RBA Lowe: Possible that some further tightening will be required

    Addressing the House of Representatives Standing Committee on Economics today, outgoing RBA Governor, Philip Lowe Lowe stated that the purpose behind the pauses in July and August was “to provide time to assess the impact of the (rates) increases to date and the economic outlook and the associated risks.”

    He reiterated that “it is possible that some further tightening of monetary policy will be required”. But the decision would be largely based on incoming data and the Board’s evolving analysis of economic forecast and potential risks.

    Lowe expressed optimism about recent economic data, remarking, “It is encouraging that the recent data are consistent with inflation returning to target over the next couple of years.”

    But he also pinpointed two risks that RBA is closely monitoring. “The first is the outlook for household consumption,” he said, attributing this concern to the myriad of factors currently influencing household finances and expenditures.

    The second risk highlighted was the potential persistence of high services price inflation which could lead to “prolonging the period of inflation being above target.”

    Lowe emphasized the RBA’s forecast, which assumes a resurgence in productivity rates, aligning with levels seen pre-pandemic. Such growth, he suggested, would help in moderating the unit labour costs and subsequently, inflation. Yet, he cautioned, “If this pick-up in productivity does not occur, all else constant, high inflation is likely to persist, which would be problematic.”

    Full remarks of RBA Lowe here.

    New Zealand BNZ manufacturing slumps to Post-GFC low in July

      New Zealand’s BusinessNZ Performance of Manufacturing Index has experienced a drop in July, declining from 47.4 to 46.3. Digging into the details, there was a notable dip in Production, which plummeted from 47.3 to 42.9, and Employment wasn’t far behind, decreasing from 46.8 to 44.3. On a slightly brighter note, New Orders saw a modest increase, moving from 43.8 to 45.0, and Finished Stocks slightly ticked up from 52.3 to 52.6. However, Deliveries took a sharp hit, falling from 49.9 to 42.3.

      Feedback from the manufacturing sector portrayed a gloomy picture. Negative comments in July stood at 72%, a slight decrease from June’s 74.5%, but higher than May’s 66.7% and April’s 70.3%. The core concerns cited by manufacturers revolved around general market uncertainty, escalating costs, and inclement weather affecting demand, particularly during July.

      Catherine Beard, BusinessNZ’s Director of Advocacy, remarked on the PMI’s July figures, indicating that they “showed very little signs of potential improvements for the sector as a whole.” Echoing this sentiment, BNZ Senior Economist, Doug Steel, highlighted the gravity of the situation, noting that “the July result was the fifth consecutive monthly sub-50 reading and, outside of Covid lockdown periods, the lowest reading since the GFC days back in June 2009.”

      Full NZ BNZ PMI release here.

      Fed’s Daly on CPI: Not a Victory Yet

        San Francisco Fed President, Mary Daly, offered a measured response to yesterday’s US CPI release, stating that while the figures “came in largely as expected, and that is good news,” it does not signify a comprehensive victory over the ongoing inflation challenges. “It is not a data point that says victory is ours,” Daly warned.

        Highlighting the nuanced nature of the current inflation landscape, Daly noted the decrease in goods inflation and indicated promising trends in housing. However, her main concern lies with core services inflation that excludes housing.

        Despite the general trend of receding inflation, core services inflation remains stubborn. Daly emphasized, “We do need to see that come back to prepandemic levels if we’re going to be confident that we can get to 2% on a sustainable basis.”

        Offering insight into Fed’s future strategy, Daly was cautious: “Whether we raise another time, or hold rates steady for a longer period — those things are yet to be determined.”

        She stressed the importance of upcoming data before Fed’s next meeting, suggesting it would play a critical role in shaping decisions. “It would be premature to project what I think would happen because there’s a lot of information coming in between now and our next meeting” in September, she added.

         

        US jobless claims rose to 248k, above expectations

          US initial jobless claims rose 21k to 248k in the week ending August 5, above expectation of 230k. Four-week moving average of initial claims rose 3k to 228k.

          Continuing claims dropped -8k to 1684k in the week ending July 29. Four-week moving average of continuing claims dropped -9k to 1701k.

          Full US jobless claims release here.

          US CPI and core CPI rose 0.2% mom in Jul, matched expectations

            US CPI and core CPI rose 0.2% mom in July, matched expectations. Food prices rose 0.2% mom,Energy prices rose 0.1% mom. The index for shelter was by far the largest contributor to the monthly all items increase, accounting for over 90 percent of the increase, with the index for motor vehicle insurance also contributing.

            For the 12 months, headline CPI rose slightly from 3.0% yoy to 3.2% yoy, below expectation of 3.3% yoy. Core CPI slowed slightly from 4.8% yoy to 4.7% yoy, below expectation of being unchanged. Food prices were up 4.9% yoy while energy prices were down -12.5% yoy.

            Full US CPI release here.

             

            US CPI awaited, NASDAQ heading lower to 55 D EMA

              Markets await key US consumer inflation data scheduled for release today, with projections centered on a 0.2% mom uptick for both headline and core CPI. On a yoy basis, headline CPI is anticipated to climb from 3.0% to 3.3%, while core CPI is projected to remain steady at 4.8%.

              This anticipated rise in headline inflation, marking the first surge in over a year, can be attributed to unfavorable base effects and a moderate uptick in gas prices. Thus, this shouldn’t particularly alarm Fed officials.

              If the inflation figures align with expectations, the 0.2% monthly increase in both core CPI would be largely consistent with Fed’s 2% inflation target. Such a scenario would strengthen the case for Fed to pause again in its September meeting, adopting a wait-and-see approach.

              Following broad decline in US stocks, NASDAQ closed down -1.17% overnight. Current development suggests that a short term top at least formed at 14446.55. Deeper decline is expected to 55 D EMA (now at 13600.45).

              The grappling question is whether rise from 10088.82, as the second wave of the medium term corrective pattern from 16212.22, has run off its course. It just missed target of 161.8% projection of 10088.82 to 12269.55 from 10982.80 at 14511.22.

              Robust support from 55 D EMA would maintain near term bearishness for another rise through 14446.55 at a later stage. However, sustained break of this EMA would raise the chance of a bearish reversal. That is, the third leg of the medium term pattern has already started. NASDAQ would then test the second line of defense at 38.2% retracement of 10088.82 to 14446.55 at 12781.89 to determine its fate.

              Japan’s PPI slows down for seventh consecutive month

                Japan’s PPI for July has once again reported a slowdown, decelerating from 4.3% yoy in the previous month to 3.6% yoy. However, this figure slightly surpassed market expectations, which anticipated a drop to 3.5% yoy. It’s worth noting that this marks the seventh consecutive month of decline for PPI, tracing back from its December peak of 10.6% yoy.

                Looking at some details, yen-denominated import prices saw a significant dip. The -14.1% yoy decline in July, a steeper fall than June’s -11.4% yoy, extends the negative trend to its fourth consecutive month.

                Simultaneously, yen-denominated export prices also demonstrated downward trends, slipping from a positive growth of 0.8% yoy in the preceding month to a negative -0.2% yoy in July.

                Full Japan PPI release here.

                WTI hits highest level this year, targeting 85 next

                  WTI crude oil continued its impressive rally, marking its highest price point for the year. This surge comes in the wake of Saudi Arabia’s firm stance, as the nation’s cabinet confirmed yesterday its unwavering support for the precautionary strategies adopted by OPEC+.

                  Adding weight to this commitment, just last week, Saudi Arabia prolonged its voluntary slash in production by a significant 1 million barrels daily until the end of September. Besides, Russia further bolstered the market sentiment by announcing a reduction in oil exports by 300,000 bpd for September.

                  Technically, near term outlook in WTI will now stay bullish as long as 79.94 support holds. Next target is 161.8% projection of 63.67 to 74.74 from 66.94 at 84.85, and possibly above.

                  However, barring any dramatic development, strong resistance should be seen from 38.2% retracement of 131.82 (2022 high) to 63.67 (2023 low) at 89.70 to limit upside, at least on first attempt.

                  RBNZ business survey points to lower inflation expectations, steady interest rates

                    As seen from the latest Quarterly RBNZ Survey of Expectations, businesses have slightly tapered their inflation expectations in the near term but wage inflation expectations were on the rise. RBNZ OCR is expected to be unchanged at the current 5.50% through the quarter.

                    Expectations for annual inflation one year ahead have moderated, moving from 4.28% to 4.17%. However, a two-year horizon sees a marginal uptick in these expectations, which have climbed from 2.79% to 2.83%.

                    More long-term views, reflected in the five and ten-year ahead inflation expectations, both indicate a pullback, dropping to 2.25% (from 2.35%) and 2.22% (from 2.28%), respectively.

                    A notable area of concern stems from the annual wage inflation expectations. Over the course of both one and two years, these expectations are on the rise. For the year ahead, expectations climbed from 4.80% to 5.04%, and for the two-year mark, they increased from 3.53% to 3.66%.

                    Regarding monetary policy, the survey results indicate a stable outlook on the OCR. By the close of the September 2023 quarter, businesses anticipate OCR to average around 5.53%, a minimal climb from the prior quarter’s estimate of 5.47%. A one-year ahead mean estimate rose 32 basis points to 5.16% from the previous 4.84%.

                    Average one-year ahead GDP growth forecast surged to 1.02%, up from previous 0.48%. Moreover, businesses seem to be projecting continued momentum, with two-year ahead GDP growth expectations reaching 1.95% from preceding 1.66%.

                    Full RBNZ Survey of Expectations here.

                    China CPI down -0.3% yoy, first negative since 2021

                      China’s CPI for July registered a drop of -0.3% yoy, marking its first decline since February 2021. Although this result is slightly better than the market’s expectation of a -0.4% drop, it underscores the economic headwinds faced.

                      Core inflation measure, which excludes the often erratic food and energy costs, showed a rise to 0.8% yoy from a mere 0.4% yoy. This points to some underlying demand within the economy, albeit muted.

                      A deeper dive into CPI reveals that food prices have seen a -1% fall yoy, a sharp contrast to the 2.3% yoy rise observed in the previous month. On the other hand, non-food prices climbed 0.5% yoy last month, bouncing back from a -0.6% yoy.

                      Dong Lijuan, chief statistician at the NBS, commented, “With the impact of a high base from last year gradually fading, the CPI is likely to rebound gradually.”

                      On the PPI front, situation remains challenging. PPI improved from -5.4% yoy to -4.4% yoy in July. This figure not only missed market expectations, which stood at -3.8% yoy, but also marked the tenth straight month of negative readings.

                      Fed’s Harker foresees stable rates and soft landing

                        Philadelphia Fed President Patrick Harker suggested a pause on rate changes in the coming months, emphasizing the importance of allowing current monetary policy measures to take effect.

                        He said today, “Absent any alarming new data between now and mid-September, I believe we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work.”

                        He also cautioned against expecting immediate rate reductions, noting, “The pandemic taught us to never say never, but I do not foresee any likely circumstance for an immediate easing of the policy rate.”

                        Harker indicated that there might be a slight rise in the unemployment rate, which was most recently recorded at 3.5% in July, along with a deceleration in the GDP’s growth rate.

                        Nonetheless, he remains optimistic, stating, “In sum, I expect only a modest slowdown in economic activity to go along with a slow but sure disinflation.”

                        “I do see us on the flight path to the soft landing we all hope for and that has proved quite elusive in the past, he added.

                         

                        ECB consumer survey: Easing inflation expectations, but waning spending optimism

                          In June ECB Consumer Expectations Survey, consumer concerns over inflation appear to be receding, with expectations for both short-term and three-year horizons declining. Despite steady views on income growth over the next year, there’s a palpable decrease in optimism around consumer spending. Meanwhile, the outlook for economic growth sees a marginal uptick, albeit remaining muted.

                          Notably, consumers seem to be less concerned about rampant inflation. Expectations for inflation over the next 12 months have retreated, with mean prediction decreasing from 5.1% to 4.7%. Median inflation outlook for the same period experienced a steeper decline, shifting from 3.9% down to 3.4%. This downward trend also extends to longer-term predictions. Mean inflation expectations for a three-year horizon have decreased from 4.0% to 3.8%, while median expectations for the same period have edged down from 2.5% to 2.3%.

                          Consumer views on household income for the next 12 months remained steady, with both mean and median expectations unmoved at 1.2% and 0.1% respectively. However, there’s growing pessimism concerning consumer spending. Expectations for mean household spending over the next year have slightly decreased from 3.5% to 3.4%, while median forecast has descended more markedly from 2.4% to 2.1%.

                          In terms of economic performance, consumers are marginally less bearish about near-term growth outlook. Mean expectation for economic growth over the next year has improved slightly from -0.7% to -0.6%, even though median remains unchanged at flat 0.0%. Interestingly, there were no alterations in consumer outlook for unemployment over the next year, with predictions holding steady.

                          Full ECB Consumer Expectations Survey here.

                          China’s exports down -14.5% yoy in Jul, shipments to ASEAN down -21.4% yoy

                            July saw a sharper-than-expected contraction in China’s exports, with decline of -14.5% yoy to USD 281.76B. This marked the steepest drop since February 2020 and exceeded market expectations, which had forecasted a decline of -12.5% yoy. Concurrently, imports also took a hit, plunging by -12.4% yoy to USD 201.16B, much steeper than anticipated -5% yoy drop.

                            With these declines, China’s trade surplus unexpectedly widened. July’s figures show surplus expanding from USD 70.6B to USD 80.6B, surpassing the market forecast of USD 67.8B.

                            A key observation was the sharp decline in shipments to ASEAN – one of China’s primary trade partners. Exports to ASEAN dropped by a significant -21.43% yoy in July, marking its second straight monthly decline. This is noteworthy as ASEAN had played a pivotal role in bolstering China’s export sector earlier in the year.

                            In addition, exports to EU and US followed suit with declines of -20.62% yoy and -23.12% yoy, respectively. The dip in shipments to US represents a continued trend, with July marking the twelfth consecutive month of decline.

                            Australia NAB business confidence rose to 2, inflationary pressures on the rise

                              Australia’s NAB Business Confidence Index for July revealed an upward tick, moving from -1 in June to 2. However, Business Conditions saw a slight dip from 11 to 10. Delving into specific metrics, readings for trading conditions, profitability, and employment remained unchanged with the previous month, all settling at 16, 10, and 6 respectively.

                              Notably, the month saw a pronounced rise in price and cost growth. Labour cost growth surged to 3.7% in quarterly equivalent terms, up from June’s 2.3%, and purchase cost growth escalated to 2.6%, a jump from the previous month’s 2.2%. Furthermore, final price growth climbed to 2%, doubling June’s 1%.

                              Commenting on the findings, NAB Chief Economist, Alan Oster, remarked, “Business conditions in July remained resilient and have largely held steady at above-average levels over the past few months.”

                              He added, “While business confidence rebounded to positive territory, overall confidence remains muted.”

                              Oster further noted the inflationary pressures highlighted by the survey, noting, “Despite the Q2 CPI release indicating an improvement, the survey underscores that the upward pressure on inflation remains significant.”

                              Full Australia NAB Business Confidence release here.

                              Australia’s Consumer Sentiment down -0.4%, no lift from RBA pause

                                Australia’s Westpac Consumer Sentiment Index for August indicated a slight decline, registering at 81, a drop of -0.4% mom from July’s reading of 81.3. Westpac’s analysis suggests that this decrease cements the prevailing pessimistic mood among consumers. Interestingly, RBA’s decision to pause rate hikes did not notably influence this sentiment. The prevailing concerns about inflation continue to overshadow, although confidence in the job market did see a marginal improvement.

                                Regarding RBA’s upcoming meeting on September 5, Westpac anticipates the central bank will maintain its current stance, leaving rates untouched at 4.1%. This cash rate is expected to be the zenith of this financial cycle. It is now up to incoming data and unfolding economic scenarios to present a compelling argument for further monetary tightening.

                                Westpac emphasized that for RBA to be prompted into action, any economic developments would need to be not just surprising, but also substantial, essentially posing a challenge to the bank’s medium-term outlook.

                                Full Australia Westpac consumer sentiment release here.

                                Japan’s wages growth and household spending miss expectations, supports ultra-loose BoJ

                                  Today’s wage growth data out of Japan came in softer than anticipated, reinforcing BoJ’s position towards maintaining its ultra-loose monetary strategy. Furthermore, the consistent decline in real wages continues to weigh down consumer spending.

                                  Nominal cash earnings for workers in June grew by only 2.3% yoy, missing the projected 3.0% yoy rise. This marks a deceleration from previous month’s impressive 2.9% yoy – the most robust growth observed in nearly 30 years. Delving deeper, June’s base salary advance was logged at 1.4% yoy, , also under May’s 1.7% yoy .

                                  Economists have previously estimated that wage increases of 3% or more are crucial to sustain consumer inflation above BoJ’s 2% target.

                                  Compounding concerns, real cash earnings continued their downward trajectory, recording a decline of -1.6% yoy, faring worse than the anticipated stasis at -0.9% yoy. This represents the 15th consecutive month of negative readings in this domain.

                                  Furthermore, overall household spending for June saw a contraction of -4.2% yoy, veering further off the expected -3.5% yoy decline. This marks the fourth consecutive month of shrinking household spending.

                                  These lackluster wage figures pose a challenge for the BoJ. As Governor Kazuo Ueda remarked, the trajectory of income trends is pivotal in determining the realistic prospects of accomplishing lasting inflation. Today’s data lends credence to the BoJ’s recent evaluation that consistently achieving price increments beyond 2% remains a distant goal. Consequently, the need to uphold its ultra-accommodative monetary parameters becomes ever more evident.

                                  Fed Williams: It’s an open question on additional rate hikes

                                    In a candid interview with the New York Times, New York Fed President John Williams deemed the present monetary policy as being “in a good place”. It’s an “open question” on whether Fed needs additional rate hikes.

                                    He emphasized the need to “watch the data”. “Are we seeing the supply-demand imbalances continue to shrink, move in the right direction? Are we seeing the inflation data move in the right direction?”

                                    He anticipates that the need for a restrictive monetary stance will persist for a while. He contemplates, “I think we’re pretty close to what a peak rate would be, and the question will really be — once we have a good understanding of that, how long will we need to keep policy in a restrictive stance, and what does that mean.”

                                    Also, highlighting his approach towards monetary policy, Williams thought of monetary policy primarily in terms of “real interest rates”, rather than “nominal rates” set by Fed. He stressed the potential consequences if inflation rates declined as projected by numerous forecasts: “if we don’t cut interest rates at some point next year then real interest rates will go up, and up, and up. And that won’t be consistent with our goals.” Hence, “to keep maintaining a restrictive stance may very well involved cutting the federal funds rate next year, or year after”.

                                    Eurozone Sentix rose to -18.9, but no joy about this development

                                      Eurozone Sentix Investor Confidence rose from -22.5 to -18.9 in August, much better than expectation of -25.0. Current Situation Index was unchanged at -20.5. Expectations Index rose from -24.5 to -17.3. Inflation theme barometer rose to -11, indicating a decline in inflationary pressure. Central bank policy barometer also rose to -13.

                                      Nevertheless, Sentix noted, “Investors are thus by no means positive about economic developments, the expected rate of deterioration is merely easing. Thus, at the beginning of August 2023, the economy in the euro zone remains in recession mode. There can therefore be no joy about this development.”

                                      In Germany, Sentix Investor Confidence fell from -28.4 to -30.4, lowest since October 2022. Current Situation Index dropped from -28.0 to -35.3. worst since July 2020. Expectations index rose slightly from -28.8 to -26.0.

                                      Full Eurozone Sentix release here.

                                      BoJ opinions: Flexible YCC needed while maintaining monetary easing

                                        In the Summary of Opinions at the July 27-28 meeting, BoJ reinforced its commitment to monetary easing but highlighted a pressing need for more “flexibility” in its yield curve control approach policy.

                                        The bank’s primary stance was evident among board members: Achieving a 2% price stability target “has not yet come in sight”, necessitating continued monetary easing and the preservation of the current YCC framework.

                                        “There is still a significantly long way to go before revising the negative interest rate policy, and the framework of yield curve control needs to be maintained,” one member noted.

                                        However, there will be potential market disruptions by strictly capping 10-year JGB yields at 0.5%, another opinion noted.

                                        Also, given the “increasingly significant upside and downside risks” to prices outlook, flexible YCC is needed for allowing market-driven interest rates, ensuring liquidity, and preventing abrupt rate shifts.

                                        The bank also remarked on the current inflation trends, suggesting they primarily stem from import inflation. A rise in earning power, especially for small and medium-sized firms, was emphasized as crucial before instituting broader YCC flexibility.

                                        At the meeting, BoJ permitted a rise in the 10-year yield beyond its usual 0.5% limit, reaching up to 1%.

                                        Full BoJ Summary of Opinions here.

                                        Fed Bowman: Additional rate hikes likely needed

                                          Fed Governor Michelle Bowman projected the necessity of further rate hikes during a weekend speech, asserting they are likely needed to push inflation back down to the Fed’s 2% target.

                                          Bowman expressed her support for Fed’s rate hike in July and stated, “I also expect that additional rate increases will likely be needed to get inflation on a path down to the FOMC’s 2 percent target.”

                                          However, Bowman was careful to emphasize that Fed policy is “not on a preset course”. Further decisions will be based on “incoming data and its implications for the economic outlook,” she stated.

                                          She said, “We should remain willing to raise the federal funds rate at a future meeting if the incoming data indicate that progress on inflation has stalled.”

                                          While recent lower inflation reading was seen as positive, Bowman asserted the necessity of consistent evidence of inflation moving meaningfully toward the 2% goal when contemplating additional rate hikes and the duration of restrictive federal funds rates.

                                          Full remarks of Fed Bowman here.