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US equities declined as investors reflected on the mixed economic data from the country. Early this week, data revealed that the country’s inflation declined in August as new cars and airfare prices fell. Additional data published on Thursday revealed that retail sales boomed in the US even as prices and supply shortages rose. Retail sales rose by 0.7% in August while core sales rose by 1.8%. At the same time, data by the Philadelphia Federal Reserve showed that the manufacturing index rose from 19.4 to 30.7 in August. Initial jobless claims also ticked upwards, sending a mixed picture of the country’s economy. The Dow Jones, S&P 500, and Nasdaq 100 indices fell by more than 0.40%.

The British pound dropped against the US dollar in the overnight session. The weakness happened as investors waited for the latest UK retail sales numbers that will come out in the morning session. These numbers will wrap up a relatively busy week for the UK economy, where the ONS has already published the latest jobs and inflation data. Economists expect that the headline UK retail sales rose from 2.4% to 2.7%. They also see core retail sales rising from 1.8% to 2.5% as the country reopened. This growth will likely be because of grocery and discretionary spending. Still, regardless of the data, there is a high probability that the Bank of England will turn hawkish in the upcoming decision.

The euro also declined against the US dollar ahead of the Eurozone inflation data. Eurostat is one of the major statistics agencies that publish preliminary inflation numbers. Therefore, based on these numbers, analysts expect the data to show that the headline CPI rose from 2.2% in July to 3.0% in August. The core CPI is expected to rise from 0.7% to 1.6%. Historically, the final CPI data does not have a major divergence from the preliminary one. Meanwhile, the euro did not react to a speech by Christine Lagarde, where she asked European governments to continue with their fiscal support.

GBPUSD

The GBPUSD pair declined to a low of 1.3763 during the overnight session. On the four-hour chart, the pair moved below the 25-day and 15-day moving averages. It is also slightly above the neckline of the double-top pattern. At the same time, oscillators like the Relative Strength Index (RSI) and MACD have been falling. Therefore, the pair will likely break out lower as the double-top is usually a bearish signal.

EURUSD

The EURUSD pair declined to a low of 1.1757 as traders waited for the upcoming EU inflation data. On the hourly chart, the pair moved below the key support at 1.1770. It also moved below the 25-day and 15-day moving averages and the Ichimoku cloud. The Relative Strength Index (RSI) also declined below the oversold level. Therefore, the pair will likely maintain the bearish trend ahead of the CPI data.

USDJPY

The USDJPY pair rose sharply because of the stronger US retail sales. The pair rose to a high of 109.82, which was the highest level since Tuesday. On the hourly chart, the pair moved above the key resistance level at 109.45. It also rose above the 25-day and 15-day moving averages while the DeMarker indicator has risen. Therefore, the pair will likely keep rising a bulls target the key resistance at 110.

General trend

• Better US retail sales were a focal point during NY session.
• Hang Seng has rebounded from the opening decline [TECH index rises; Financials trade generally lower amid drop in Ping An Insurance; Property names trade mixed, Evergrande extends decline].
• Shanghai Composite ended morning trading -0.6% [Industrials index lags; Consumer Staples index rises].
• Nikkei has remained modestly higher [Topix Marine Transportation index rises after guidance from Maersk].
• S&P ASX 200 has lagged [Resources index declines; China ore FUTs drop over 5%; Broker downgrade weighs on Fortescue].

Headlines/Economic Data

Australia/New Zealand

• ASX 200 opened flat.
• (AU) Australia sells A$1.5B v A$1.5B indicated in 4.50% Apr 2033 bonds, avg yield 1.3394%, bid to cover 3.88x.
• (AU) Australia seeking WTO China wine duties dispute settlement panel.
• (AU) Reserve Bank of Australia (RBA): Excess cash at exchange settlement (ES) accounts at A$362.6B v A$360.2B prior.
• (NZ) Reserve Bank of New Zealand (RBNZ) to publish Assistant Gov Hawkesby speech on Sept 21st on ‘Least Regrets’ Policy [**Reminder: Aug 18th RBNZ Monetary Policy Statement said: The Committee agreed that their least regrets policy stance is to further reduce the level of monetary stimulus so as to anchor inflation expectations and continue to contribute to maximum sustainable employment.].
• (NZ) New Zealand Aug Manufacturing PMI: 40.1 v 62.2 prior (1st contraction in 8 months); Manufacturing sector returned to contraction on the back of another nationwide lockdown; any moves towards the sector getting back into expansion will ultimately depend on how soon Auckland can also return to lower alert levels.
• (NZ) New Zealand Fin Min Robertson: Extended Trans-Tasman travel bubble pause for 8 weeks.

China/Hong Kong

• Hang Seng opened -0.3%, Shanghai Composite -0.3%.
• (CN) China PBOC Open Market Operation (OMO): Injects CNY50B in 7-day reverse repos v CNY10B in 7-day reverse repos prior; Sells CNY50B in 14-day reverse repos v CNY0B prior; Net inject CNY90B v Net CNY0B prior; Injects CNY50B v CNY0B prior in 14-day reverse reports at 2.35% v 2.35% prior [first 14-day operation since Feb 5th].
• (CN) PBOC: The purpose of today's operation is to keep liquidity stable at quarter-end.
• (CN) China Commerce Ministry (MOFCOM): Economic teams from both US-China have maintained communications; US and China trade teams are in normal contact; Will work to implement agreements between Xi and Biden.
• (CN) China said to extend tariff exemption on some 81 US goods till Apr 16th, 2022 - press.
• (CN) China Aug Foreign Direct Investment (FDI) YTD Y/Y: 22.3% v 25.5% prior.
• (CN) China submits application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) - press.
• (CN) China PBoC and Russia Central Bank said to be discussing deepening of bank cooperation - financial press.
• (CN) US and Australia Joint Statement: Countries share concern on China claims in South China Sea, Will strengthen ties with Taiwan.
• (CN) China is resolved to stabilize coal prices - Economic Daily.
• (CN) China Vice Premier Liu He: China to boost EVs consumption.
• CN) China Vice Transport Minister Wang: China to cover 80% of all highways with Electric Vehicle (EV) Charging by 2025.
• (CN) Said that Vaccine producers in China have begun to offer booster shots beginning this month, will start vaccinating certain groups through Nov - Press.
• (CN) China PBOC sets Yuan reference rate: 6.4527 v 6.4330 prior.
• (CN) China Trade-Weighted CFETS Yuan Basket Index hits the highest since Mar 2016 – financial press.
• (CN) China Ministry of Finance (MOF) sells 3-month bills and 30-year bonds.
• (HK) China PBOC to sell CNY5B in 6-month bills in Hong Kong on Sept 24th (Friday).
• (CN) Wanjia Enhanced Income Bond Fund [161911.CN] said to halt trading in Shenzhen - US financial press.
• Fantasia Holdings [property co., 1777.HK]: Fitch downgrades rating to B from B+; Outlook Negative.
• (HK) Hearing various HK property names have been downgraded by US broker (including Times China and China Aoyuan).

Japan

• Nikkei 225 opened +0.2%.
• (JP) BOJ: Japan End Jun (Q2) Household Assets: ¥1,992T, +6.3% y/y; BoJ holdings of JGBs: 44.1% v 44.5% prior - Quarterly Flow of Funds Report.
• (JP) Candidates Kono, Kishida, Noda, and Takaichi have registered for LDP leadership race [in line].
• (JP) Japan LDP Leadership Candidate Takaichi: Nuclear power is needed to reach 0 carbon goal – Press.
• (JP) Japan said to have decided to offer a 3rd coronavirus shot (booster) – Press.
• (JP) Japan Econ Min Nishimura: Need to determine if China meets standards to enter CPTPP.

Korea

• Kospi opened -0.1%.
• (KR) Said that North Korea may be expanding capacity for nuclear weapons at uranium plant - Press.

Other Asia

• (SG) SINGAPORE AUG NON-OIL DOMESTIC EXPORTS M/M: -3.6% V +2.4%E; Y/Y: 2.7% V 8.5%E; NODX to China and the EU 27 declined.

North America

• (US) AUG ADVANCE RETAIL SALES M/M: +0.7% V -0.7%E; RETAIL SALES (EX-AUTO) M/M: 1.8% V 0.0%E.
• (US) President Biden spoke with House Speaker Pelosi (D) and Senate Maj Leader Schumer (D): Agreed need to repeal Trump era tax cuts - US financial press.
• (US) Said that Senator Manchin (D-WV) has not been persuaded to vote for $3.5T infrastructure bill [in line] - Press.
• (BR) Brazil said to consider raising the IOF (financial transaction) tax to fund Auxilio Brasil (new social program) - Local press.

Europe

• (EU) ECB notes FT story of potential rate increase is not accurate; Conclusion on rates is not consistent with forward guidance.
• (EU) Reportedly unpublished ECB inflation estimate raises chance of a rate rise in just over 2-years; Expects to hit 2% inflation target by 2025 - Financial Times.
• (UK) Netherlands PM Rutte will reportedly invite the UK to join the [defense] deal with the EU - UK's Times.
• (UK) Chancellor Rishi Sunak is planning to use next month’s Budget to set out new rules to reign in government borrowing - FT.
• (EU) EU Commission said to renew a series of anti-dumping duties on Chinese and Taiwanese exporters of flat rolled stainless steel products.
• Invesco [IVZ.UK]: Invesco reportedly in discussions to merge with State Street's asset management division – press.
• Maersk [MAERSKB.DK]: Guides Q3 adj EBIT close to $6.0B, adj EBITDA close to $7B v $2.3B y/y; Raises FY21 outlook.

Levels as of 01:20 ET

• Nikkei 225,+0.6 %, ASX 200 -0.8% , Hang Seng +0.7%; Shanghai Composite -0.6% ; Kospi +0.3%.
• Equity S&P500 Futures: +0.1%; Nasdaq100 +0.1%, Dax +0.1%; FTSE100 flat.
• EUR 1.1773-1.1758; JPY 109.91-109.66 ; AUD 0.7302-0.7280 ;NZD 0.7083-0.7059.
• Gold +0.2% at $1,759/oz; Crude Oil -0.2% at $72.47/brl; Copper +0.5% at $4.3055/lb.

Market movers today

• In the US, consumer confidence from University of Michigan for September is released. The index nose-dived in August but the drop has not been seen in other consumer surveys so it seems likely it will rebound a bit. Also keep an eye on the inflation expectations index.
• In the euro area, final CPI numbers for August are released. They will bring more details on the sub components and hence what drove the sharp increase in core inflation to 1.6% y/y from 0.7% y/y.
• Markets will also keep an eye on the development in the problems for China's second largest developer Evergrande and possible contagion to other markets.

The 60 second overview

US consumers: Retail sales ticked in strong yesterday with the control group (which excludes autos, gas and food services) at 2.5% m/m. Headline sales were not as strong, partly because there was no growth at all in "food services" (restaurants). Markets reacted by sending US yields higher to the levels from early this week and with broad USD strengthening.

Chinese real estate market: Trading of Evergrande bonds was halted and we see rising contagion to other big developers whose shares are diving. Home sales dropped 20% y/y in August following China's tightening measures, which have added to the challenges for developers already feeling the heat from tighter regulation last year. So far there is limited spill-over to developed markets but it bears watching.

Equities: Equities lower yesterday although the European session was relatively strong and hence European stocks outperformed rest of the world yesterday. We have seen a lot of all-time highs the last 10 days and the risk appetite in equity markets has faded somewhat. This is well in line with what we expect for the rest of the year where some of the strong tailwinds equities have had the last 16 months are fading. No huge style and sector difference yesterday but consumer discretionary led on retailer and homebuilder strength while materials was the worst performer as industrial metals softened. In the US, equities were mostly lower, Dow -0.2%, S&P 500 -0.2%, Nasdaq +0.1% and Russell 2000 -0.1%. Markets are mixed in Asia this morning where the Evergrande story continues to unfold. European futures are 0.5% higher while US futures are only a notch higher.

FI: It was a rather mixed day in EGB markets yesterday with choppy trading. Stronger than expected US retail sales weighed on bonds, but was later reverted leaving core EGBs broadly unchanged on the day.

FX: We now like the risk-reward of selling NOK FX via options. AUD/USD declined yesterday driven largely by stronger broad USD. The PLN was one of the worst performing EM currencies yesterday amid general sour mood posed by USD strength.

Credit: Credit followed equities in green and iTraxx Xover tightened 1.7bp while IG tightened 0.2bp. Cash bonds followed suit, with HY bonds tightening 1.5bp and IG0.5bp.

STOCKS

Dow has risen from immediate trend support and looks bullish towards 35250. Dax can rise towards 15800/80 too in the near term. Nikkei and Shanghai have scope to test 30000 and 3575/50 before rising back from there. Indian equities have surged well over the past few sessions and look strongly bullish for the medium term, but we may expect some pause or pull back today.

Dow (34751.32, -63.07, -0.18%) rose slightly yesterday. Trend support is seen near 34500 on the daily candles and while that holds, we nay expect a slow and steady rise towards 35250 in the coming week. Any break below 34500 if seen (less likely) can be strongly bearish.

DAX (15651.75, +35.75, +0.23%) has risen too and has scope to test 15800-15850 in the near term. Range of 15850-15400 may continue to hold.

Nikkei (30485.11, +161.77, +0.53%) has risen today but unless a rise above 30750 is seen, there is scope for a fall towards 30000 in the near term. Immediate range of 30000-30750 can hold for now. Only on a break below 30000 if seen would open up chances of a possible fall to 29000 or lower. Till then we may expect the mentioned range to hold.

Shanghai (3606.31, -1.36, -0.038%) has declined sharply over the last 1-2 sessions. A test of immediate support near 3575-3550 is possible before a sharp rise back towards 3625-3650 or higher is seen in the medium term.

Nifty (17629.50, +110.05, +0.63%) tested 17645 yesterday which may act as an interim resistance on the very near term charts. Although the longer term view is to see an eventual rise to 17800/850, we may expect a pause in the upmove today for a small correction or stability. Any fall from here could extend to 17400 on the downside before resuming the uptrend.

Sensex (59141.16, +417.96, +0.71%) tested our expected 59000 yesterday to close higher. While medium term view is bullish for a test of 60000, we may have to allow for a pause or short correction from current levels before resumption of upmove. Watch price action today near current levels.

COMMODITIES

Strong US Dollar pushes metal prices down which can continue for another few sessions before any recovery is seen. Gold, Silver and Copper have all fallen. Gold can test 1725-1700 while Silver can fall towards 22 in the near term. Copper has scope to test 4.20 before bouncing back from there towards 4.40.

Brent (75.46) sustains trade above $75 and while that holds, a further rise towards resistances of 77-78-80 can be tested which can produce a sharp decline towards 70 in the medium term. WTI (72.20) is also trading above 72 and can face rejection from 73-75 region soon. Watch price action to see a near term rejection from respective resistance zones.

Gold (1758.30) has broken below 1780/65 mentioned yesterday and can be headed towards 1725-1700 in the near term. View is bearish while below 1765/60.

Silver (22.89) has also broken below 23.50 and could test 22 in the near term before bouncing back from there.

Copper (4.3030) has fallen too and could test the lower end of the 4.20-4.40 range before bouncing back from there.

FOREX

Sharp rise in Dollar Index after a higher retail sales data yesterday. The index can head towards 93.0-93.25 from where a rejection is possible. Euro has fallen sharply and could test 1.1750-1.1700 before attempting to rise but broadly 1.16-1.19 may continue to hold for the coming weeks. EURJPY has tested 128.60 before bouncing back from there. A range of 128-130.50 may hold for now. Aussie and Pound look bearish too for the near term. USDCNY has risen well and can dip from 6.47/48 in the near term. USDINR tested 73.3450 yesterday but can rise back to 73.80 today backed up by a weak Euro and Chinese Yuan.

Dollar Index (92.911) has risen sharply and can continue to rise towards immediate resistance near 93-93.25 from where a decline can be expected.

Euro (1.1764) has given way exactly as mentioned in yesterday’s edition. The exchange has tested 1.1750 before slightly bouncing from there. We need to see if it holds above 1.1750 to bounce back to 1.18 and higher else it can fall to 1.1725-1.1700 in the near term strengthening the downtrend. While below 1.1750, chances of a fall towards 1.1650 would open up.

EURJPY (129.27) has fallen in line with our expectation to test 128.607 before bouncing back sharply from there. We need to see if 128.50-128 holds in the near term to trigger a bounce back to 130-130.50 in the medium term. While above 128, immediate view is bullish. A broad range of 130.50-128 may continue to hold.

Dollar-Yen (109.85) has risen well but continues to hold within the 109-110.50 range. Within the range the exchange can rise towards the upper end.

Aussie (0.7286) has broken below 0.73 and looks bearish towards 0.7250-0.72 in the near term before any attempt to bounce back from there. Immediate view is bearish while below 0.73.

Pound (1.3789) is holding within the range of 1.3750-1.39 and could continue to trade within the range trying to move up towards 1.39 from current levels.

USDCNY (6.4572) rose sharply from levels near 6.43 but can face rejection from 6.47/48 in the near term and fall further towards 6.40 soon. Watch price action near 6.47/48 in the near term.

USDINR (73.52) tested 73.3450 yesterday but bounced back sharply. A rise to 73.80 looks possible today as both Euro and Chinese Yuan have weakened against the Dollar.

INTEREST RATES

The US Treasury yields have risen back well after the US retail sales data release yesterday. The US retail sales rose 0.8% (MoM) in August after declining 2.17% in July. While the bounce in yields sustain, a further rise to test the key resistances cannot be ruled out ahead of the US Federal Reserve meeting next week. The German yields hover near their crucial resistances and will have to be watched closely for a reversal from here and mark the end of the corrective rally. The 5Yr and 10Yr GoI remains bearish to fall further. However, a sideways consolidation is a possibility before a further fall is seen.

The US 2Yr (0.22%), 5Yr (0.84%), 10Yr (1.34%) and the 30Yr (1.88%) Treasury yields have risen back across tenors. The 10Yr has moved above 1.3% and has brought back the chances of testing 1.4%. Can the upside extend up to 1.45%-1.5% that we had expected earlier? We will have to wait and see. The 30Yr on the other hand has to break above 1.9% to gain bullish momentum and rise to 2% and higher levels.

The German 2Yr (-0.71), 5Yr (-0.62%), 10Yr (-0.30%) and 30Yr (0.19%) yields remain higher and stable. The 10Yr is just entering into its -0.30%/-0.25% resistance zone and the 30Yr is just below the key level of 0.20%.We expect the yields to reverse lower from and resume the broader downtrend. The price action in the coming days will need a close watch.

The Indian 10Yr GoI (6.1682%)remains lower and keeps intact the bearish view of seeing 6.12%-6.1% while below 6.2%. The medium-term view is also bearish to see 6.05%-6% on the downside.

The 5Yr GoI (5.6025%) is managing to sustain above 5.6%. While above 5.6% a range of 5.6%-5.64% is possible in the near-term. However, while below 5.64%, the broader bias is bearish to break 5.6% and fall to 5.55%-5.5% eventually in the coming days.

Short Term Elliott Wave in Silver (XAGUSD) suggests cycle from February 1 peak is unfolding as a 5 waves diagonal. Down from February 1, wave (1) ended at 23.78 and rally in wave (2) ended at 28.74. The metal then extends lower in wave (3) towards 22.39 and bounce in wave (4) ended at 24.87. The 1 hour chart below shows the metal turning lower again after ending wave (4).

Wave (5) is currently in progress as an impulse structure. It still needs to break below wave (3) at 22.39 to confirm that the next leg lower has started. Down from wave (4), wave (i) ended at 24.61 and rally in wave (ii) ended at 24.82. The metal then extends lower in wave (iii) towards 24.2, wave (iv) ended at 24.55, and final leg wave (v) ended at 23.82. This completed wave ((i)) in higher degree. Rally in wave ((ii)) ended at 24.29 as a zigzag structure.

The metal then extends lower in wave ((iii)). Down from wave ((ii)), wave (i) ended at 23.55, wave (ii) ended at 23.96, and wave (iii) ended at 22.58. Near term, while pivot at 24.87 high stays intact, expect rally to fail in 3, 7, or 11 swing for further downside.

Silver 60 Minutes Elliott Wave Chart

Key Highlights

• USD/JPY dipped towards 109.10 before correcting higher.
• A major hurdle is forming near 109.90 and 110.00 on the 4-hours chart.
• EUR/USD extended its decline below the key 1.1780 support.
• GBP/USD traded below the 1.3800 support zone, but it is still above 1.3720.

USD/JPY Technical Analysis

The US Dollar reacted to the downside from the 110.20 zone against the Japanese Yen. USD/JPY tested the 109.10 zone and recently started a fresh increase.

Looking at the 4-hours chart, the pair recovered above the 109.25 and 109.40 resistance levels. There was also a break above the 50% Fib retracement level of the downward move from the 110.16 swing high to 109.10 low.

However, the pair failed to clear the 109.90 resistance. It seems like there is a major hurdle forming near the 110.00 level, the 100 simple moving average (red, 4-hours), and the 200 simple moving average (green, 4-hours).

There is also a connecting bearish trend line forming with resistance near 109.90 on the same chart. The trend line is close to the 76.4% Fib retracement level of the downward move from the 110.16 swing high to 109.10 low.

To start a fresh increase, the pair must clear 109.90 and 110.00. If not, the pair might start a fresh decline below the 109.50 level.

On the downside, an initial support is near the 109.25 level. The main breakdown support is near 109.10. Any more losses might push the pair towards the 108.40 support zone in the near term.

Looking at EUR/USD, the pair failed to stay above the key 1.1780 support and extended its decline. Similarly, GBP/USD traded below the 1.3800 support zone, but it might find bids near 1.3720.

Economic Releases

• UK Retail Sales for August 2021 (YoY) - Forecast +2.7%, versus +2.4% previous.
• UK Retail Sales for August 2021 (MoM) - Forecast +0.5%, versus -2.5% previous.
• Euro Zone CPI for August 2021 (YoY) - Forecast +3%, versus +3% previous.
• Euro Zone CPI for August 2021 (MoM) - Forecast +0.4%, versus -0.1% previous.

Silver follows Gold and drops sharply this week. The development should confirm rejection by 55 day EMA and the bearish signal suggests that larger decline from 30.07 is ready to resume. Near term focus is now back on 22.36 support. Break there will target 61.8% projection of 28.73 to 22.36 from 24.86 at 20.92.

Also, the rejection by 55 week EMA also carries medium term bearish implication. The whole decline from 30.07 has the potential to drop to as low as 61.8% retracement of 11.67 to 30.07 at 18.69 before completion.

New Zealand BusinessNZ manufacturing index dropped to 40.1 in August, down from 62.6, back in contraction. Looking at some more details, production tumbled from 63.9 to 27.7. Employment dropped from 57.9 to 54.5. New orders dropped from 63.7 to 44.4. Finished stocks dropped from 56.8 to 46.1 Deliveries dropped from 56.3 to 33.6.

BNZ Senior Economist, Doug Steel stated that "while many anticipate a bounce in activity as the country progresses down alert levels (all going well on the Covid front), today's PMI clearly demonstrates the economic pain being felt.  This should not be underestimated, even if there is hope for the future. GDP and manufacturing output are expected to fall heavily in Q3.  It is something of a reality check in the afterglow of yesterday's very strong Q2 GDP outcome."

Full release here.

Key insights from the week that was.

This week, we received updates on Australian business and consumer confidence as well as a speech by RBA Governor Lowe.

Beginning with business confidence and conditions, the NAB survey provided tentative evidence that this wave of the virus and the consequent lockdowns are having less of an effect on the economy than in 2020. Confidence in NSW looks to be responding to the vaccination drive, the state’s index rising 8pts to -12 in August. The extension of Victoria’s lockdown however saw confidence deteriorate there to -10. Both outcomes are materially below the national figure of -5, itself a well-below average reading, but up 2pts in the month.

Business conditions meanwhile are well off their June quarter highs (+14pts in August versus Q2’s +30pt average); however, the index did rise 4pts in August and the current level is still above the long-run average of the series. Explaining these outcomes: coming into these lockdowns, the economy was carrying strong momentum; as we speak, restrictions are impacting our largest cities, but not the whole nation; and, thanks to the rapid vaccination drive, there is a clear path out of this lockdown.

While challenged by present circumstances, Australian consumers are optimistic on the outlook, the Westpac-MI consumer sentiment index rising 2% in September to an above-average reading of 106.2. Behind this headline result was material strength in the components related to the economic outlook, the 1-year and 5-year views up almost 5% in the month to respectively be 15% and 25% above their long-run averages. Views on family finances are modestly above average levels currently, supported by strong gains for house prices, equities near all-time highs and labour market resilience (more on this below).

As highlighted by our Chief Economist Bill Evans this week, the recent strength shown by consumer sentiment rests on the rapid vaccination of Australia’s population which is materially reducing health risks related to the virus and should soon allow the nation to re-open. Also discussed in the above video is the structural challenge faced by households with respect to housing affordability, a potential headwind for consumption in the recovery – particularly once the cash rate lifts off the lower bound.

Looking beyond the immediate, critical for consumer spending in coming years will be the strength of our labour market. August’s loss of employment was in line with our expectation at -146k (WBC-150k). While a large fall in jobs, the 3.7% decline in hours worked was more significant, resulting in a percentage point increase in the rate of underemployment to 9.3%, more than twice the published unemployment rate (4.5%). Hours worked were, unsurprisingly, weakest in NSW (-6.5%), but also down sharply in Qld (-5.2%) and Vic (-3.4%).

These outcomes highlight that the benchmark for success in recovery will be hours worked and the rate of underemployment instead of the level of unemployment. To see lasting strength in consumer spending and hence GDP, household incomes must return to their full employment level, not just the headcount of those who seek employment and find it.

This issue is very clearly on the mind of the RBA. Notable in Governor Lowe’s speech on “Delta, the Economy and Monetary Policy” was the belief that to achieve its inflation target in the medium-term, “wages will need to be growing by at least 3 per cent”, almost double the annual growth rate for the Wage Price Index at June 2021. It is worth emphasising that the RBA not only believe the slack present in our labour market must be removed if their wage and inflation goals are to be achieved, but also that the adverse inertia present in wages growth pre-pandemic must abate. This additional headwind stems from several forces including “multi-year employment contracts; [the] strong cost-control mindset of Australian business; and low and stable inflation expectations”. These are challenges entrenched the world over, making them a significant challenge to overcome.

Offshore this week, GDP and house price data for New Zealand confirmed the strength of their economy and justified the RBNZ increasing rates with no delay. Our NZ team have consequently moved forward their first-rate hike from November to October 2021. In the US meanwhile, the August CPI report gave support to the view that the recent surge in inflation is transitory, with the monthly headline gain coming in a touch below the market’s expectation at 0.3%, and core inflation soft at 0.1%. Retail sales then showed resilience, with August’s much stronger-than-expected gain only partly offset by downward revisions to July.

The most significant international data this week however came from China. The chasm between annual retail sales growth to August (2.5%yr) and year-to-date growth (18.1%) highlights how severe the impact of recent restrictions against COVID-19 has been on spending. Although the year-to-date reading also signals the underlying strength of the sector which, as best we can tell from the PMIs, continues to be well supported by the labour market. Fixed asset investment was essentially in line with expectations in the month, despite property investment disappointing again. The troubling situation faced by Evergrande and hit to confidence for the rest of the sector is likely to continue to affect investment in coming months. But the reforms underway and strength of households should lay a strong foundation for robust growth in 2022, 2023 and beyond.

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