A further slowing in growth
The overnight session was all about the July Fed Minutes.
The overnight session was all about the July Fed Minutes and while often these summary notes provide a range of all the different views within the FOMC, taken together the message appears to be that as much as a September hike is a possibility, the Fed is unlikely to move until there is a consensus on the outlook for growth, hiring and inflation.
While concerns from abroad have receded and the pickup in US job gains have helped eased two major uncertainties about the outlook, there are still some concerns about the growth outlook and inflation. As such there was a general consensus that it is prudent to wait for more data before making a decision to hike again.
The Fed meets again on September 20 for two days and since its last meeting economic data has been mixed. Jobs data in July was strong, but July retail sales disappointed suggesting consumption may not be a strong contributor to growth in Q3 and inflation for the month was also soft. Recent data would therefore suggest a hike is not imminent.
Prior to the release of the Minutes most markets were treading water, the USD traded with a positive tone, core global yields were mostly sideway, though equities were a bit heavy. In Europe, the Eurostoxx 600 and the FTSE 100 indices drifted lower for most of the session and ended the day -0.83% and -0.5% respectively. Following the release of the Fed Minute, US equities recovered to close the day marginally in positive territory, UST yields have drifted a little bit lower and the USD is weaker across the board.
Looking at currencies in more detail, the DKK and EUR sit at the top of the leader board up 0.1 and 0.08% against the USD and GBP is unchanged supported by some resilience in the labour market. Overnight the ILO UK measure of unemployment was unchanged at 4.9%, its lowest level since 2004/05 and data showed a fall in jobless claims, rather than a rise the market expected. Ahead of the release of the Fed minutes, the NZD and AUD were under pressure and while both have enjoyed an uplift post the Minutes, the pickup was not enough to lift them back into positive territory against the USD. Both are at the bottom of the leader board down 0.40% and 0.53% respectively
Looking at other news, Fed Bullard was on the wires and he reiterated his view of one more rate hike for this cycle leaving the Fed Funds rate at 0.625% through to the end of 2018.
Australia’s labour force report for July is out this morning and our economists expect a net monthly employment growth of 12k which should help keep the unemployment rate unchanged at 5.8%. Our numbers are fairly close to market consensus with Bloomberg showing the expected median at 10k and the unemployment rate at 5.8%.
The usual caveats for the numbers apply, the survey has a tendency to be quite volatile and sample rotations can often be the cause for large swings in the numbers. This month is a classic example; one eighth of the sample that drops out has a higher employment-to-population ratio and a lower unemployment rate than the rest of the sample. So unless the eight that comes in July also has above average metrics, then the chances are that the employment change could be biased down and the unemployment rate biased up.
NAB’s expectations for a net monthly employment growth of 12k is driven by positive signals from the likes of the NAB employment index and job advertisements which suggest we should get a solid employment outcome, however this initial number has been adjusted to reflect our expectation of a negative impact from sample rotation. The OIS market is currently pricing around a 50% chance of another RBA rate cut in November. A large negative employment number could potentially push the market to increase the chances of an RBA rate cut this year and weigh on the AUD, however some caution is advised as the devil could be in the detail.
Looking at offshore events, the UK releases retail figures for July (ex-fuel 0.3% exp vs -0.9% prev), Europe gets it construction output for June and final CPI numbers for July (0.9% yoy exp vs 0.9% prev). The US publishes weekly jobless claims and the August Philly Fed Survey. Claims are seen to be little changed at 268k and the Philly Fed is expected to rebound to +2 from 2.9.
Last but not least, Fed’s Dudley is scheduled to answer questions at a press briefing in New York and early tomorrow morning Fed Williams speaks in Anchorage where a Q&A is also expected. No doubt both will be pushed to provide more colour around their new thinking of a lower neutral rate and the implications for monetary policy ahead.
On global stock markets, the S&P 500 was +0.19%. Bond markets saw US 10-years -2.55bp to 1.55%. In commodities, Brent crude oil +1.88% to $49.82, gold+0.1% to $1,347, iron ore -1.9% to $60.87. AUD is at 0.7654 and the range since yesterday 5pm Sydney time is 0.7614 to 0.7676.
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