Main Themes: Markets were rocked by a move by US President Trump to impose additional tariffs on China in a tweet. There were sharp declines in shares and bond yields. The US dollar was down against most majors, but the Australian dollar fell to 68 US cents.
Share Markets: Despite a positive start, markets fell sharply after Trump’s tweet and the escalation in trade tensions. The Dow fell over 1% and the S&P500 was down 0.9%.
Interest rates: Bond yields fell significantly, reflecting stronger demand amid the renewed global tensions. US 10-year yields fell 12 basis points to 1.90%.
Foreign Exchange: The US dollar index was lower after Trump’s tweet, but was already weaker following the run of disappointing manufacturing data overnight. The Japanese yen was a strong performer, given the lift in risk aversion. The Australian dollar was vulnerable, which has been particularly sensitive to the China-US trade tensions. AUD was trading at around 68.7 US cents before the announcement before plunging to 68.0 US cents early this morning.
Commodities: Oil prices slumped as the escalating trade tensions raised concerns about demand - Brent benchmark prices fell 7%. Gold prices jumped as Trump’s tweet boosted demand for safe havens.
Australia: Yesterday, we gained further evidence of stabilising in dwelling prices. Dwelling prices across 8-capital cities edged up 0.1% in July. While this was a small increase, it was the best result since August 2017.
Dwelling prices in both Sydney and Melbourne have increased for two consecutive months, providing a clearer indication that prices in these two capital cities might have bottomed out.
The stabilisation in prices was more broad-based across capital cities in July. Five out of the eight capital cities recorded increases - Brisbane (0.2%), Hobart (0.3%) and Darwin (0.4%), along with Sydney and Melbourne (both rising 0.2%).
The two rate cuts from the RBA and clarity over housing tax policies after the Federal election have translated into a major turnaround in sentiment within the housing market. Stronger interest in the housing market has also been reflected in higher auction clearance rates in Sydney and Melbourne.
In annual terms, dwelling prices in all capital cities declined in July, except for Hobart and Canberra.
Recent rate cuts from the RBA and the prospect of more to come will continue to support the housing market. A return to the strong price growth over 2012 to 2017 is unlikely any time soon. Slow income growth and high household debt levels will likely prevent a sharp turnaround. However, it would seem that the housing market is performing better than expected and a mild recovery could come sooner than previously thought. The litmus test will be the spring selling season, as sales volumes are still low.
The AiG performance of manufacturing index improved by 1.9 points to 51.3 in July. The reading is above 50.0, suggesting manufacturing activity will expand in the period ahead.
The export goods price index rose by a relatively strong 3.8% in the June quarter to be more than 17% above the level of a year ago. Notable of late is the spike in iron ore prices in the wake of supply disruptions in Brazil.
Export price gains continue to outstrip those for imports. The import price index increased by a modest 0.9% in the quarter, boosted by higher global petroleum prices.
In the June quarter, the terms of trade for goods increased by 2.8% to be 13.6% higher than a year ago.
China: The Caixin manufacturing purchasing managers’ index (PMI) improved by half a point to 49.9 in July. The result beat consensus expectations but remains below the critical 50.0 level that divides activity from expansion and contraction.
Japan: The Jibun manufacturing PMI deteriorated by 0.2 of a point to 49.4 in July.
United Kingdom: The Bank of England (BoE) left monetary policy settings unchanged as widely expected. Nonetheless, the central bank lowered its growth forecasts reflecting worries over Brexit, and saw a 30% chance that there will be an annual contraction in 2020. The BoE has yet to shift towards the stance to readily ease policy of other central banks, although there were increased concerns over the global environment and the impact of Brexit on the UK economy.
The Markit manufacturing PMI was steady at 48.0 in July, and is continuing to point to a contraction.
United States: Over twitter, US President Trump has said that “trade talks are continuing, and during the talks the US will start, on Setember 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China… This does not include the 250 Billion Dollars already Tariffed at 25%.” Trump additionally said that China was not following through on its pledges to buy more American farm products. It follows a round of trade talks this week, which did not appear to have much tangible results. Earlier on, China had said that both sides had a “candid, highly effective, constructive and deep exchange on major trade and economic issues of mutural interest”.
The release of economic data continued to show strength in the labour market but weakening conditions in manufacturing.
The ISM manufacturing index deteriorated from 51.7 in June to 51.2 in July. It remains in expansion territory, but it was the lowest since 2016. The Markit manufacturing PMI similarly indicated a struggling manufacturing sector, which was revised upwards from 50.0 to 50.4 in the final estimate for July. Despite the revision, the index was still down from the 50.6 reading in June.
Initial jobless claims rose from 207k to 215k for the week ending July 27, but the four-week moving average fell from 213.3k to 211.5k. They continue to highlight tightness in the labour market.
Today’s key data and events:
NZ Consumer Confidence Jul prev 122.6 (8am)
AU Producer Prices Q2 prev 0.4% (11:30am)
AU Value of Retail Sales Jun exp 0.1% prev 0.1% (11:30am)
AU Real Retail Sales Q2 exp 0.3% prev -0.1% (11:30am)
EZ PPI Jun exp -0.3% prev -0.1% (7pm)
EZ Retail Sales Jun exp 0.3% prev -0.3% (7pm)
US Non Farm Payrolls Jul exp 165k prev 224k (10:30pm)
US Unemployment Rate Jul exp 3.6% prev 3.7% (10:30pm)
US Avg Hourly Earnings Jul exp 0.2% prev 0.2% (10:30pm)
US Trade Jun exp –US$54.6bn prev –US$55.5bn (10:30pm)
US Factory Orders Jun exp 0.7% prev -0.7% (12am)
US Durable Goods Orders Jun Final prev 2.0% (12am)
US UoM Cons. Sentiment Jul Final exp 98.5 prev 98.4 (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 Ph: 02-8253-0898