August 2, 2016

Markets Today: Take it easy

Released overnight, the US ISM Manufacturing release for July was barely a miss, coming in at 52.6 against consensus of 53.0.

Released overnight, the US ISM Manufacturing release for July was barely a miss, coming in at 52.6 against consensus of 53.0.  The report revealed little change in the employment component that remained soggy at 49.4, after June’s 50.2, the market now to pay close attention to Employment in Wednesday’s Non-manufacturing ISM.

The release had a minimal impact on the USD in the overnight session, the Bloomberg spot USD index up 0.34% this morning.  US Treasury yields rose, 2s up 2.4bps and 10s up 6.9bps to 1.51%.  Also released overnight was Construction spending for June, down 0.6% (consensus was +0.5%), offset somewhat by an upward revision.

While the US ISM Manufacturing release was a small miss, the final July Eurozone counterpart was revised up slightly, to 52.0 (up from 51.9), Germany’s up a tenth.  However, in the lead up to the BoE meeting on Thursday, the preliminary UK Manufacturing PMI was revised down to 48.2 from the preliminary 49.1, only boosting expectations further the Bank will ease monetary policy further, through an expected lowering of the Bank rate if not further asset purchases (QE).  Sterling was already pulling back into the release, and the weaker print was the spur for a further decline towards levels at the end of last week, Cable trading this morning at around 1.3180.

After hugging 0.76 for most of yesterday, and in the lead up to what most pundits think is a close call today from the RBA, the AUD has pulled back into the mid-to-lower 0.75s overnight. Base metals have been mixed with copper down but nickel up, WTI trading on $40/bbl, and gold little changed.  The daily Chinese import price of iron ore though rose $62.27/t, up $2.90, +4.88% with Dalian iron ore futures up 2.86% and Chinese steel rebar futures rising 1.50%, some late mail for the RBA to ponder on at this morning’s Board meeting.  Incidentally, at 0.7535, the AUD/USD is almost bang on when the Bank finalised its May forecasts.

Coming up

Ahead of the RBA board announcement at 2:30 PM, we get the June reports for International Trade and Building Approvals.  Of the two, port and industry data points to an uplift in June in bulk commodity export shipments, specifically iron ore and LNG. Gold exports might also get a lift, if only because the past two months have been a lot weaker than normal. NABs estimate for the trade balance is a lower than consensus $A1.65m that would normally be supportive of the Aussie ahead of the RBA.

We have no strong presumption about building approvals and industry information suggests that the trend in the development pipeline is weakening, that suggests to us an outcome flat for the month after the 5.2% fall in May. Also out this morning is the weekly ANZ Roy Morgan consumer confidence index, NZ house prices and the NZ two-year inflation expectations report.

That brings us to the RBA outcome at 230 with the market priced toward an easing (64% priced), with an on hold (NAB included) view likely to support the front end of the AU yield curve and the Australian dollar. It’s going to be a very interesting decision in what will be Governor Stevens’ second last in the chair, stepping down September 17. As we said now on several occasions, last week’s CPI was right in line with RBA expectations.

The other big event today, for the yen markets, is Japanese Government’s ¥28tr fiscal stimulus statement and its details.  No timing as yet, the package likely to be announced once Cabinet signs it off, then revealing how much is new money.

Early in the European session there is a speech being given by the Fed’s Robert Kaplan in Beijing, with the main market focus on the PCE deflators within the US personal income and spending report for June. For NZD watchers, there is also a weekly dairy option tonight.


On global stock markets, the S&P 500 was -0.13%. Bond markets saw US 10-years +5.29bp to 1.51%. In commodities, Brent crude oil -2.89% to $42.27, gold+0.3% to $1,361, iron ore +4.9% to $62.27. AUD is at 0.7536 and the range since yesterday 5pm Sydney time is 0.753 to 0.7595.

Good luck.

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