A further slowing in growth
The US dollar rose 0.6% across the board overnight in reaction to stronger than expected US GDP growth and a stellar ADP payrolls print.
Equities were also supported, up 0.5% in US and Europe. The upwardly revised GDP figures are the first hints that “hard data” in the US is finally catching up with the “soft data”. Although possibly being a ‘This is What You Came For’ moment for markets, movements in yields were more muted with Treasuries and Fed pricing little changed. The market still only prices a 26% chance of a rate hike by December and only one is fully priced by the end of 2018 compared to the Fed’s dot points of four.
First to the data. US Q2 GDP growth was upwardly revised to an annual rate of 3.0% from 2.6% (2.7% expected). The 3.0% mark now brings it closer towards where softer indicators suggest it should be. The driver of the upward revision was the US consumer with consumption growth revised to 3.3% annualised from 2.8%. ADP Payrolls were also out overnight and were very strong, up 237k in August and well above the consensus pick of 185k. At first blush that is suggestive of upside risks to Friday’s more important Non-farm Payrolls, but as many analysts note ADP is far from infallible and August tends to be a soft month for payrolls – consensus sits at 180k.
European data was also very strong with German CPI at 1.8% y/y in August (1.7% expected). Overall that suggests underlying inflation has strengthened in Europe and supports a tapering of the ECB’s asset purchase program. Eurozone consumer confidence was also strong, hitting its highest level since July-2007!
The lack of reaction in the rates market was surprising. US 10 year Treasuries traded in a tight range of 2.13-2.15% and ended the session at 2.13%. It is not clear why Treasuries were so unresponsive to the data – perhaps a combination of month end flows and concerns over the debt ceiling. On the debt ceiling, S&P said “failure to raise the debt limit would likely be more catastrophic to the economy than the 2008 failure of Lehman Brothers and would erase many of the gains of the subsequent recovery”. Despite that, most analysts still expect the debt ceiling to be raised in time and the tragic events with Hurricane Harvey is also cited as acting to pressure a quick deal to fund disaster relief and reconstruction.
The US dollar (DXY) rose 0.6% across the board on the news, checked only once by Trump’s tweet on North Korea. Trump tweeted: “The US has been talking to North Korea, and paying them extortion money, for 25 years. Talking is not the answer!” Markets were unfazed, seeing the tweet more as bluster and Defence Secretary Mattis was also quick to clarify “we’re never out of diplomatic solutions”. Nevertheless, the DXY at 92.9 is around the levels seen in mid-2016 having more than fully retraced the initial Trump-reflation trade. Our models continue to suggest the US dollar has 8% Trump discount.
Other major currency pairs were correspondingly lower: Euro (-0.7%); Yen (-0.5%); Pound (0.0%); Aussie (-0.6%); Kiwi (-0.8%). The Aussie had a volatile intra-day session having initially spiked by 0.4% to be within a hairs breadth of the 0.80 level at 0.7997 on better than expected construction figures yesterday, but gave this back and more on US dollar strength to end the day 0.6% lower.
The Kiwi also had some excitement, dipping 0.5% on comments by outgoing RBNZ Governor Wheeler who said “A lower New Zealand dollar is needed to increase tradable inflation and help deliver more balanced growth”, but the dip was short lived after more positive comments. Nevertheless, the stronger US dollar saw the Kiwi back down to finish -0.8% on the day.
As we go to print President Trump gave his speech on tax reform. The market has had zero reaction with detail lacking despite Trump stating “I don’t want to be disappointed by Congress, you understand me?”. Trump merely restated his initial dot points of aiming for an ideal goal of a 15% corporate tax rate, down from the current 35%, partially paid for by eliminating some deductions and boosting economic growth.
It’s a day of key global risk events. First up are the Chinese PMIs (11.00am AEST), Australian Capex (11.30am AEST) and the US PCE deflators (22.30pm AEST).
As for the Chinese PMIs, the market looks for a similar pace of activity at 51.3 from 51.4 last month. Details last time revealed strength in steel production and it will be interesting to see whether this has continued in August.
Focus then shifts down-under to Australia’s Capex report which contains expenditure figures for Q2 as well as investment intentions for 2017-18. Although the market looks for a 0.2% q/q increase, the whisper number is likely higher after yesterday’s stellar Construction Work Done numbers. The market will also be attuned to expectations for spend, with the market expecting a third estimate of $95.9bn for 2017-18. Also out are RBA Credit Statistics (11.30am), thought this typically receives little attention.
Next up are inflation figures for the Eurozone (will they also beat given Germany’s figures yesterday?). The last piece is then the US PCE deflators. The market looks for a still subdued 0.1% q m/m increase for both the headline and core measures. The Chicago PMI will also garner attention ahead of Friday’s more significant Manufacturing ISM.
On global stock markets, the S&P 500 was +0.46%. Bond markets saw US 10-years +0.17bp to 2.13%. In commodities, Brent crude oil -2.58% to $50.66, gold-0.2% to $1,310, iron ore -0.4% to $76.08, steam coal +0.4% to $97.40, met. coal -0.1% to $196.90. AUD is at 0.7905 and the range since yesterday 5pm Sydney time is 0.789 to 0.7996.
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