at 1.1844, the best performing of the majors overnight, up 0.96%. In some contrast, the AUD has under-performed, now just testing 0.80, up 0.17% ahead of the RBA Board statement this afternoon. (More on that below.) Eurozone unemployment and core inflation were both better than expected. Unemployment in June was down to 9.1% from 9.2%, also helped by a downward revision. Headline CPI in July was right in line with expectations at 1.3% y/y (unchanged), core CPI a tenth higher than in June and expectations at 1.2%. Admittedly there’s little in all that, but supportive of the momentum.
The Chicago PMI printed at a still high 58.9 (down from 65.7; 60.0 was expected), the Dallas Fed Manufacturing survey was stronger, while Pending Home Sales rose 1.5%, out-shading the 1.0% consensus. Separately, the Fed’s latest Senior Loan Officer’s Survey reported that credit conditions remain fluid with virtually no tightening evident, but also reporting that large and medium firms had the lowest net percentage of loan demand since the December quarter of 2011.
While the AUD has been a slight under-performer, it’s certainly been in the spotlight. China’s July official PMI printed at a tenth below expectations at 51.4, it seems the market was braced for a lower print – rather than its six month average – that might have played more to the slowing growth story in the second half. Also, the accompanying China Steel PMI was up to 54.9 from 54.1, including from a bounce in orders to 63.1. Chinese iron ore and steel futures had a very strong session yesterday (futures curves lifting across tenors), also evident in the spot price of iron ore that’s up an eye-glazing 7.2% overnight. Met and steaming coal futures prices also had good gains; LME base metals rose 0.57%, largely mirroring the weaker USD.
It’s another pretty full agenda for the calendar over the next 24 hours. This morning sees the local AiG Manufacturing PMI for July, weekly ANZ-Roy Morgan Consumer Sentiment, the full month CoreLogic AU House price report for July, then the Nikkei Japan Manufacturi9ng PMI and the Caixin China Manufacturing PMI, the latter perhaps to draw some market interest.
Then the focus turns to the RBA statement at 2.30. Two keys the market will be interested in are 1) whether they change the language around the exchange rate other than to again note that a low rate would/could be helpful, and 2) their description of the economy and summary of forecasts that will be unveiled in full on Friday. Will the RBA say any more on the exchange rate other than to note that it’s been rising and in large part from a lower USD? The market understands that the Bank wants to see a weaker currency, but what can be said without inflating property? The improving economy – its transition – would be giving the RBA a degree of comfort and ability to be patient to let the market sort itself out, to sit and wait for now, to be measured. Commodity prices will be pause for thought for the RBA too. The bank will summarise the forecasts, again noting they are “little changed”, still expecting growth to recover to3%. They might well warn about the impact of higher power prices holding up headline inflation for a time.
It’s then a potentially big night if the data is at all different in substance from expectations. Final Eurozone PMIs are unlikely to be revised much if history is any guide, there’s the UK Markit Manufacturing PMI (the CBI Trends survey was still positive, if a tad softer in July; the UK Manufacturing PMI could overshoot expectations). That’s followed by the first cut of Eurozone June quarter GDP. French June quarter GDP was in line with expectations.
Then it’s all eyes on the US, first with personal spending and PCE deflators, the latter likely to show a still soft core deflator of 0.1%/1.4% based on the CPI. That’s followed by the US ISM Manufacturing Survey for July and the Global Dairy Auction that our BNZ colleagues expect to be broadly neutral.
On global stock markets, the S&P 500 was -0.07%. Bond markets saw US 10-years +0.53bp to 2.29%. In commodities, Brent crude oil +0.88% to $52.68, gold+0.0% to $1,269, iron ore +7.2% to $73.70, steam coal +8.4% to $93.20, met. coal +2.3% to $176.00. AUD is at 0.8003 and the range since yesterday 5pm Sydney time is 0.7956 to 0.8004.
For full analysis, download the report
For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets
© National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.