Good reports from retailers support US equities even against the backdrop of a plunge in housing starts, but a late turnaround now sees the S&P500 flat. Global rates are higher after falling earlier this week. Currency moves have been modest, with strong Canadian core CPI inflation helping boost CAD and higher rates seeing JPY under pressure. The NZD is slightly weaker. Oil and dairy prices are weaker.
Risk sentiment improved overnight, supported by positive earnings reports from big US retailers Walmart and Home Depot. This saw the S&P500 up over 0.6%, driven by the retailers but a sharp turnaround in the past hour now sees the index flat. Walmart offered a more upbeat tone after last month’s cut to its profit forecast. The CEO said that the results improved more than expected on robust back-to-school sales, lower fuel prices, more buyers from its wealthier customers and the company had slowed inventory growth and will be well positioned for the holiday season. Home Depot posted slightly better than expected earnings and reaffirmed its full-year guidance.
Economic news has been mixed. US housing starts plunged 9.6% m/m in July, another much weaker than expected housing market indicator. Permits showed a more modest decline of 1.3%. Leading indicators such as poor sentiment, too-high inventories, plunging mortgage applications and high interest rates point to much more pain to come for the sector and the construction sector will become a significant drag on the economy. Industrial production was stronger than expected at 0.6% m/m in July, driven by a 6.6% surge in motor vehicle production, on easing bottlenecks that are allowing a return to more normal production levels.
UK labour market data continued to show evidence of a tight market, with robust jobs growth, an unemployment rate of 3.8% and higher wage inflation, with average weekly earnings of 4.7% y/y (ex bonuses). However, on the weaker side, job vacancies fell and wage growth continues to significantly lag close to double-digit CPI inflation. Canadian CPI inflation showed the expected cooling of the headline rate, down to 7.6% y/y, but core measures continued to rise, with the three key measures all rising to reach a 5-5½% range, adding to the chance of more “front-loaded” tightening from the Bank of Canada, with the 2-year bond rate up 13bps on the day.
In currency markets, CAD has been the top performer overnight, up 0.4% following that inflation data and despite the backdrop of still-falling oil prices. Oil prices dropped another 3%, with Brent crude trading with a USD91 handle as traders weigh up the chances of an extra 1.3m barrels per day from Iran on a nuclear deal. An official familiar with the talks said that the EU saw Iran’s reply to the draft nuclear deal as constructive.
On other commodities, the latest GDT dairy auction saw the price index down 2.9%, making it 10 falls out of the past 11 auctions, cumulating to a drop of 29% since the early March peak. Falling prices add to downside risk to Fonterra’s $9.50 midpoint milk price forecast for the current season. The NZD traded down below 0.6320 overnight, but higher risk sentiment and a turnaround in the USD sees the NZD trading just under 0.6350. The AUD traded below 0.70 and has recovered to 0.7025.
JPY is the weakest of the majors, with USD/JPY up 0.7% to 134.20 on the more positive risk sentiment backdrop that is helping drive higher global rates, largely reversing the moves of the previous day. French and German 10-year rates are up 7-8bps while the UK 10-year rate is up 11bps. The US Treasuries curve shows a flattening bias, with the 2-year rate up 6bps and the 10-year rate up 3bps to 2.82%.
NZ rates fell yesterday on the back of global forces, with the 2-year swap rate down 3bps to 3.93% and the 10-year rate down 7bps to 3.61%. There were slightly larger falls for NZGBs, with the 10-year rate down 9bps to 3.39%. Australian 10-year bond futures show a 3bps lift in yield since the NZ close. That will set the early tone for trading, while afternoon trading will be driven by the key Australian wages data followed closely by the latest RBNZ MPS.
The RBNZ will be pleased that last week’s data showed some easing of inflation expectations, while the housing market continues to weaken at a rapid pace, but this must be viewed against recent upside surprises in non-tradeables CPI inflation and wages inflation.
A bleak economic outlook won’t prevent the RBNZ from hiking rates another 50bps – universally expected by surveyed economists and fully priced in the OIS market – with the still-strong domestic inflation backdrop leaving the Bank no choice. The big fall in wholesale rates since mid-June has fed into lower mortgage rates. This goes against what the Bank is trying to achieve with tighter monetary policy. The Bank is unlikely to want to see further falls in mortgage rates and will need to maintain a hawkish tone to achieve this. Market reaction will be determined by the tone of the outlook and the OCR projections, which are expected to show the OCR still peaking around the 4% mark, albeit earlier than projected in May.
Tonight sees the release of UK CPI data, which could crack 10% y/y on a mild upside surprise (consensus 9.8%). US retail sales is expected to be on the soft side in July (close to zero after adjusting for inflation), while the minutes of the Fed’s late-July meeting are also released.
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