Main Themes: Trade worries came back to haunt investors, as the prospect of a new round of US tariffs on China loomed. There were also concerns in emerging markets, namely for Argentina and Turkey. Share markets and bond yields fell. The A$ was hit by the softer risk environment and weaker-than-expected data yesterday.
Share Markets: The recent rally in stock markets eased reflecting the lingering concerns over trade tensions and emerging markets. US shares fell - the S&P500 and the Nasdaq edged down from record highs, dropping 0.4% and 0.3%, respectively. The Dow fell 0.5%.
Interest Rates: US government bond yields fell reflecting the risk averse mood and despite the uptick in inflation data last night. US 10-year yields fell 3 basis points to 2.86%.
Foreign Exchange: Softer risk appetite was supportive of the US dollar. The Australian dollar conversely fell to trade a 72.7 US cents this morning, and also weighed down by disappointing capex and building approvals data yesterday.
Commodities: Oil prices gained on reduced supply from Iran and Venezuela. Prices of other commodities lost ground as the US dollar rebounded and risk appetite weakened.
Australia: Private capital expenditure (also known as capex) fell 2.5% in the June quarter, the first quarterly drop in 1½ years. Annual growth eased from a pace of 4.3% in the March quarter to 0.4% in the year to the June quarter, which was the weakest in a year. Actual spending in 2017-18 was $118.9 billion, a modest 4.1% increase from 2016-17. Much of that improvement has come from a solid increase in non-mining investment. Looking ahead to 2018-19, the outlook is not as positive. The third estimate came in at $102.0 billion. This is 1.1% lower than the third estimate for spending for 2017-18. Both mining and non-mining investment intentions were somewhat disappointing. We are still yet to see the end of the downturn in mining investment, although the drag on the economy is continuing to lessen. The spending intentions survey suggests that this drag has further to run. After the strong increase in non-mining investment over 2017-18, plans imply non-mining investment spending will flat line in 2018-19.
Building approvals fell 5.2% in July, almost retracing the 6.8% increase in June. It still leaves the number of approvals in the month elevated, but approvals are now 16.0% lower than their August 2016 peak. The downturn in housing market is making its way through to building activity. There was broad weakness across States. Building approvals declined in all States, with the exception of Tasmania. The level of approvals sits well above the long-run average and indicates residential construction activity will remain elevated over the next 12-18 months. Auction clearance rates, a slowdown in house prices and weaker lending data suggest that housing activity will continue to soften, and will continue to feed through to weaker residential construction. That said, a downturn in housing will be mitigated by strong population growth and a firm labour market.
Europe: Most confidence indicators weakened in August, likely reflecting concerns over trade. Economic confidence fell from 112.1 in July to 111.6 in August. The business climate indicator also weakened from 1.30 to 1.22. Meanwhile, consumer confidence was unrevised at -1.9 but still down from the -0.5 reading in July.
German inflation (EU measure) edged down from an annual pace of 2.1% in July to 1.9% in August.
Japan: Retail sales edged 0.1% higher in July, for an annual pace of 1.5%. It was a touch below expectations for a 0.2% increase. The data point to a soft start for consumer spending in the September quarter.
New Zealand: Building consents fell 10.3% in July following an 8.2% drop in June. Although the data is volatile, it points to a flatlining of residential construction at an elevated level.
United States: Consumer spending is continuing to grow at a firm pace rising 0.4% in July. Meanwhile, personal incomes were a touch below expectations lifting 0.3% (versus an expected 0.4%). PCE headline inflation edged up from 2.2% to 2.3% in July, the highest in six years and the core measure of inflation, the measure closely watched by the Fed, hit 2.0%. It reinforces the view that the economy is continuing to perform solidly and there is the risk that inflationary pressures will build. Nonetheless, the fact that consumer spending is outpacing incomes point to a downside risk that growth in consumer spending will lose momentum.
Today’s key data and events
NZ ANZ Consumer Confidence Aug prev 118.4 (8am)
UK GFK Consumer Confidence Aug exp -10 prev -10 (9:01am)
JN Jobless Rate Jul exp 2.4% prev 2.4% (9:30am)
JN Industrial Prod’n Jul exp 0.2% prev -1.8% (9:50am)
CH Non-Mfg PMI Aug exp 53.8 prev 54.0 (11am)
CH Manufacturing PMI Aug exp 51.0 prev 51.2 (11am)
AU Private Sector Credit Jul exp 0.3% prev 0.3% (11:30am)
JN Housing Starts Jul y/y exp -4.1% prev -7.1% (3pm)
UK Nationwide House Prices Aug exp 0.1% prev 0.6% (4pm)
EZ German Retail Sales Jul exp -0.2% prev 0.9% (4pm)
EZ Unemployment Rate Jul exp 8.2% prev 8.3% (7pm)
EZ CPI Core y/y Aug exp 1.1% prev 1.1% (7pm)
US Chicago PMI Aug exp 63.0 prev 65.5 (11:45pm)
US UoM Consumer Sentiment Aug exp 95.5 prev 95.3 (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