Todays podcast

• Stronger than expected US Retail Sales hurts, not helps, US risk sentiment; 2024 rate cut bets pared
• Horribly weak China data, early PBoC rate cut, temporary boosts AUD
• UK wages growth accelerates (refrain) but unemployment rises. GBP best G10 currency
• AU WPI at 0.8% consolidates view RBA could be done, for several more months at least
• Coming up: RBNZ; China house prices, UK CPI, EZ GDP, US industrial production; MATILDAS

Stronger than expected US Retail Sales data added to rest of the world-driven weakness in US equities at the open and which haven’t recovered since, all the mainboard indices finishing with losses of 1% or more. This after Hong Kong’s Hang Seng index and China’s CSI 300 both finished in the red following yesterday’s slew of (very) weak China activity data. This was notwithstanding the somewhat earlier than expected monetary policy easing signal from the PBoC.  The poor risk tone in the US and elsewhere has seen front-end US Treasury yields slightly lower on the day, but 10s are modestly higher, alongside which the US money market has further pared its 2024 Fed easing expectations. The US dollar is overall little changed, losses for most G10 currencies offset by a flat Euro and small gains for the Pound, the latter following another significant upside surprise on UK wages growth.

China has captured a good chunk of the financial news headline in the past 24 hours, starting with the PBoC’s 15bps cut to the Medium Term Lending Facility (MLF) rate to 2.50%, quickly followed by a set of weaker than expected July activity data where annual growth rates for Retail Sales 2.5%) Industrial Production (3.7%) and Fixed Asset Investment (3.4%) were all down on June and all weaker than expected (evidence enough for the earlier-than-expected PBoC monetary policy easing signal). The data was accompanied by news that (high and rising) youth unemployment figures would no longer be published, and then later in the day a Bloomberg source story suggesting that the Chinese authorities are considering cutting stamp duty on stock trades for the first time since 2008 in an attempt to revive confidence in the world’s second largest equity market (stamp duty is currently 0.1%, levied equally on the buyer and seller).

For a brief period during our time zone Tuesday, the AUD was the world’s best  performing G10 currency, appearing to owe something to a view that the China rate cut timing and weak July activity numbers – the latter following last week’s very soft July credit data and weak export and import numbers – was evidence of a heighted sense of urgency by the authorities in rolling out growth-supporting measures. That view hasn’t survived the night, rightly on the view that ‘seeing is believing’.  All the leading lights in the CCP machinery are currently meeting in the seaside resort of Beidaihe. Let’s see what comes out of it, but in the past we haven’t seen big (public) policy pronouncements.

As for yesterday’s local events, the combination of the fractionally below consensus 0.8% quarterly rise in the Wage Price Index in Q2 and RBA August Minutes in which members observed a “credible path back to the inflation target with the cash rate staying at its present level” had some (temporarily) depressing impact on money market rates, while adding to the earlier China rate cut-induced slippage in AUD/USD, to its intra-day low of 0.6463.

NAB’s take on the WPI is that the low-ball outcome reflected a relatively small number of employees receiving a pay rise in the quarter with a tendency for more wage increases to now only occur at the start of a new financial year (i.e., so to appear in Q3, alongside the impact of the Minimum Wage and Awards rise as well as the pay level adjustment for aged care workers). As a result, NAB’s economists doubt that Tuesday’s outcome will impact the RBA’s prior (August SoMP) assessment for a peak in WPI growth marginally above 4% against the 3.6% Q2 outcome.

AUD’s (temporary) local day outperformance Tuesday was undermined late in the day by GBP, jumping on higher-than-expected wages data showing Average Weekly Earnings up 8.2% in the 3 months to June from an upward revised 7.2% in May (7.8% ex-bonuses, up from 7.5%).   Ignored – potentially at the peril of BoE watchers – was the rise in the ILO measure of unemployment to 4.2% in the 3 months to June from 4.0% in May, and to 4.0% in July from 3.9% for the Claimant Count Rate.   UK money markets moved to price some chance of a 50bps Bank rate hike in September (32bps) versus a slightly less than 100% chance of 25bps beforehand.

The biggest overnight data news has been for US Retail sales , which exceeded expectations on all measures: Headline 0.7% against 0.4% consensus, Ex-autos 1.0% versus 0.4% expected and the Control measures which best maps to the Consumption component of GDP also 1.0%, against 0.5% expected.  It’s possible, some US data analysts note, that shifts in the timing of Amazon Prime Day is playing havoc with the seasonal adjustment process but that may be clutching at stronger in looking for evidence that the US consumer has significantly slowed their spending habits. Incidentally, while very early days in the quarter, the Atlanta Fed’s latest GDP Nowcast forecast for Q3 GDP is running at 5%.

Elsewhere on the data front the Empire (NY State) manufacturing survey slumped to -19.0 from 1.1, but it’s a small sample survey, while the NAHB Home builders index, which has been on a strongly rising trend, dipped to 50 from 56.0. In both case likely more noise than signal. Canada’s CPI rose to 3.3% from 2.8% against 23.0% expected though core measures were little changed and more in line with expectations.   In Europe, the German ZEW survey shows Current Conditions falling to -71.5 from -59.5 but Expectations up to -12.3 from -14.7.

In NZ dairy prices fell heavily at auction overnight. Market participants were braced for an ugly result at the GDT auction overnight and it was certainly all of that.  The GDT Price Index slumped 7.4%. This follows the 4.3% drop at the previous event, taking prices to nearly 25% lower than a year ago to outright low levels. The price index was last around this sort of level in 2018 and 2016 before that. Prices are outright weak.

US equity losses accelerated somewhat into the close with the S&P500 ending down 1.16% and the NASDAQ by 1.14%, with Financials and Energy the worse performing S&P sectors, the former not helped by warnings from Fitch about potential ratings downgrades for major US banks, including JP Morgan.

10 year bond yields re higher across Europe (3-5bps on average) while US 10s are ending New York +2bps having made a new post October 22 high of 4.27% (4.21% now).

AUD/USD ends the New day/starts the APAC session a smidge above 0.6459 (-0.5%) after a Tuesday intra-day high of 0.6522, with NZD down 0.4%. Losses for these two are only exceeded by NOK (-0.6%) where oil prices are down +/-1.5% and SEK (-0.8%). GBP is the only G10 currency up on the day, +0.15% post the aforementioned wages data.

Coming Up

• A blank Australia calendar Wednesday save for a certain football match (go Lionesses Matildas, says your Pommy Australian author). Whatever, please no penalty shootout, not sure the old ticker could handle it.
• The RBNZ’s midday (AEST) decision should pass without incident, our BNZ colleagues expecting the message from last time – that the bank thinks it’s done enough to get inflation back to target (and amid clear signs of a weakening economy) to by and large be repeated.
• More than usual interest in China July new home prices (11:30AEST) which on Bloomberg calculations showed a small monthly fall in June for the first time this year (albeit just -0.06%).  Confidence house prices have bottomed is one prerequisite for a revival in householder investor buying interest (as circular as that argument is).
• Hot on the heels of yesterday uber-strong wages data, UK July CPI is expected to show a decent fall (-0.5%m/m) driven by lower energy tariffs that UK households are now getting but which will appear in today’s figures for the first time. Together with expected favourable base effects from last July’s 0.6% monthly rise, year-on-year CPI is seen down to 6.7% y/y from 7.9% in June.
• EZ GDP in Q2 is expected at 0.3% Q/Q (of the biggest EZ nations, France has already reported at 0.5%, Germany 0.0% and Italy -0.3%).
• In the US, July Industrial production (seen 0.3% after -0.5% in June) and Housing Starts (expected 1.1% m/m after -8.0%) are the main releases, with July FOMC Meeting Minutes out at 4:00 AEST Thursday morning.

Market prices

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets. Read our NAB Markets Research disclaimer.