Main Themes: The raft of global economic data continued to be disappointing, particularly within manufacturing. The European Central Bank (ECB) meets tonight and markets are expecting a dovish shift. Bond yields and the euro have fallen. The Australian dollar also weakened with the undercurrent of global growth concerns and expectations of deeper rate cuts from the RBA.
Share Markets: Mixed earnings results flowed onto share market performance overnight. Chipmakers pushed the Nasdaq up 0.9% and the S&P500 rose 0.5%. Meanwhile, the Dow fell after disappointing results from Boeing and Caterpillar, which fell 0.3%.
Interest Rates: Yields on US treasuries fell after the run of soft economic data overnight, and tracked European yields lower ahead of the European Central Bank (ECB) meeting tonight. No policy change is expected, but markets are preparing for an increasingly dovish stance. A near 50% chance is priced in for 10 basis point cut in interest rates.
Foreign Exchange: The US dollar index trended sideways, although the euro weakened following weak manufacturing data in Germany. Sterling gained on some reduced political uncertainty, however will likely remain under pressure in coming months as risks of a hard Brexit remains heightened with Johnson as PM. The Australian dollar weakened on expectations of deeper rate cuts from the RBA and remained under pressure in the overnight session reflecting the undercurrent of global growth concerns. The AUD fell to around 69.8 US cents this morning.
Commodities: Oil prices fell, reflecting ongoing concerns about demand and despite a large drawdown in US crude stockpiles. Gold prices rose, supported by expectations of easier monetary policy before the ECB meets tonight.
Australia: We now expect the RBA to cut two more times (rather than once more). We see the most likely timing as October (previously November), followed by February next year, but stress that each meeting is live. Indeed, a rate cut as soon as September cannot be ruled out.
We also think there is some prospect the RBA will deliver a package of supportive policies as, or after, the RBA lowers the cash rate from 0.75% to 0.50%.
Please refer to our cash rate outlook, published yesterday, for more detail.
Europe: The German Markit manufacturing PMI weakened further into contraction territory, falling from 45.0 in June to 43.1 in July. However, services remained relatively buoyant, although easing from 55.8 in June to 55.4 in July. The broader European PMIs both contracted both fell to 46.4 and 53.3 for manufacturing and services, respectively, in July. The deeper contraction in manufacturing activity points to a grim reading on the euro zone ahead of the European Central Bank (ECB) monetary policy meeting to be held tonight.
Japan: The Jibun purchasing managers’ indices (PMIs) for the composite, services and manufacturing industries each improved in July from their readings in June. The readings for the composite and services were above 50.0, indicating ongoing expansion is likely in the months ahead, however, the manufacturing result remained below 50.0.
New Zealand: The trade surplus widened to NZ$365 in June, from NZ$175 million in May. The result was stronger than consensus forecast, due to a bigger-than-expected 4% drop in imports than expected. Exports were close to flat for the month.
The annual trade deficit improved further to NZ$4.9 billion, having peaked at NZ$6.7 billion in February this year. We expect only a modest improvement from here, as the rise in dairy export prices has now largely been passed through. The recent plunge in export log prices will also weigh on the trade figures in the coming months.
United Kingdom: Boris Johnson took office as Prime Minister, and promised to lead Britain out of the European Union on October 31 with “no ifs or buts”.
United States: Existing home sales fell 1.7% in June, against expectations for a 0.4% decline. It is continuing to suggest that housing activity remains sluggish despite falls in mortgage rates. In other sign of weakness in the housing market, mortgage applications fell 1.9% for the week ending July 19, declining for four straight weeks. While new home sales rebounded a sharp 7.0% in June, it is trending sideways and point to housing construction yet to provide a significant contribution to economic growth.
PMI indicators from Markit provided a mixed reading on activity. The manufacturing PMI fell from 50.6 in July to 50.0, right at the point which divides expansion from contraction. It was the lowest since 2009, and provides a growing warning signal that the industrial sector is hurting under the weight of global uncertainty and ongoing trade tensions. The Markit services PMI was more positive, lifting from 51.5 in June to 52.2 in July. Consequently, the composite PMI edged up from 51.5 in June to 51.6 in July.
Today’s key data and events:
UK CBI Survey Jul (8pm)
EZ ECB Policy Meeting exp no change (9:45pm)
US Durable Goods Orders Jun Prem exp 0.8% prev -1.3% (10:30pm)
US Goods Trade Jun exp -$72.5bn prev -$74.5bn (10:30pm)
US Wholesale Inventories Jun exp 0.5% prev 0.4% (10:30pm)
US Retail Inventories Jun exp 0.2% prev 0.5% (10:30pm)
US Initial Jobless Claims w/e Jul 20 exp 218k prev 216k (10:30pm)
US Kansas City Fed Mfg Activity Index Jul exp 3 prev 0 (1am)
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 Ph: 02-8253-0898