Main Themes: Focus was on US retail sales which beat expectations. However, share markets were spooked by a new threat of tariffs from Trump. US bond yields and the US dollar rose.
Share Markets: US shares slipped from record highs as concerns over trade lifted once again. At a Cabinet meeting, Trump said that the US still had a long way to go to conclude a trade deal with China and could put additional tariffs on “if we want”. Shares are also being impacted by earnings results which are currently underway. The Dow fell 0.1%, while the S&P500 fell 0.3%.
Interest Rates: Yields on US treasuries lifted on stronger-than-expected retail sales, but then pared those gains later on, likely on the back of dovish comments by Fed speakers overnight. US 10-year yields ended 1 basis point higher at 2.10%. US 2-year yields lifted 2 basis points to 1.85%.
Foreign Exchange: The US dollar index rose on signs that US household spending remains resilient. Sterling dropped to its lowest in more than two years as Boris Johnson and Jeremy Hunt, both contenders to be Prime Minister, took hard Brexit stances and would not accept the Northern Irish backstop component of May’s current Brexit deal. The AUD weakened on US dollar strength, falling from an intraday high of 70.4 US cents to 70.1 US cents this morning.
Commodities: Oil prices weakened on signs of easing tensions with Iran after Trump said that progress had been made. Gold prices fell following stronger-than-expected retail sales and on the stronger US dollar.
Australia: In the minutes of the RBA board meeting in July, the RBA stated it “would continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time”. While the RBA is continuing to indicate an openness for further monetary easing, the language in the minutes is less explicit than a month ago and suggests less urgency in another near-term rate cut. The labour market is continuing to be key focus for the RBA. Given the soft pace of economic growth, weakening confidence and conditions among businesses and slowing job vacancies, we expect the labour market will soften. A slower pace of job growth further highlights a risk that the unemployment rate will rise. The RBA continues to note that there was still “’spare capacity in the labour market”. Downside risks to the economy are continuing, including soft consumer spending, a deterioration in business conditions and a more uncertain global outlook. Importantly, leading indicators are pointing to a deterioration in the labour market. The RBA is therefore expected to pull the rate cut trigger once again. We continue to favour the timing of such a move in November, but cannot rule out the RBA moving earlier.
Europe: The ZEW survey continue to point to weak expectations for economic growth. The index for the Euro zone edged slightly lower from -20.2 in June to -20.3 in July, the weakest since January.
New Zealand: CPI rose 0.6% in the quarter, in line with expectations of the market and the RBNZ. Higher fuel costs boosted inflation in the quarter, although price pressures were otherwise well-contained. While the annual rate picked up from 1.5% to 1.7%, it remains in the bottom-half of the Reserve Bank’s 1 to 3% target range. Given weakening conditions domestically, an uncertain global environment and a clear indication from the RBNZ, it suggests that the central bank will lower official interest rates when it meets next month.
United Kingdom: It was a mixed employment report overnight. Employment growth was softer than expected, growing 28k in May versus estimates for a 70k gain. The ILO employment remained steady at 3.8%, but the tightness of the labour market is resulting in a pick-up in wages. Average weekly earnings accelerated from an annual rate of 3.2% in April to 3.4% in May, well above the consensus estimate of 3.1%. While there has not been a material pick-up since the beginning of the year, wage growth remains well above the 2.6% pace a year ago.
United States: Retail sales beat expectations in June, rising 0.4%. The consensus estimate was for a 0.2% gain, and followed an increase of 0.4%. Consumer spending remains resilient, at a time when there are increasing signs that business activity is moderating.
Industrial production was flat in June, following a 0.4% gain in May and a -0.5% decline in April. Over the quarter, it indicates that industrial output has flatlined, corresponding with weaker manufacturing activity in most surveys.
The NAHB housing market index edged up from 64 in June to 65 in July. Home builder confidence is likely getting a boost from lower mortgage rates.
Federal Reserve Chair Powell reiterated earlier comments that the Fed would “act as appropriate to sustain the expansion”. The comments continue to reaffirm the view that rates would be lowered in July. Other Fed officials also provided some dovish comments. Dallas Federal Reserve President Kaplan said that the best argument for easing monetary policy was the yield curve, which has been forewarning a weaker growth outlook for sometime. Chicago Federal Reserve President Evans raised the possibility of cutting 50 basis points at the July meeting saying that “if I think it takes 50 basis points before the end of the year to get inflation up, then something right away would make that happen sooner”. However, Evans also added that “a strong domestic economy facing some uncertainty – you could easily argue to go a little slower”.
Today’s key data and events:
AU WBC Leading Index Jun prev -0.1% (10.30am)
UK CPI Jun y/y exp 2.0% prev 2.0% (6.30pm)
US Housing Starts Jun exp -0.7% prev -0.9% (10.30pm)
US Building Permits Jun exp 0.1% prev 0.7% (10.30pm)
US Federal Reserve's Beige Book (4.00am)
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