Markets
European (core) inflation and Q2 GDP growth topped expectations and keeps the September ECB meeting a very live one but it caught more attention from market watchers than markets themselves. The Fed’s Senior Loan Officer Opinion Survey showed that past rate increases are still working through the economy, curbing both credit demand and supply. Chair Powell had the SLOOS already at his disposal during the policy meeting last week. Core bonds started on weaker footing in Asian and early European dealings but soon found their composure. Eventual changes amounted to no more than -1.3 (2-)y to +0.1 (30-y) bps in Germany and moves of less than 1 bp across the US curve. European stocks inched marginally higher as did Wall Street, thanks to an end-of-session jump. The dollar showed no clear directional trend on FX markets. EUR/USD in the end closed a tad lower in the 1.10 area. EUR/GBP went nowhere in the upper 0.85/86 half. The Japanese yen was a notable underperformer following the BoJ’s unscheduled bond-buying operation. USD/JPY finished comfortably above 142, EUR/JPY north of 156. Cyclicals and commodity driven currencies including the Norwegian krone, Aussie and kiwi dollar topped the G10 leader bord. Brent oil extended its recent advance yesterday to close above $85/b for the first time since mid-April.
Stocks in the Asian-Pacific region kick off the new month in a mildly constructive risk setting. China marks an exception. The private Caixin manufacturing PMI unexpectedly fell into contraction territory (49.2 from 50.5). The dollar ekes out a small gain while the Aussie trades on the backfoot following the RBA’s decision to hold steady. Japan’s yen is still in the defensive though losses remain contained. Yet another stronger-than-expected PBOC fixing of China’s yuan doesn’t result in follow-up gains after a strong July month for the currency. USD/CNY fills bids in the 7.166 region. Core bond markets trade with a minor upward bias as we go into early European dealings. There’s not much to be seen there in terms of economic data though. We have to wait until the US opens with the JOLT job openings and July manufacturing ISM scheduled for release. The former is expected to ease to a still-elevated 9600k. Consensus for the latter is for a potential bottoming out of the indicator, from 46 to 46.9 but analysts were hoping something similar last month too. This time around, several regional indicators as well as the July PMI’s suggest it may finally happen. That could put a bottom below core/US bond yields and the dollar, although we do not expect a sharp market reaction as other key data points are still due later this week.
News and views
The Reserve Bank of Australia this morning kept its policy rate unchanged at 4.1%. The decision surprised the average analyst (expectations for a 25 bps) but not so much markets, who only saw a 20% chance of another tightening move. The RBA’s hold comes amid uncertainty of the passthrough of its previous 400 bps rate hikes on household consumption, the labour market and the economy in general. Inflation is declining but is still too high at 6% with especially persistent services inflation a point of worry. CPI should decline further but may only reach the 2- 3% target range in late 2025. The economy meanwhile is growing below trend as household consumption weakened as did dwelling investment. A tight labour market is showing further signs of some easing. Wages continue to grow however. The pace is considered to be consistent with the inflation target provided that productivity growth picks up. The RBA keeps the possibility of more tightening on the table but it depends on how the data evolves. Today’s halt provides the opportunity of a more thorough assessment by the next meeting September 5. Australian money markets currently only attach a 50% probability of one more hike later this year to 4.35%. Swap yields drop up to 6 bps at the front end of the curve while the Aussie dollar loses moderate ground. AUD/USD declines from 0.672 to 0.667.
UK shop prices for the first time in two years actually fell in July, dropping 0.1% m/m compared to June. That brought the annual rate from 8.4% to 7.6%, the second drop straight after hitting a series high of 9% in May this year. It is another potential sign of inflation easing further in the country, even though the rate is still much too high. June CPI numbers two weeks ago also came in lower than expected after four consecutive (strong) beats. The data is undoubtedly welcomed by the Bank of England. The central bank meets on Thursday. A hike is all but certain though the jury is still out on the size (25 vs 50 bps).
