August 4, 2017

Markets Today: It Takes (more than) Two

The British Pound has been knocked off its recent lofty perch.

The biggest news stories overnight are the 6-2 Bank of England MPC vote for no change in rates together with downgraded growth forecasts, which has knocked the British Pound off its recent lofty perch, and a significant downside surprises from the US non-manufacturing ISM survey which suggests some downside risk to tonight’s US payroll numbers (see Coming Up).

And just in the last hour or so, the Wall Street Journal has reported that US special prosecutor Robert Mueller has impanelled a grand jury to investigate the allegations of Russia’s interference in the 2016 elections. No great surprise perhaps, but the US dollar and US Treasury yields both fell back a touch on these headlines just ahead of the New York close.

Ahead of the Bank of England’s latest decision, there was speculation that Chief Economist Andy Haldane might, in light of recent remarks, shift his vote on the Bank Rate decision in favour of an immediate rate rise.  As it transpired, the vote was 6-2 versus 5-3 last time. So two of the three June dissenters (McCafferty and Saunders) held their ground, the third (Kristen Forbes) has now left and the new kid on the MPC block, LSE economic professor Silvana Tenreyo, voted with the majority.

BoE governor Mark Carney gave a pretty downbeat assessment in his post-meeting press conference, largely due to Brexit uncertainties. The Bank also downgraded its growth forecast – now 1.7% from 1.9% for 2017 and 1.6% from 1.7% in 2018 – while retaining its forecast for inflation to hit a peak of 3% and remaining above the 2% target throughout the forecast period (2.2% at the end).  Lower real incomes are a big part of the pessimistic growth story here. Against the Euro, the pound fell to its lowest levels in nine months, EUR/GBP now back above 0.90 for the first time since early November 2016.

The US data saw the non-manufacturing ISM index fall to 53.9 from 57.4 against an expected much smaller fall (56.5). This places the July index below its 2016 average. And since services represent some 88% of the U.S. economy, it suggests that underlying growth is currently no higher than about 2%. Elsewhere US weekly jobless claimed remained low at 243k while factory goods orders in July rose by 3% in line with expectations.  Earlier in the night the final Eurozone composite PMI printed at 55.7, close enough to the 55.8 preliminary reading.

Lower US treasury yields, with 10s down to around 2.22% from 2.26% when we left off Thursday, has seen the Japanese Yen fare best among the major currencies, with Sterling firmly at the bottom of the pack. AUD/USD has recovered about a quarter of a cent of yesterday’s local session losses, to around 0.7950.  This amid mixed commodity prices (oil off around 50 cents, gold up $2 and iron ore 63 cents higher at $72.93).

Coming Up

A big day ahead from both the AUD and USD sides of the AUD/USD equation with the RBA Statement of Monetary Policy and June retail sales both at 11:30 AEST and then US employment data tonight.

Retail Sales is typically one of the more sensitive of the Australian data points, this last month of the quarter providing nominal sales growth (or not!) for the month and sales volumes for the quarter.  For the June month, NAB’s forecast (partly based on NAB’s new Cashless Retail Sales Index for June) is for flat sales, with competitive conditions still evident in the NAB Business Survey through to May (consensus +0.2%). While there is some downside risk to this estimate – together with damped sales prospects in the near term from the already-in-place rises in power prices – we are also mindful that Department Store Sales dipped in May and often sees payback the next month within still difficult conditions. For the quarterly volume read-out, NAB is 1.3% (consensus 1.2%). Knee-jerk market reaction is more likely to come from the monthly than quarterly reading and where a negative number may be needed to take much of a bite out of the Aussie.

As for the SoMP, the RBA told us on Tuesday their forecasts for the economy are ‘largely unchanged’. Nevertheless markets are on guard for an upwards revision to their near term inflation forecasts (driven by utility prices rises) but possible small downgrade to medium term inflation forecasts (on soft wages growth and/or exchange rate gains since May). There is also risk that Tuesday’s Statement referencing growth rising to ‘around 3%’ over the next two years translates into a lowering of the 2 ¾-3 ¾% forecast in May for growth in the years ended June 2018 and December 2018. More elaboration on their concerns about the recent rise in the currency will also be closely parsed.

On US payrolls, the relatively weak employment sub-index in last night’s non-manufacturing ISM (55.9 from 60.8) suggests some downside risk to pre-existing expectations for a 180k rise in non-farm payrolls.  The unemployment rate is seen falling to 4.3% from 4.4%.  As, if not more, market interest will be centred on average hourly earnings growth, seen +0.3% on the month but which would depress annual growth to 2.4% from 2.5% and meaning hopes for a pick-up in earnings growth to nearer 3% remain elusive.


On global stock markets, the S&P 500 was -0.22%. Bond markets saw US 10-years -4.98bp to 2.22%. In commodities, Brent crude oil -0.86% to $51.91, gold-0.3% to $1,268, iron ore +0.9% to $72.93, steam coal -0.5% to $94.55, met. coal +3.3% to $186.00. AUD is at 0.7948 and the range since yesterday 5pm Sydney time is 0.7915 to 0.7969.

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