Main Themes:Financial markets are nervously anticipating the US Federal Reserve decision later tonight (4am AEST). Market participants are preparing for a 25 basis point cut from the Fed, but are not ruling out the possibility of a bigger-sized cut. Trade tensions also lifted after tweets from US President Trump overnight.
Share Markets: US share markets edged lower, weighed down by a mixed bag of corporate earnings and concerns about trade talks. The Dow Jones finished 23 points weaker (or -0.3%) and the S&P 500 index ended 8 points lower (or -0.3%).
Interest Rates: US 2-year treasury yields again drifted sideways between 1.84% and 1.86% and US 10-year yields ranged between 2.04% and 2.07%. Interest-rate markets are pricing 29 basis points of easing tonight from the Federal Reserve, indicating a small chance of a 50 basis point cut (a 25 basis point cut is consensus).
Australian 3-year government bond yields also drifted sideways, between 0.79% and 0.80%. Australian 10-year yields traded between 1.20% and 1.23%. Interest-rate markets priced a 30% chance of an RBA rate cut in August, up from 15% a week ago.
Foreign Exchange: The US dollar index is unchanged on the day, after earlier nudging up to a two-month high. EUR/USD rose from 1.1135 to 1.1160. USD/JPY fell from 108.70 to 108.45, the Bank of Japan’s unchanged stance yesterday supporting the yen. AUD/USD extended a two-week old slide to 0.6869 – the lowest level since June 19. NZD/USD similarly fell to 0.6602 – the lowest since July 10. AUD/NZD broke below 1.0400 to 1.0390.
Commodities: World oil prices rose overnight, underpinned by expectations of a US rate cut tonight. Meanwhile, iron ore rose 1.7% to US$119.80.
Australia: Building approvals fell by 1.2% in June, maintaining a downward trend which has persisted since late 2017. It points to residential construction continuing to languish over the near term. While there have been signs that dwelling prices have stabilised, these signs of improvement have been confined to Sydney and Melbourne. Moreover, it would take a more meaningful recovery in prices for an improvement to flow through to residential construction. Weakness in approvals was driven by apartments in the private sector, falling 6.5% in June. Approvals in private-sector houses rose 0.4% in the month.
Europe: The European Commission confidence surveys for July confirmed an ongoing malaise; the business climate indicator falling to -0.12 from +0.17, its lowest levels since 2013. The services sector confidence index eased to 10.6, from 11.
Japan: The jobless rate fell from 2.4% in May to 2.3% in June, back to a 27-year low. The job-to-applicant ratio declined from 1.62 to 1.61. Both indicators are highlighting extreme tightness in the labour market.
Industrial production fell by 3.6% in June, the largest monthly decline in 1½ years. The drop suggests global trade tensions and the loss of momentum in the global economy is impacting negatively on Japanese factory activity.
The Bank of Japan met yesterday and left policy settings unchanged. It maintained its ultra-loose monetary policy, despite growing pressure to introduce more easing measures. The Bank of Japan said yesterday it "will not hesitate to take additional easing measures if there is a greater possibility that the momentum toward achieving the price stability target will be lost”.
United Kingdom: UK Prime Minister Boris Johnson said it's "up to the EU" to compromise on a Brexit agreement and avoid a no-deal divorce. Johnson said "if they can't compromise, if they really can't do it, then clearly we have to get ready for a no-deal exit". These remarks reinforced Johnson’s position that he will not accept an Irish backstop.
New Zealand: Building consents fell 3.9% in June although this followed a 13.5% jump in May. Consents remain at an elevated level and point to further growth in residential construction over the coming year.
United States: US President Trump slammed China on the day his trade team arrived in Shanghai. "The problem with China, they just don't come through," he tweeted. It was "supposed to start buying our agricultural product now — no signs that they are doing so." As for the talks, "my team is negotiating with them now, but they always change the deal in the end to their benefit" to "ripoff the USA." Trump’s tweets elevated trade tensions again.
Personal incomes rose 0.4% in June, in line with recent trends. Personal spending grew 0.3%, matching expectations, following an upwardly revised 0.5% rise in May. This data confirms ongoing solid momentum to consumer spending.
The core personal consumption expenditure (PCE) deflator, the Fed’s preferred inflation gauge, rose 0.2% in June. While the annual pace came in below consensus expectations at 1.6% in June, the three-month annualised pace firmed to 2.5%.
The Conference Board’s Consumer Confidence index leapt higher in July to 135.7, well above consensus expectations (125), from 124.3 in the prior month. The result puts confidence back within earshot of the near twenty-year high hit last year. Confidence in the labour market and broader economy firmed.
Pending home sales rose 2.8% in June, beating even the most bullish forecasts, an encouraging sign for an industry that has struggled to find its gears despite rate cuts and a solid jobs market.
Today’s key data and events:
UK GfK Consumer Confidence Jul exp -13 prev -13 (9.01am)
NZ ANZ Business Confidence Jul prev -38.1 (11am)
CH Manufacturing PMI Jul exp 49.6 prev 49.4 (11.00am)
CH Non-manufacturing PMI Jul exp 54.0 prev 54.2 (11.00am)
AU CPI Q2 (11:30am)
Headline q/q exp 0.5% prev 0.0%
Headline y/y exp 1.5% prev 1.3%
Trimmed Mean q/q exp 0.3% prev 0.3%
Trimmed Mean y/y exp 1.5% prev 1.6%
AU Private Sector Credit Jun exp 0.3% prev 0.2% (11.30am)
EZ German Retail Sales Jun exp 0.5% prev -1.7% (4pm)
UK Nationwide House Prices Jul exp 0.2% prev 0.5% (4pm)
EZ Unemployment Rate Jun exp 7.5% prev 7.5% (7pm)
EZ GDP Q2 exp 0.2% prev 0.4% (7pm)
EZ CPI Estimate Jul y/y exp 1.1% prev 1.2% (7pm)
US ADP Employment Chg Jul exp 150k prev 102k (10.15pm)
US Employment Cost Index Q2 exp 0.7% prev 0.7% (10.30pm)
US MNI Chicago PMI Jul exp 51.1 prev 49.7 (11.45pm)
US FOMC Policy Decision exp 2.00%-2.25% prev 2.25%-2.50% (4am)
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.
Chief Economist, Chief Economist Ph: 02-8254-3251