Main Themes: Could there be any theme other than the World game this morning? Croatia go through to their first ever World Cup final to face France after beating England 2 goals to 1. It was an intense match for both sides, especially from the start of the second half. Away from the pitch, trade wars continued to be the main theme in markets.
Share Markets: The renewed tensions in the trade arena caused US share markets to sell off. The S&P 500 index fell 20 points (or -0.7%).The Dow Jones closed down 219 points (or -0.9%).
Interest Rates: After falling yesterday on the trade headlines, US 10-year treasury yields rose from 2.86% to 2.92%, but slipped again to 2.84% late in the New York session. US 2-year yields rose from 2.55% to 2.59% and preserved much of that gain, helped by firm US wholesale inflation data. Fed fund futures yields continued to price 1½ more rate hikes for this year.
Foreign Exchange: The US dollar index is up moderately overnight. EUR/USD fell from 1.1740 to 1.1665. USD/JPY rose from 111.00 to 112.17, which is its highest rate since January. The AUD and NZD demonstrated they are typically the most sensitive G10 currencies to global-trade news. The uncertainty from the escalating trade-war news is likely to continue to put downward pressure on both these currencies in the short term at least. AUD/USD extended yesterday’s losses from 0.7420 to 0.7361. NZD/USD similarly fell from 0.6820 to 0.6756. AUD/NZD rebounded off 1.0870 to nearly 1.0920.
Commodities: The latest round of shots fired in the trade war between the US and China has hit commodities hard. The losses have been broad-based, as investors fear the rise in protectionism will hurt global growth and demand for raw materials.
Australia: Housing finance was stronger than expected, rising by 1.1% in May. It follows five consecutive months of decline. On an annual basis, loans to owner occupiers were down 2.5% in May. The value of lending to investors eased 0.1% in May, which was the third consecutive monthly decline. On an annual basis, lending to housing investors was down 13.4%.
The Australian Prudential Regulation Authority (APRA) Chairman Byres said yesterday any more lending curbs will be “at the margin”. He said “while there is more good housekeeping to do, the heavy lifting on lending standards has largely been done.”
Consumer confidence rose by 3.9% to a reading of 106.1 in July, according to the latest survey from the Melbourne Institute and Westpac. This was the highest reading since November 2013 and well above the 100 level, indicating more consumers are optimistic than pessimistic. Indeed, it was the eighth reading above 100. Detail within the survey suggests the increase in sentiment was driven by rising optimism about the economy.
Canada: The Bank of Canada raised their benchmark rate by 25 basis points to 1.5% overnight, as widely expected. The Bank cited global trade tensions as the key risk to the outlook, but remained upbeat on domestic conditions and signalled more gradual hikes.
China: According to a Wall Street Journal article, China's retaliation against US President Trump's new tariffs may include delaying M&A approvals and licenses for US firms and ramping up inspections of American products. While Beijing has yet to lay out its measures, Vice Minister of Commerce, Wang Shouwen, said China will not yield to blackmail and warned Washington must negotiate in good faith.
United States: The wholesale price of goods and services rose by 0.2% in June, after a rise of 0.5% in May. The annual rate lifted from 3.1% in May to 3.4% in June, which is the highest annual rate in nearly seven years. Core producer prices, which strip out volatile price items (i.e. food and energy), rose by 0.3% in the month and by 2.8% on a year ago. The figures indicate that inflation pressures in the production pipeline are firming amid rising demand and tariffs on steel and other goods.
The US has announced its plans to impose taxes on a further US$200 billion worth of Chinese imports, in retaliation for China's response to America's first round of tariffs. The US administration released a 195-page list of Chinese imports that will be hit with a 10% tariff. The tariffs could take effect from as early as September. It follows from the 25% tariffs on US$34 billion worth of Chinese imports into the US that took effect at midnight on Friday.
It is clear that trade tensions are escalating and this escalation shows no signs of easing in the near term, creating downside risk for the global growth outlook.
Today’s key data and events
UK RICS House Prices Jun exp -4% prev -3% (9:01am)
AU Cons. Inflation Expectations Jul prev 4.2% (11am)
UK BoE Credit Conditions & Bank Liabilities Surveys (6:30pm)
EZ Ind. Production May exp 1.2% prev -0.9% (7pm)
US CPI Jun exp 0.2% prev 0.2% (10:30pm)
Times are AEST. All data forecasts are m/m or q/q and seasonally adjusted unless otherwise specified. Forecasts for Australian data are our forecasts and for other countries they are consensus forecasts.
Besa Deda, Chief Economist