Below trend growth to continue
Weaker than expected US economic growth for the June quarter after an underwhelming outcome from the Bank of Japan on Friday set the tone for markets on Friday and at the open today.
Weaker than expected US economic growth for the June quarter after an underwhelming outcome from the Bank of Japan on Friday set the tone for markets on Friday and at the open today. The currency markets start this week with the Japanese yen stronger, the USD weaker and the AUD/USD opening in early trade almost right on 0.76, right up to its highs of Friday night after the US growth disappointment. US Treasury yields eased and the Fed funds futures curve is pricing in a 40% chance of the Fed lifting the rates again by the end of the year and one hike not fully priced until the first half of 2018. In commodity markets, iron eased after a strong week, oil prices were mixed after falling last week. Local weekend auction results showed strong auction results, Sydney’s at 80.4% (the strongest this year), Melbourne’s at 75.6%, up from 71.6%.
It’s far from done and dusted for the USD and the Fed as it’s a very big week for US data with the ISM reports, tonight for manufacturing and the non-manufacturing report on Wednesday, with payrolls on Friday all important growth signposts into the September quarter
Released Friday, Eurozone GDP for the June quarter was right in line with expectations at 0.3% q/q, matching the growth performance of the US economy in the second quarter that for the advance estimate came in at 1.2% (seasonally adjusted annualised rate), even weaker than Thursday’s 1.8% GDPNow estimate from the Atlanta Fed. On a year to basis, growth in the Eurozone over the year was a little ahead of the US at 1.6%, compared to US growth of 1.2%. The detail of the US growth was a little more comforting with strong personal consumer spending up 4.2%, but soft investment. Growth was held back by a draw from inventories that detracted an additional 0.75% points above the previous quarter’s drag.
The Fed’s John Williams and Robert Kaplan (both non-voters this year) were speaking after GDP, Williams saying that the Fed will be raising rates over the next couple of years, that strong data could still support two 2016 hikes, noting the inventory weakness in the GDP report, but also that it was important to make progress on both goals to hike. He said he’d be “perfectly comfortable” with some inflation overshoot. Kaplan said that the GDP report “makes you want to see more information” and that the Fed can raise rates gradually and patiently.
In NZ this morning, Fonterra has maintained its milk price forecast steady at $4.25 with its earnings guidance 2016-17 marginally better, the NZD already bid from weak US GDP.
It’s a heavy event week kicking off today with the official Chinese PMIs at 11 AM, then the Caixin manufacturing PMI 45 minutes later. Final July manufacturing PMI reads for the UK and the Eurozone are scheduled, then the US ISM Manufacturing report tonight.
There are some local data points today, and while each adds a little to their own sub-story of the economy, none is market sensitive. There’s the AiG PMI Manufacturing index that’s been above 50 semi-comfortably for some time now. There’s also the Melbourne Institute’s CPI gauge for July, HIA new home sales report for June and the full July month CoreLogic RP Data house prices report.
Other big events include tomorrow’s RBA meeting and the Japanese Government’s fiscal stimulus package, its size and content and, on Thursday, the Bank of England’s expected easing in monetary policy and the RBA’s quarterly Statement on Monetary Policy on Friday. NAB look for the RBA to hold rates steady tomorrow.
On global stock markets, the S&P 500 was +0.32%. Bond markets saw US 10-years -5.13bp to 1.45%. In commodities, Brent crude oil -0.87% to $43.53, gold+1.7% to $1,358, iron ore -2.1% to $59.37. AUD is at 0.7596 and the range since Friday 5pm Sydney time is 0.7494 to 0.7607.
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