Main Themes: Equities and bond yields rose overnight in the US, as markets were calmed by US President Trump’s rhetoric dialling back on trade.
Share Markets: Share markets lifted overnight, after a deep sea of red in the previous trading session. The Dow Jones rose by 270 points (or +1.1%) and the S&P 500 index gained 31 points (or +1.1%). Trump’s comments on trade suggested China wants to return to the negotiating table and this helped equity bourses push higher.
Interest Rates: US bond yields lifted marginally across the curve. The US bond curve remains inverted, which in the past has tended to precede sharp slowdowns in US economic activity.
Foreign Exchange: The Australian dollar lifted from its low of 0.6690 yesterday morning to recover to an overnight high of 0.6788. Despite the improvement in the AUD/USD exchange rate, we continue to think the AUD remains vulnerable to a slide of 0.6300 in coming months, as underlying trade tensions continue to threaten world growth prospects.
Commodities: Oil erased gains while gold stayed above US$1,525 an ounce.
Australia: There was no major economic data released yesterday.
Europe: The slump in German business confidence extended further in August; the IFO survey’s business climate index slipped to 94.3, from 95.8 in July. It is the lowest reading in seven years.
New Zealand: The trade balance swung to a NZ$685 million deficit in July, the first deficit since February. A fall in dairy exports was behind the deterioration, although the fall was partly offset by stronger meat exports.
United States: Durable goods orders rose by 2.1% in July, after a gain of 1.8% in June (previously reported as a 1.9% rise). This increase was driven by demand for Boeing planes.
A sub measure in this report is the core capital goods shipments excluding aircraft, which is a close proxy for business investment. This measure fell 0.7% in July. June’s result was revised also, from a 0.3% rise to a flat outcome. July’s first decline was the first since March. Moreover, in annualised three-month moving average terms, this measure slowed to the weakest pace since October 2016.
This sector is being affected by the high level of uncertainty from the trade tensions. This data also preceded the latest round of tit-for-tat tariff war.
Overnight, US President Trump dialled back the trade rhetoric overnight, asserting China wants to make a deal "very badly" and praising Beijing's chief negotiator. Trump said at a G7 press conference that Vice Premier Liu He "used the word 'calm' and he agrees. However, Trump added any deal will have to address the trade imbalance and be "better for us”.
The US president also took the heat out of other disputes. He said he's not "at this moment" considering fresh tariffs on imported autos and parts from Japan, citing an agreement in principle on trade. Furthermore, in his joint news conference with Trump, Macron said they've struck a deal to end a feud over France's tax on some tech giants, possibly averting the threat of US sanctions on wine.
In other data, the Chicago Fed’s national activity index deteriorated to -0.36 in July, from +0.03 in June. All four major categories that make up the index fell in July.
Today’s key data and events:
CH Industrial Profits Jul y/y prev -3.1% (11:30am)
AU RBA Deputy Governor Debelle Speaks (12.50pm)
EZ German GDP Q2 final exp -0.1% prev -0.1% (4pm)
US FHFA House Prices Jun exp 0.2% prev 0.1% (11pm)
US S&P House Prices Jun exp 0.1% prev 0.1% (11.00pm)
US Richmond Fed Mfg Aug exp -4 prev -12 (12.00am)
US CB Cons. Confidence Aug exp 129.3 prev 135.7 (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.
Besa Deda, Chief Economist Ph: 02-8254-3251