Market Wrap.

Growth clouds build.

Asian markets continued to assess the outcome of yesterday’s soft Chinese and US data.

Asian equity markets were broadly unchanged (though H. Seng underperformed -1.35% and ASX managed to gain +0.58%) prior to mild gains in European stocks (DAX +0.6%, FTSE 100 +0.6%).

AU data included a prelude to the new monthly CPI releases (June CPI rose to 6.8%y/y from 6.2%y/y in May and 5.5% in Apr.). CBA’s July Household Spending (+1.1%m/m, +12.2%y/y from downwardly revised +0.6%m/m and 8.7%y/y in June) was overshadowed by RBA’s minutes. Although the RBA’s Statement on Monetary Policy information was much repeated, the minutes did highlight widespread inflation pressures. Other RBA watchers suggest that RBA might slow their hiking pace given the references to no “pre-set path” on policy, but Bill Evans sees the bias remaining for 50bps hike in September (see below).
AU and NZ bond markets mirrored yesterday’s sharp squeeze in US/Europe: AU 10yr yields fell -14bps. NZ 10yr yields also pulled back over -10bps. Although US yields edged lower in Asian hours (10yr -1.5bps to 2.77%), European yields steadily rose steadily in early trading (10yr Gilt yields +3bps to 2.05%, 10yr Bunds +3bps to 0.93% with US yields also lifting (10yr +2bps to 2.81%).
UK’s labour data for June/July was solid though with some mixed nuances. Headline inflation was in line at 3.8%, employment dipped -0.1%m/m but average weekly earnings were firm at 4.7%y/y (est. 4.5%y/y) though still show a decline in real earnings of -3%y/y.
German and Eurozone ZEW surveys for August failed to show any rebounds in expectations (Germany -55.3, est. -52.7, prior 53.8; Eurozone -54.9, prior -51.1), though current conditions did not deteriorate as much as feared (Germany -47.6, prior -45.8, est. -49.0; Eurozone -42.0, prior -44.4).

Although AUD had briefly bounced on the higher inflation release, it ground lower as USD (JPY -0.7% to 134.30, EUR -0.3% to 1.0130, GBP -0.3 to 1.2020, AUD -0.3% to 0.7100, NZD underperformed ahead of RBNZ and slipped -0.7% to 0.6320).

US July housing starts and permits are likely to be overshadowed by US industrial production for July whilst Canada releases July CPI (will the core measures indicate any peak in inflation?).

The regular GDT Auction is expected to show a further slip in prices (of around -1%) whilst the main NZ focus will be on RBNZ’s OCR/MPS policy meeting. AU 2Q Wage Price Index (Westpac forecast +0.9%q/q) may be a lagging report but will be more keenly watched than July’s Westpac-MI Leading Index given RBA and market concentration on tight labour markets and inflation.

WE GET

· AU: Westpac-MI Leading Index & 2Q Wage Index (17^th), Labour Force (18^th), Flash PMIs (23^rd), RBA Kearns speaks (24^th), Ret. sales (29^th), Bldg. Apps. (30^th), Pvte. Credit & 2Q Work Done (31^st)

· NZ: 2Q PPI & RBNZ OCR/MPS (17^th), Trade & (F) Card spending (19^th), 2Q Real Retail Sales (25^th), Cons. Conf (26^th), Bldg. Permits & ANZ Business Survey (31^st), CoreLogic Hse. Px. (1^st)

· EZ: EZ 2Q GDP (17^th), EZ CPI (18^th), Ge PPI & EZ C/Acc.(19^th), Flash PMIs & EZ Cons. Conf. (23^rd), Ge 2Q GDP & IFO (25^th), Ge Cons. Conf. (26^th), Ge Ret. Sales (tbc), Ge CPI & EZ Conf. Surveys (30^th)

· UK: CPI/RPI/PPI (17^th), GfK Cons. Conf., Ret. Sales & Public Finances (19^th), Flash PMIs & CBI Trends & CBI Ret. Sales (23^rd), Nationwide Hse. Px. (tbc), Cons. Credit (30^th)

· US: Bld. Starts/Permits & Ind. Prod (16^th), Retail Sales, Inventories & FOMC Minutes (17^th), Philly Fed, Claims & Leading Index (18^th), Chic Fed (22^nd), Flash PMIs, Rich. Fed & New Home Sales (23^rd), Dur. Gds. & Pending Home Sales (24^th), 2Q (2^nd) GDP, Claims & Kansas Fed. (25^th)

WESTPAC PUBLICATIONS
RBA August Board Meeting Minutes : More evidence of widespread inflation.
Bill Evans

· Despite the release of the comprehensive Statement on Monetary Policy (SOMP), the Minutes did still signal the need for further steps to “normalising monetary conditions.”

· Their no “pre-set path” on policy comment does suggest a shift down in tightening, but the need to get above neutral before altering the path still suggests a 50bps hike in Sept.

· Westpac continue to look for a series of further 25bps hikes to a peak of 3.35% in 2023 in order to flatten demand and deter further price rises and avoid any second round of hikes.

RBNZ Aug. 2022 Ready Reckoner : Recent data may profile a mild reduction in OCR path.
Michael Gordon

· Although the impact of recent data since last OCR mering may indicate slight reductions to the MPS OCR track, current price and wage pressures warrant maintain the recent track.

· RBNZ’s judgement of domestic and global is key around the uncertainty for the OCR track but domestic labour pressures ought to offset other factors.

RBNZ Scenarios for Markets analysis (Imre Speizer) is centred on widespread expectations for 50bps hike with surprise likely around shifts in the OCR tracked or changes in guidance.

· Neutral profile of an unchanged OCR track and guidance is seen as 70% outcome, dovish (lowering guidance) is given 10%, raising the OCR track and a hawkish tone is 20%.

Westpac published their Preview of RBNZ Aug. 2022 MPS last week.

AU July Overseas Arrivals and Departures : Strong month driven by seasonal mid-year holiday travel.

Ryan Wells

· Recovery in overseas travel apparent. Overseas arrivals rose some 50% (from 730k in June) to 1.08mn in July whilst departures rose more modestly (from 881k to 973k).

US Labour Market Implications for FOMC (video) : July’s bumper NFP suggest tight conditions.
Elliot Clarke

· Although the bumper 528k NFP for July should support consumer spending and offset recent weakening in spending, other labour market details suggest fragility.

· Job losses within the US household survey creates concern, though job creation is continuing, payroll gains may slow as inflation erodes wage lifts and risks recession risks rise.

· Unemployment could lift 0.5% to 1.0% into end 2024 with upside bias, but the key risk for US economy is not a sharp correction but a prolonged below trend slowdown.

ADDITIONAL PUBLICATIONS

G10 FX Model & Themes : Sizing up the US vs Eurozone.
Richard Franulovich

Model

· CAD remains main long (+22%) with NOK (+16%). AUD flips to long (+12%) and NZD short reduced (-13%), but still favoured short with GBP (-14%) and EUR (-10%). USD neutral (+1%).

Themes

· Renewed growth concerns (Chinese data weak) boosting USD. European stagflation concerns remain as gas prices surge to new highs amid European droughts.

· However, US outlook also deteriorating, GDP growth being trimmed sharply (sharper than in Eurozone). US Fin. Conditions have been easing whilst Eurozone conditions have tightened.

· Still too early to call a turn against USD, but forward indicators are providing early warning. A more compelling shift in US activity trends and Fed’s stance are needed before USD reversal.

AU & NZ Rates Weekly : RBNZ set to impact risk sentiment down under (Published Monday).
Damien McColough, Imre Speizer, Jessica Ren

· Cash rate pricing is exhibiting week-to-week volatility … and is still reflecting a chance of a rapid shift to rate cuts.

· Is the curve flattening phase nearing an end? Not near term, although we are nearing the end of the flattening impulse.

· As usual, the US will provide the macro curve directional backdrop … although the AU-US curve “box” is as steep as it has ever been.

· Inflation expectations are being felt at the front end of the curve … while the revision to long end term premia has slowed and reversed.

· In NZ, we explore the backdrop for this Wednesday’s RBNZ’s MPS.

NZ Quarterly Economic Overview Aug. 2022 : Pushing Through (Published Monday)
Westpac NZ Economics

· Regular quarterly flagship covering the outlook for NZ economy, debt, global economy, financial markets and agriculture.

· Forecasts increasingly point to lean growth ahead. Overstimulated post-Covid economies have led to most serious bout of inflation in decades and so demand needs to be reined in.

· As tough as the economic reining in may be, it has to be done to return inflation to target. Special Topic on NZ border reopening - tourists return, skill shortages should be addressed.

Westpac IQ

Consumer Sentiment takes another tumble

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