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Key Points:

• Australian Headline CPI falls to 0.2% q/q.
• Trimmed Mean CPI remains on target at 0.5%.
• Inflation softening likely to only be transitory.

The latest Australian Consumer Price Index (CPI) figures were released earlier today and provided the market with a little surprise, with the headline result declining to 0.2% q/q. This proved to be significantly below the current estimates for inflation with most economists expecting a 0.4% q/q print. Subsequently, the Aussie Dollar has already eased around 30 pips but it remains to be seen what this means for the broader economy.

Certainly, the slip in the Headline CPI figures is interesting but, on its own, it’s not likely to have a great deal of impact on the RBA’s forward direction. In addition, a more important measure, the Trimmed Mean CPI, was actually broadly in line with expectations and returned a result of 0.5% q/q. In fact, this is actually the CPI result that the central bank looks at when they are seeking to set their monetary policy. Subsequently, the view that the recent slip in the headline CPI figure largely removes the pressure for the RBA to act in the medium term is ill-informed.

In fact, the main reason for the slip in the Headline CPI was the overall volatility of petrol and food prices. This largely explains why Core CPI has remained unmoved and, subsequently, suggests that any price effects are expected to be transitory. Subsequently, it would be wise to not read too much into the medium term impacts of a fall in inflation.

However, Australia still faces a challenge with the ongoing rebalancing that is occurring within their economy. Although looser monetary policy has assisted in softening the end of the commodity super cycle there still remains much transition of capital back towards services to occur. Certainly, the recently strength that the AUD has experienced has been relatively unwelcome by the RBA and many have taken the view that the currency is now significantly overvalued.

In fact, many of the reasons for the gain are the ebbing sentiment around the greenback, not the strength of the Australian economy. Subsequently, the AUDUSD is likely to snap lower in due course as broad support for the greenback returns to the fray. This may especially be the case if the market takes a negative view to the current CPI figures, despite the lack of a long-term impact.

Ultimately, the key take away from this commentary is that the slip in the headline CPI rate is relatively unimportant in the scheme of economic variables given that the core inflation rate did not change. However, the current valuation of the Aussie Dollar is more concerning and could be potentially putting a break on export competitiveness that may concern the RBA over the near term.

Asia Summary

Asian markets opened mixed, after yesterday’s lackluster session; focus still remains on the Fed. China markets were weaker with some standouts due to H1 guidance. China Cabinet announced all centrally owned firms under state asset regulator to become limited liability firms or joint stock firms by the end of 2017.

Australia Q2 CPI was the main risk event of the session, data showed that core inflation remains well below the 2-3% targeted by the RBA, which means that rates should be kept on hold for some time. Latest survey showed a 54.5% chance that the RBA will keep rates on hold until May 2018. The more muted inflation was attributed to weaker wages and lower fuel costs. The AUD fell 0.5% to session lows of 0.7892, 3-yr govt yield touched 2.037%. Later in the session RBA Govt Lowe warned that there could be financial stability risks from additional easing and affirmed some coverage of the RBA’s discussion of the neutral rate misinterpreted its intention. He also reiterated preference for a weaker currency.

Key economic data

(AU) AUSTRALIA Q2 CONSUMER PRICES (CPI) Q/Q: 0.2% V 0.4%E; Y/Y: 1.9% V 2.2%E; TRIMMED MEAN Q/Q: 0.5% V 0.5%E ; Y/Y: 1.8% V 1.8%E

(NZ) NEW ZEALAND JUN TRADE BALANCE (NZD): 242M V 150ME; 12-MONTH YTD: -3.66B V -3.68BE

(JP) JAPAN JUN PPI SERVICES (CGPI) Y/Y: 0.8% V 0.8%E

(AU) AUSTRALIA JUN SKILLED VACANCIES Q/Q: 0.9% V 1.0% PRIOR

Speakers and Press

China

(CN) China Securities Regulatory Commission (CSRC): to regulate and expand access to China's capital markets

(US) US expected to 'soon' issue new sanctions against China entities for violating UN sanctions against North Korea - US financial press

Australia

(AU) Reserve Bank of Australia (RBA) Gov Lowe: RBA does not need to follow other central banks in policy moves; Q&A: Do not think RBA is overestimating the level of neutral rate, some coverage of neutral rate misinterpreted our intentions

Korea

(KR) Revised assessment from US officials finds North Korea may be able to launch nuclear ICBM sooner than previously anticipated; could achieve capability to strike North America cities next year - Wash Post

Japan

(JP) Bank of Japan Deputy Gov Nakaso: Reiterates still long way to go to meet 2% inflation target and will persistently pursue current powerful easing

Other

(US) Senate Republican plan to repeal and replace Obamacare fails to get votes needed for approval - financial press

Asian Equity Indices/Futures (00:00ET)

Nikkei +0.5%, Hang Seng +0.06%, Shanghai Composite -0.37%, ASX200 +0.96%, Kospi -0.29%

Equity Futures: S&P500 -0.05%; Nasdaq -0.08%, Dax -0.09%, FTSE100 -0.10%

FX ranges/Commodities/Fixed Income (00:00ET)

EUR 1.1654-1.1638; JPY 112.09-111.86; AUD 0.7941-0.7893; NZD 0.7436-0.7416

Aug Gold +0.38% at 1,247/oz; Sept Crude Oil +1.02% at $48.38/brl; Sept Copper +1.30% at $2.88/lb

USD/CNY (CN) PBOC SETS YUAN REFERENCE RATE AT 6.7529 V 6.7485 PRIOR

(CN) China PBOC OMO injects CNY130B in 7 and 14 day reverse repos v CNY140B prior

(PH) Philippines rejects all bids in 20-yr bond auction; received PHP11.2B in bids v PHP15B offered (1st failed auction this year) –late in yesterday’s session

(CN) China Ministry of Finance (MOFCOM) sells 3-yr bonds at 3.46% v 3.47%e; bid-to-cover ratio 3.86x

(TH) Thailand sells THB6B in 18.89-yr government bonds; avg yield 3.0645%; bid-to-cover ratio 3.47x

Equities notable movers

Australia/New Zealand

Tower New Zealand, TWR.NZ NZ regulators block proposed merger with Suncorp over concerns about reduced competition; -23.8%

Oz Minerals, OZL.AU Reports Q2 gold production 32.1K oz,+23% y/y; copper production 28.2Kt v 27.4Ke, +12% y/y, +8.6%

Hong Kong/China

Evergrande Real Estate, 3333.HK Guides H1 Net to triple y/y; +12.9%

ASM Pacific, 522.HK Reports Q2 (HK$) Net 756.2M v 671Me ; Rev 4.42B v 4.5Be; -10.1%

Japan

Mitsubishi Motors, 7211.JP Reports Q1 Net profit ¥22.97B v loss ¥129.7B y/y; Op ¥20.6B v ¥4.62B y/y; Rev ¥440.9B v ¥428.7B y/y; +5.9%

Other

UBER.IPO Said to narrow short-list for CEO position to less than 6 candidates which include HPE's Meg Whitman; an announcement could come in less than 6 weeks - US financial

US markets on close: Dow +0.5%, S&P500 +0.3%, Nasdaq 0.0%, Russell +0.9%

Best Sector in S&P500: Financials

Worst Sector in S&P500: Healthcare

Biggest gainers: FCX +14.7%; NCM +6.9%; RRC +6.9%

Biggest losers: STX -16.5%; IPG -13.3%; MU -5.6%

At 17:00ET/21:00GMT: VIX 9.43 (+0.00pts); Treasuries: 2-yr 1.39% +1.8%), 10-yr 2.33% (+3.5%), 30-yr 2.91% (+2.8%)

US Market Summary

(US) The Senate managed to pass a vote today to start debate on repeal of Obamacare. The vote was 50-50, with VP Pence vote casting the tie-breaker. The actual makeup of the healthcare bill remains unknown.

(US) Commerce Secretary Ross said global steel overcapacity is quite massive, pointing out that China may account for half of global excess capacity in steel. In a conciliatory note, he said trade and economic ties with China are a work in progress, and that the TPP trade proposal had some very good features that we can try to build on. He hopes to address South Korea free trade agreement shortly, adding that the US economy is in reasonably good shape.

(US) With stocks back in favor, Treasuries paid the price, with a strong sell-off across the curve. 10-year and 30-year yields gained 7 bps a piece, reaching 2.33% and 2.91% respectively; 10s30s spread steady at 58 bps

Aussie dropped after the weaker than expected inflation report, as traders took profit after the currency rallied to 2-year against USD and last week. Headline CPI moderated to +1.9% y/y in 2Q17 from +2.1% a quarter ago. The market had anticipated an increase to +2.2%. Key contributors to the weakness were lower automotive fuel prices as global oil prices plunged and the usual seasonal drop in domestic holiday, travel and accommodation prices. RBA's trimmed mean slipped 0.1 percentage point to +1.8%, in line with expectation, while the weighted median CPI climbed +0.1 percentage point to +1.8% in the second quarter. Consumer price levels are an important gauge of central banks' monetary outlook. The dilemma currently facing major central banks worldwide is the continuing economic growth and employment market improvement, alongside subdued inflation. At the July meeting minutes, RBA acknowledged that weak inflation is a global phenomenon with core inflation remaining low while headline inflation turning down..

RBA's Neutral Rate Rhetoric Overstated

Indeed, Aussie's rally last week was a result of market's overreaction to 'neutral rate' rhetoric's by the RBA and Fed Chair Janet Yellen. Recall that RBA suggested that the neutral nominal cash rate is around 3.5%, with medium-term inflation expectations well- anchored around 2.5%'. It also noted that 'a reduction in risk aversion and/or an increase in the potential growth rate could see the neutral real interest rate rise again'. Fed's Yellen noted at the testimony that 'the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance'.

Despite initial impression that RBA's language was implying a tightening stance, RBA's estimated nominal neutral rate, currently at 3.5%, was weaker than the previous projection of 5% (prior to global financial crisis). More importantly, what RBA noted was 'nominal neutral rate' which, if adjusted with medium term inflation expectations of around 2.5%, would bring a real rate of 1%. This is indeed coincident with the Fed's long-run neutral rate in real terms. Meanwhile, Yellen's comments on neutral rate were not more pessimistic than previously. Indeed, the Fed's neutral rate stance over recent years has remained similar, suggesting that the neutral rate had fallen fell sharply after the financial crisis and has remained near zero; r-star would move high should the temporary factors dissipate over time and the long-term level of the neutral rate has permanently shifted downward due primarily to slower potential growth.

RBNZ Assistant Governor John McDermott also talked about the monetary policy outlook earlier today. His stance, while driven muted market reaction, was rather dovish. He suggested that current estimate of the neutral interest rate is around 3.5 % with potential output growth at 2.9% and core inflation at 1.4%. He added that the neutral rate has been slowly falling for some time, due to lower potential output growth. Dating back to early 2015, the central bank noted that the neutral interest rate is around 4.5%

Daily Pivots: (S1) 1.2481; (P) 1.2506; (R1) 1.2532; More....

No change in USD/CAD's outlook. While deeper fall could be seen, considering bullish convergence condition in 4 hour MACD, we'll be cautious on strong support from 1.2460 key support to contain downside and bring rebound. On the upside, break of 1.2608 minor resistance will indicate short term bottoming and turn bias back to the upside for 1.2968 support turned resistance. However, firm break of 1.2460 will target next key fibonacci level at 1.2048.

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. Fall from 1.3793 is seen as the third leg and should target 50% retracement of 0.9406 to 1.4869 at 1.2048. At this point, we'd look for strong support from there to contain downside and bring rebound. However, firm break there will target 100% projection of 1.4689 to 1.2460 from 1.3793 at 1.1564.

Daily Pivots: (S1) 0.7902; (P) 0.7936; (R1) 0.7970; More...

AUD/USD continues to stay in consolidation below 0.7988 and intraday bias remains neutral. Near term outlook remains bullish as long as 0.7785 support holds and another rise is expected. Break of 0.7988 will target 100% projection of 0.6826 to 0.7833 from 0.7328 at 0.8335 next. However, break of 0.7785 will argue that deeper pull back in under way and could target 55 day EMA (now at 0.7658).

In the bigger picture, current development suggests that rebound from 0.6826 is developing into a medium term rise. There is no confirmation of trend reversal yet and we'll continue to treat such rebound as a corrective pattern. But in any case, further rise is now expected to 55 month EMA (now at 0.8100) or even further to 38.2% retracement of 1.1079 to 0.6826 at 0.8451. Break of 0.7328 support is needed to confirm completion of the rebound. Otherwise, further rise is now expected.

Daily Pivots: (S1) 1.1613; (P) 1.1662 (R1) 1.1696; More...

Despite edging higher to 1.1711, EUR/USD quickly retreated. Considering weak momentum with 4 hour MACD staying below signal line, intraday bias is turned neutral first. Some consolidations would be seen but downside should be contained above 1.1444 resistance turned support and bring another rally. Above 1.1711 will target 1.2 handle next.

In the bigger picture, an important bottom was formed at 1.0339 on bullish convergence condition in weekly MACD. Sustained break of 55 month EMA (now at 1.1760) will pave the way to key fibonacci level at 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516. While rise fro 1.0339 is strong, there is no confirmation that it's developing into a long term up trend yet. Hence, we'll be cautious on strong resistance from 1.2516 to limit upside. But for now, medium term outlook will remain bullish as long as 1.1295 support holds, in case of pull back.

Daily Pivots: (S1) 1.2994; (P) 1.3038; (R1) 1.3070; More...

GBP/USD is still bounded in range below 1.3125 and intraday bias remains neutral first. With 1.2811 support intact, another rise is mildly in favor. Break of 1.3125 will target 61.8% projection of 1.2108 to 1.3047 from 1.2588 at 1.3168. Overall, choppy rebound from 1.1946 is seen as a corrective pattern, hence, we'd be cautious on strong resistance from 1.3168 to limit upside. But firm break of 1.3168 will bring further rise towards 1.3444 key resistance. Meanwhile, break of 1.2811 support will be the first sign of reversal and will turn bias to the downside to target 1.2588 key support next.

In the bigger picture, overall, price actions from 1.1946 medium term low are seen as a corrective pattern that is still in progress. While further upside is expected, overall outlook remains bearish as long as 1.3444 key resistance holds. Larger down trend from 1.7190 is expected to resume later after the correction completes. And break of 1.2588 will indicate that such down trend is resuming.

Daily Pivots: (S1) 111.15; (P) 111.55; (R1) 112.28; More...

The recovery from 110.61 temporary low extends higher but USD/JPY is staying below 112.41 resistance so far. Intraday bias remains neutral first. Another decline is expected with 112.41 intact. Below 110.61 will target 108.81. Break there will resume whole correction from 118.65 and target 61.8% retracement of 98.97 to 118.65 at 106.48. Nonetheless, break of 112.41 will dampen this bearish view and turn focus back to 114.49 resistance instead.

In the bigger picture, the corrective structure of the fall from 118.65 suggests that rise from 98.97 is not completed yet. Break of 118.65 will target a test on 125.85 high. At this point, it's uncertain whether rise from 98.97 is resuming the long term up trend from 75.56, or it's a leg in the consolidation from 125.85. Hence, we'll be cautious on topping as it approaches 125.85. If fall from 118.65 extends lower, down side should be contained by 61.8% retracement of 98.97 to 118.65 at 106.48 and bring rebound.

Daily Pivots: (S1) 0.9475; (P) 0.9500; (R1) 0.9549; More...

USD/CHF's rebound indicates temporary bottoming at 0.9437 and intraday bias is turned neutral first. We remain cautious on strong support from 0.9443 key support to bring reversal. But break of 0.9699 is needed to confirm Otherwise, another fall will be in favor. Sustained trading below 0.9443 will extend the down trend from 1.0342 to 161.8% projection of 1.0342 to 0.9860 from 1.0099 at 0.9319.

In the bigger picture, focus is now back 0.9443 key support level. Sustained break there indicate underlying bearish momentum and would target 0.9 handle and possibly below. Meanwhile, strong rebound from current level and break 0.9699 resistance will extend long term range trading between 0.9443/1.0342.

US stocks ignored policy uncertainty surrounding President Donal Trump and surged to record highs overnight. S&P 500 jumped to record high at 2477.13, up 0.29%, on strong earnings. NASDAQ also rose 0.02% to record at 6412.17. DOW jumped 0.47% to close at 21613.43, just shy of record. Surging oil price, which saw WTI reaching as high as 48.66, is another factor boosting sentiments. Meanwhile, US yields also staged a strong comeback just ahead of FOMC rate decision. 10 year yield closed up 0.072 to 2.326, scoring the largest jump in nearly 4 months. In the currency markets, Canadian Dollar is trading as the strongest major currency for the week while Yen and Swiss Franc are the weakest. Dollar and Sterling are mixed as markets await FOMC meeting and UK Q2 GDP.

The jump in treasury yield on inflation expectations is worth a note. It started with record German Ifo business sentiment that pushed 10 year bund yields up to 0.566. On the background, there was the strong rally in oil and industrial metal like copper. TNX is having its focus back on 2.396. Break there will extend the rebound from 2.103 to 2.621 high. Such development will be Yen negative.

Markets await FOMC and UK GDP

FOMC policy decision and statement will be the main focus today. The Fed would leave the policy rate unchanged but the key is whether the Fed would turn more dovish on the inflation outlook which might affect the future normalization path. The market consensus remains that there would be one more rate hike in December, which was signalled in the June dot plot. However, more and more voices of doubt about the implementation due to recent disappointment on the data front. Another focus is whether the Fed would announce the kickoff period of the balance sheet reduction plan.

Meanwhile, earlier in the day, Swiss will release UBS consumption. UK will release Q2 GDP and BBA mortgage approvals. US will also release new home sales.

Oil surged on production cut

Oil prices rallied on hopes that output surplus would come under control. Saudi Arabia has planned to cut exports to 6.6M bpd, down 1M bpd from a year ago, in August. The pledge was followed by UAE with its energy minister Mohamed al-Mazrouei announcing that state-owned Abu Dhabi National Oil Company will cut its crude exports by about 10% in September. While Nigeria and Libya are still exempted from the output cut deal, the two countries promised to limit outputs after which have reached a certain level.

IMF urged ECB to maintain stimulus

IMF said in a report published yesterday that "monetary policy should remain firmly accommodative until there is a sustained rise in the inflation path toward the ECB's price stability objective." And, it also emphasized that some countries in the region need to tolerate inflation above target for a "prolonged period" to life the average inflation among member states. The IMF acknowledged that recovery in Eurozone is "firming and becoming broad based". But it also warned that "the improving near-term outlook is clouded by significant downside risks, especially in the medium and long term, amidst thin policy buffers." Also, "some high-debt countries could experience rising borrowing costs in the face of tighter global financial conditions or reduced monetary accommodation."

BoJ Nakaso: Improving output gap will lift prices

BoJ Deputy Governor Hiroshi Nakaso said that he's still confident that inflation will reach the 2% target around fiscal 2019. And, BoJ should stick with the current stimulus program. He noted that for now, companies have been trying to "absorb higher labour costs by revising their business processes". In such a way, higher labour costs are not being passed on to consumers. However, he emphasized that "the output gap is clearly improving, so companies will become more aggressive in setting wages and prices."

Aussie lower after CPI

Australian Dollar weakens mildly today after lower than expected inflation data. CPI rose 0.2% qoq in Q2, below consensus of 0.4% qoq. Annually, CPI slowed to 1.9% yoy, down from 2.1% yoy and missed expectation of 2.2% yoy. RBA trimmed mean CPI slowed to 1.8% yoy, down from 1.9% yoy. RBA weighted median CPI, however, rose to 1.8% yoy, up from 1.7% yoy. RBA Governor Philip Lowe said today that tightening in global central banks "has no automatic implications for monetary policy in Australia". And RBA "didn't" and "don't need to" move in "lockstep" with others.

RBNZ McDermott stays dovish

RBNZ Assistant Governor John McDermott has spoken about the monetary policy outlook, with a dovish stance. He suggested that current estimates the neutral interest rate is around 3.5 % with potential output growth at 2.9% and core inflation at 1.4%. He added that the neutral rate has been slowly falling for some time, due to lower potential output growth. The impact on kiwi was rather muted. NZDUSD continued its sideways trading around a 10-month high. released from New Zealand, trade surplus widened to NZD 242m in June.

USD/CHF Daily Outlook

Daily Pivots: (S1) 0.9475; (P) 0.9500; (R1) 0.9549; More...

USD/CHF's rebound indicates temporary bottoming at 0.9437 and intraday bias is turned neutral first. We remain cautious on strong support from 0.9443 key support to bring reversal. But break of 0.9699 is needed to confirm Otherwise, another fall will be in favor. Sustained trading below 0.9443 will extend the down trend from 1.0342 to 161.8% projection of 1.0342 to 0.9860 from 1.0099 at 0.9319.

In the bigger picture, focus is now back 0.9443 key support level. Sustained break there indicate underlying bearish momentum and would target 0.9 handle and possibly below. Meanwhile, strong rebound from current level and break 0.9699 resistance will extend long term range trading between 0.9443/1.0342.

Economic Indicators Update