Weekly Market & Currency Developments – From Our Bankers

Investor Signposts: Week Beginning July 1 2018

Australia: New beginnings

• The first week is usually the busiest period of each month. And it is no different for July – the start of the new financial year in Australia.

• The week kicks-off on Monday with CoreLogic releasing the June data on home prices. Based on daily data released so far in June, home prices have fallen 0.2 per cent in the five mainland capital cities to stand 1.6 per cent lower than a year ago. The national index may end up a bit firmer due to higher home prices in regional areas and Hobart.

• Also on Monday ANZ issues the data on job ads for June and both AiGroup and Commonwealth Bank release survey results on manufacturing activity.

• Job ads rebounded in May by 1.5 per cent after three straight months of very modest declines. Meanwhile surveys show that manufacturing activity remains healthy at present, helped by a lower Aussie dollar. The AiGroup measure stands at 57.5 where any reading above 50 indicates an expansion of activity.

• On Tuesday the Reserve Bank Board meets but no change in rate settings is expected – the 23rd month of unchanged rates.

• In terms of economic data on Tuesday, the latest weekly reading on consumer confidence is issued by Roy Morgan and ANZ. And the Australian Bureau of Statistics (ABS) releases the data on building approvals for May. This data refers to council approvals to build new homes. Monthly results can be volatile due to ‘lumpiness’ of apartment approvals.

• On Wednesday, there is a raft of indicators or surveys to be released. Both AiGroup and Commonwealth Bank release results of the surveys of purchasing managers in the services sector. The Federation Chamber of Automotive Industries releases the June sales data for new vehicles. And the ABS issues May data on retail trade and international trade (exports and imports).

• Retail sales posted a healthy gain of 0.4 per cent in April but higher petrol prices and early mid-year sales would have had had contradictory effects on the May results. New vehicle sales over April and May were softer than a year ago but budding buyers may have just been awaiting the mid-year sales.

• On Thursday Alexandra Heath, the Head of Economic Analysis at the Reserve Bank, delivers a speech to the Urban Development Institute of Australia in Wollongong.

• On Friday AiGroup releases the purchasing manager survey results on the construction sector.

Overseas: investors await US jobs data

• Over the coming week the June data on non-farm payrolls (employment) in the US will be released together with survey results detailing activity in the manufacturing and services sectors.

• The week begins in China on Sunday when Caixin will release the results of a survey of purchasing managers active in the manufacturing sector. The equivalent gauge of the services sector is issued by Caixin on Tuesday.

• In the US, the week begins on Monday when the Institute of Supply Management (ISM) releases the monthly survey of purchasing managers in the manufacturing sector. On the same day, May data on construction spending is issued. Economists tip the ISM gauge to ease from 58.7 to 58.4 in June where any reading above 50 indicates expansion of the manufacturing sector.

• On Tuesday, US data on new auto sales is issued with the regular weekly data on chain store sales and monthly figures on factory orders.

• US markets are closed for the Independence Day holiday on Wednesday.

• On Thursday a backlog of data releases are scheduled. ISM releases the June results of the survey of purchasing managers active in the services sector. Challenger releases data on job cuts announced by US-based employers during June. Job cuts announced in May were the lowest in seven months. The ADP survey of private sector payrolls is also issued with analysts tipping a 175,000 lift in private jobs in June.

• Also on Thursday the May international trade data (exports and imports) is issued together with minutes of the last Federal Reserve meeting as well as the regular weekly data on new claims for unemployment insurance.

• On Friday arguably the most influential of the week’s data releases is issued – the non-farm payrolls or monthly employment report. In May, 223,000 jobs were created and economists expect that another 188,000 jobs were created in June.

• However job creation is only part of the story. Investors will be watching to see if the jobless rate fell further from the 18-year low of 3.8 per cent. And wages (hourly earnings) are also of interest to investors. Average hourly earnings rose by 0.3 per cent in May to stand 2.7 per cent higher than a year ago.

Weekly Global Currency Outlook

• Two major themes continue to be the main medium‑term drivers for the currency market. First, monetary policy divergence between the US Federal Reserve and other major central banks, which favours broad based USD strength. The policy relevant US core PCE deflator reached the Fed’s 2% target for the first time since April 2012, according to the May data. This reinforces the case for two more 25bps fed funds rate hikes this year (September & December) to an upper‑bound of 2.50%. In the Eurozone, headline CPI inflation also reached the European Central Bank’s (ECB) 2% target in June. But with Eurozone annual core CPI inflation muted at just 1%, the ECB indicated they expect key interest rates to remain at current levels “at least through the [northern hemisphere] summer of 2019”.

• Second, downside risk to global economic growth benefits USD largely against global‑growth sensitive currencies (like AUD, NZD and CAD). The JPMorgan global manufacturing PMI, currently at a ten month low, is expected to ease further in June (Tue). Meanwhile, the uncertainty generated by more protectionist global trade policy remains a major headwind to global economic activity. On Friday, US and Chinese tariffs on US$34 billion worth of their respective goods imports take effect. And as of 1 July, Canada started to impose tariffs on about US$12.6 billion worth of US goods imports in response to US duties on Canadian steel and aluminium. We repeat, the real economic impact of the tariffs announced and implemented so far are negligible.

• In the US, Friday’s June non‑farm payrolls report is the focus. Leading employment indicators point to above average non‑farm payrolls gains (consensus: 195k). Despite a strong US labour market, business and consumer surveys of future compensation, and a high consensus expectation of June average hourly earnings growth (+0.3%/mth, 2.8%/yr) suggest the risks are skewed to the downside, which may temporarily soften the USD.

• AUD/USD can edge lower this week on slower Chinese economic activity and more evidence on Tuesday that the RBA is in no rush to raise the cash rate. The RBA are likely to adopt a more cautious tone with respect to the global growth outlook because of the recent increase in trade tensions. China’s manufacturing PMI dipped 0.1 more than expected in June to 51.5.

• GBP will partly be guided this week by the UK June PMIs and Brexit developments. UK Prime Minister Theresa May is expected to publish on Friday a detailed White Paper highlighting the UK’s preferred economic relationship with the European Union (EU). The UK needs to adopt a softer stance with its Brexit “red lines” for progress with the EU to materialise. Otherwise GBP will remain heavy.

• NZD/USD is likely to remain under downward pressure. Last week our ASB colleagues pushed out the timing of the first RBNZ rate rise from August to November 2019. Tuesday’s global dairy trade auction will set short‑term guidance on NZD.



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