Main Themes: An announcement by China and the US to hold trade talks this month eased trade-war concerns and was supportive of sentiment.
Share Markets: Positive earnings results and de-escalating trade tensions supported a stockmarket rebound. The Dow surged 1.6%, while the S&P500 rose 0.8% and the Nasdaq rose 0.4%.
Interest Rates: The improvement in sentiment initially propped up yields, although they dipped briefly upon the release of weaker-than-expected US data overnight. US 10-year treasury yields rose as high as 2.89%, but then fell later on to be little changed over the session, closing at 2.87%.
Foreign Exchange: The US dollar was slightly lower, weighed down by the relative weak economic data and the improvement in risk appetite. Losses however, were muted given the sharp move in equity markets. Conversely, most currencies recovered against the greenback, including the yuan and GBP, respectively helped by the news of US-China trade talks and stronger-than-expected retailing data. The Australian dollar bounced after the fall in the unemployment rate in yesterday’s employment data, rebounding from around 72.3 US cents to trade at around 72.6 US cents this morning.
Commodities: Prices of most commodities rose, including oil and copper, as risk appetite improved and the US dollar eased.
Australia: Employment fell 3.9k in July, only the second drop in jobs in nearly two years. However, in the context of a 58.2k increase in jobs over June, the soft monthly outcome for July does not come as a major surprise. The overall picture of the jobs market continues to be one of strength. The unemployment rate fell from 5.4% in June to 5.3% in July, the lowest in nearly six years. The fall reflected a drop in the in the participation rate from 65.7% in June to 65.5% in July. However, the gradual reduction in the unemployment rate over the past few years is pointing to a lessening of spare capacity in the labour market. Leading indicators and solid economic growth suggest employment gains should be sufficient to continue to bring the unemployment rate down over time. Indeed, we believe there is a reasonable risk that the unemployment rate will hit 5% in 2019, ahead of the RBA’s timing. This would suggest that the economy could approach full-employment some time next year, and point to a risk that wage pressures will build. We, however, remain sceptical that wage growth will pick up sufficiently for the RBA to lift interest rates any time soon, even with the unemployment rate approaching 5.0%. The experience from overseas suggests technological change and competition could limit the ability of firms to lift wages substantially.
Japan: Japan’s trade balance swung from a ¥721bn surplus in June to a ¥231.2bn deficit in July. The deterioration reflected slower exports and a higher import bill due to a lift in oil prices. It coincides with a slowing in momentum in Chinese economic activity. On the question of trade tensions, it is too early to say whether the impact of tariffs is playing a part in the weaker exports. A clearer picture will emerge in coming months.
Europe: The trade balance edged down from €16.9bn in May to €16.7bn in June, but a surplus remains sizeable.
United Kingdom: Retail sales rose 0.7% in July, more than recovering a 0.5% decline in June, and beating the consensus estimate for a 0.2% increase. Warmer weather may have helped boost spending in addition to the World Cup-related spending and discounting.
United States: Housing starts recovered only a marginal 0.9% in July, after a revised 12.9% drop in June. A range of housing indicators are suggesting softer conditions reflecting the impact of higher mortgage rates and higher costs of construction. Nonetheless, the 1.5% increase in building permits suggests some partial recovery in starts.
The Philadelphia Fed index fell from 25.7 in July to 11.9 in August, the lowest in almost two years. It stands in stark contrast to the New York regional survey released the previous day which rose to a ten-month high. The difference might reflect regional disparities although some of the detail told similar stories. In both surveys, new orders slowed suggesting that manufacturing activity was likely to moderate. The Philadelphia survey was also suggesting that businesses were optimistic in regards to the outlook.
Initial jobless claims edged down from 214k to 212k for the week ending August 11, still suggesting ongoing tightness in the labour market.
Today’s key data and events
NZ PPI Outputs Q2 prev 0.2% (8:45am)
AU RBA Governor Lowe Semi Annual Testimony (9:30am)
AU RBA Assistant Governor Ellis Speaks (5:30pm)
EZ Current Account Jun prev €22.4bn (6pm)
EZ CPI y/y Jul fin exp 2.1% prev 2.0% (7pm)
US Leading Index Jul exp 0.4% prev 0.5% (12am)
US UoM Consumer Sentiment Aug exp 98.0 prev 97.9 (12am)
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.
Janu Chan, Senior Economist