Below trend growth to continue
During the US dollar’s recent revival associated with deteriorating global risk sentiment and steepening yield curves, the commodity currencies – in particular the AUD and NZD – have been the hardest hit.
During the US dollar’s recent revival associated with deteriorating global risk sentiment and steepening yield curves, the commodity currencies – in particular the AUD and NZD – have been the hardest hit. Thus it’s no surprise to see the antipodean currencies topping the G10 FX leader board overnight in association with a bounce in US stocks and modest weakening in the US dollar. AUD/USD trades back above 0.75 and the NZD above 0.73, for gains of 0.6% and 0.5% respectively over the past 24 hours.
The revival in stocks owes something to a resurgence in Apple’s share price, in turn linked to positive reports of early sales of the iPhone7 (or is it Samsung’s current travails with exploding Galaxy batteries, the U.S. Consumer Product Safety Commission last night issuing a formal product recall?).
As relevant to the rise in stocks, the fall in the VIX and the softer US dollar, has been a raft of generally disappointing US data and which have further boosted confidence that the Fed will not be moving on rates next week. Retail sales fell by 0.3% in headline term and by 0.1% ex-autos and also the core ‘control’ measure. To be fair, retail sale represents less than 50% of overall US consumer spending (it doesn’t capture the bulk of service sector activity). So we may still get overall personal consumption expenditure growing at a near-3% clip in Q3, but the hard evidence for that is currently lacking.
As well, industrial production fell by 0.4% (-0.2% expected after the strong 0.7% July rise, though even that was revised down, to 0.6%). Producer prices meanwhile were flat on the month and in core terms rose by just 0.1% on the month and +1% on a year ago. On the plus side, the Philly Fed and Empire manufacturing surveys showed bigger than expected bounce, but the details beneath the headlines weren’t that flash. Weekly jobless claims remain low, indicating ongoing labour market strength.
Despite the soft data and slightly lower short term US rates, longer dated bond yields are little changed. So the curve steepening theme of late is uninterrupted.
The Bank of England left policy as it was yesterday, through the minutes made clear that the majority still expect to vote to takes rates lower (from the current 0.25%) before the end of the year. Sterling was an underperformer in currency land as a result.
As for yesterday’s employment data, our economists describe it ‘a mixed report with a soft edge’. Overall employment falling by 3.9k was offset by the good news of a drop in the unemployment rate to its lowest since July 2013 (5.6%). The latter however was aided by the fall in the labour participation rate by 2/10%. Furthermore, the rise in the underemployment rate (those in work but working fewer hours than they’d like) rose by 0.3% to 8.7% – the highest since records began in 1978.
Overall, our sense is that the improvement in the labour market evident earlier this year has at a minimum slowed. The RBA won’t be panicking, with this year’s two rate cuts still to work their way through the economy. But it plays to our view that further cuts may be needed next year to prevent the unemployment rate trending back higher, in the context of headwinds to growth from an expected slowdown in housing construction and a slowdown in the growth rate of LNG production.
The domestic data and events calendar is pretty bare today, save for New Zealand aficionados who might show a bit of interest in ANZ’s August job advertisement and September consumer confidence.
The main draw offshore this evening is US August CPI, one of the last – in fact the last – top draw release before the Fed sits down next Wednesday and Thursday. Core CPI (ex-food and energy) has been trending sideways in recent months after the acceleration up though the Fed’s 2% target zone in the second half of 2015 and the start of this year. The Fed evidently continues to pay much more attention to the broader Personal Consumption Expenditure (PCE) deflator, which in core terms has continued to languish below 2% with no signs of acceleration.
Headline CPI is expected to lift to 1% from 0.8% (with past energy price weakness still having a depressing influence) and with the core measure remaining at July’s 2.2%.
Also up tonight is the preliminary US September University of Michigan consumer sentiment index. Last month, this disappointed while the Conference Board’s version excelled (and had a significant market impact). A rise to 90.6 from 89.8 is the consensus. The inflation expectations series (last at 2.5% for both 1-year and 5-10 years) should also attract attention – it does at the Fed.
On global stock markets, the S&P 500 was +1.01%. Bond markets saw US 10-years -0.69bp to 1.69%. In commodities, Brent crude oil +1.09% to $46.35, gold-0.6% to $1,314, iron ore +0.0% to $55.97. AUD is at 0.7515 and the range since yesterday 5pm Sydney time is 0.745 to 0.752.
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