Below trend growth to continue
Most of Friday’s market price action emanated from the US Q2 Employment Cost Index, which at just +0.2% Q/Q (not annualised) was the lowest quarterly change since records began in 1996. The market was looking for +0.6% after +0.7% in Q1.
Most of Friday’s market price action emanated from the US Q2 Employment Cost Index, which at just +0.2% Q/Q (not annualised) was the lowest quarterly change since records began in 1996. The market was looking for +0.6% after +0.7% in Q1. The number pushed the annual ECI rise down to 2.0% from 2.6% in Q1, and back to where it was a year ago. US economic commentators noted that the unexpected weakness resulted mostly from a slump in sales commissions or incentives. Wages ex-sales incentives were +2.0% Y/Y after 2.1% in Q1 and 1.8% a year ago, so broadly consistent with the average hourly earnings reading in the last employment report. So the latter, for July, in this coming Friday’s report will obviously be a keen market focus.
In FX, much of the sharp slide in the dollar in the immediate aftermath of the ECI data was subsequently reversed thanks in part to an upside surprise in the Chicago PMI but also comments from St. Louis Fed president James Bullard. On Friday became the first Fed official to have given an interview or speech since Wednesday’s FOMC meeting conclusion. He told the WSJ that ‘we’re in good shape’ to lift rates at the Sep 16-17 FOMC gathering and suggested that at last week’s meeting, the Fed wanted to see how the subsequently released Q2 GDP data shaped up before clearing the way to act. Bullard shrugged off Friday’s report showing surprisingly tepid wage gains, saying he isn’t worried about that situation right now
The same could not be said for Treasuries, where yields actually extended their declines in late trade to close on the lows for most tenors. Equities quite liked the ECI message but drifted lower during the NY afternoon with indices mostly lower. So once again, FX looks to be well ahead of the US rates market in anticipating the first (and perhaps subsequent) Fed moves.
DXY ended -0.23% at 97.34, having been as low as 96.35 (-1.3%) post ECI. EUR/USD finished NY +0.48% to 1.0984 having been as high as 1.1114. USD/JPY suffered with Treasury yields, -0.2% to Y123.89. AUD recovered the 0.73 handle to be +0.21% to 0.7308 despite fresh across the board commodity price weakness (ex-gold). US dollar weakness couldn’t prevent NZD losing ground, – 0.15% to 0.6592 and CAD more so than any other G10 currency, USD/CAD +0.7% to 1.3091. Lower oil and weaker GDP (May -0.2%) were to blame. Canadian PM Stephen Harper has just called the general election for 19 October and where latest opinion polls put the centre-left opposition narrowly ahead of the incumbent Conservatives.
In rates, US 2-year notes ended the NY session -6.7bps at 0.66%, and 10s -7.9bps to 2.18%. The fall in 10s is from an intra-month (13 July) high of 2.46% and to the lowest (closing) level since 1 June.
In stocks, the S&P500 finished -0.32% and implying a 1.3% gain in July overall; the Dow -0.32% for -0.23% in July overall, and NASDAQ -0.1% for +2.38% on the month.
In commodities, gold rallied $7.04 to $1,095.8 (still -$3 on the week), but elsewhere it was a sorry story with the LMEX index finished -0.8% and iron ore losing $2.23 to $53.41 (though it was still + $2 up on the week). WTI crude lost another $1.40 to $47.12 (-$1 on the week) and Brent -$1.10 to 52.21 (-$2.40 on the week).
Probably to the surprise of nobody, the official China manufacturing PMI published Saturday failed to validate the sharp decline in the earlier Caixin (formerly HSBC) Markit version that recall fell to 48.2 from 49.4. It slipped to 50.0 from 50.2 and the 50.1 expected. The services reading rose to 53.9 from 53.8.
Other than the aforementioned US ECI, the later-released Chicago PMI jumped 54.7 from 49.4 (50.8E). The final University of Michigan CSI slipped to 93.1 from the 93.3 preliminary and 94.0 expected.
It’s a very big week ahead on both sides of the Tasman and globally. In Australia, there is the RBA’s policy decision (Tue), attendant Statement on Monetary Policy (Fri), and the labour market report (Thu). The BoE’s Inflation Report (Thu) will be interesting. There’s plenty on the US calendar through the week, but the keen focus is on the employment report (Fri). Today brings the national manufacturing ISM for July, expected to be unchanged on June at 53.5 as well construction spending and June personal income spending and deflator data.
In NZ, our BNZ colleagues look for NZD-negative outcomes from the dairy auction (early Wed am) and the Fonterra payout update (Fri). The local Q2 employment report is also due (Wed).
It’s a NSW banking holiday today but we’ll get the AiG manufacturing PMI, CoreLogic RP Data July house prices, TD Securities’ monthly inflation gauge, HIA new home sales and ANZ July job ads. The final Caixin Final China manufacturing PMI is due at 11.45 AEST.
On global stock markets, the S&P 500 was +0.70%. Bond markets saw US 10-years +2.88bp to 2.28%. On commodity markets, Brent crude oil +0.64% to $53.64, gold 0.0% to $1,096, iron ore +4.6% to $55.89. AUD is at 0.7312 and the range since Friday’s local close has been 0.7235 to 0.7367.
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