Daily Market Digest: RBA minutes, UK inflation, US data dump

Aug 16, 3:54 pm
forex australia_RBA

Market Summary

  • RBA meeting minutes offers no new surprises; AUD extends gains
  • UK inflation climbs to a 20-month higher in July 2016
  • ZEW: German economic sentiment rises 7.3 points
  • US headline inflation stays flat in July on a month over month basis

Today’s Economic events

  • RBA releases monetary policy meeting minutes
  • Australia new motor vehicle sales m/m -1.30% vs. 3.50% previously
  • UK CPI y/y 0.60% vs. 0.50%; Core CPI y/y 1.30% vs. 1.30%
  • UK PPI input m/m 3.30% vs. 0.60%; PPI output m/m 0.30% vs. 0.30%
  • Eurozone ZEW economic sentiment 4.6 vs. -6.3
  • German ZEW economic sentiment 0.5 vs. 2.1
  • Eurozone trade balance 23.4bn vs. 23.2bn
  • Canada manufacturing sales m/m 0.80% vs. 0.80%
  • US CPI m/m 0.0% vs. 0.0%; Core CPI m/m 0.10% vs. 0.20%
  • US housing starts m/m 2.10% vs. 0.60%
  • US building permits m/m -0.10% vs. 0.50%

Coming up:

  • (USD) Capacity utilization rate
  • (USD) Industrial production
  • (NZD) Employment change q/q; Unemployment rate
  • (NZD) PPI Input; PPI Output

AUD gains on RBA meeting minutes

The RBA released the minutes of the meeting from the August 2nd monetary policy today, which ended with the central bank cutting interest rates further by another 25bps to 1.50%. The minutes said, “Economic growth was expected to pick up to be above estimates of potential by mid-2017.”

Australia 10Yr Yields: 1.877%
Australia 10Yr Yields: 1.877%

The minutes did not spring any surprises but was broadly seen as being upbeat. Sluggish inflation remained the main theme with ongoing low inflation expectations likely to push the rate cuts even lower over the coming months.

In the quarter ending June 2016, Australia’s consumer price index was recorded at 1.0%, below the RBA’s target band of 2 – 3% with the minutes showing “Underlying inflation was expected to remain low for a time before picking up gradually as spare capacity in labor and many product markets diminished.”

The RBA’s meeting minutes showed that lower housing market prices also played a role in convincing the policy members to lower interest rates. “At the same time, members noted that indicators for the established housing market in the first half of 2016 had pointed to an easing in conditions, including lower housing credit growth and an easing in housing price pressures,” the minutes showed.

The RBA’s next policy meeting is due on September 6 which will be the last policy meeting that will see Governor Glenn Stevens being replaced his deputy Philip Lowe.

The Australian dollar continued to post strong gains on the RBA minutes and alongside the US dollar which has turned weaker since this morning accelerating the declines. AUDUSD was seen trading 0.65% higher at the time of writing. The 10-year Australian bond yields did not react much, down 0.79% for the day, at 1.877%

UK inflation rises in July to a 20-month high

Consumer prices in the UK in the month of July climbed 0.60% on a year over year basis, data from the UK’s Office for National Statistics showed on Tuesday. It was the highest level since November 2014 and following the 0.50% increase from June and was higher than the median estimates of 0.50%.

UK Consumer Price Index: 0.60% y/y, July 2016 (Source: ONS)
UK Consumer Price Index: 0.60% y/y, July 2016 (Source: ONS)

On a month over month basis, consumer prices in the UK fell 0.10% matching expectations and posted the first monthly decline six months. In June, UK’s consumer prices gained 0.20%. Core CPI which excludes food and energy slowed during July, rising 1.30% compared to 1.40% in June.

Producer prices also increased with output prices rising 0.30% on a year over year basis after prices contracted 0.20% in June. Analysts expected to see an increase of 0.20%. Input prices also increased 4.30% on a yearly basis after falling 0.50% a month before. Producer prices were seen rising for the first time in two years, largely attributed to the UK’s vote to leave the EU.

The annual CPI matched the Bank of England’s forecast for July. Driving consumer prices higher was marked by an increase in transports prices which jumped 0.20% in July on a year over year basis on increased transport costs due to higher fuel prices.

GBPUSD extended its gains for the day; rising 0.70% after the CPI report was released. The cable posted a strong reversal after the price fell to Brexit lows near $1.2880 on Monday.

ONS, however, said that there was no Brexit effect on inflation. Kallum Pickering from Berenberg said, “Prices continued to fall for food and non-alcoholic beverages, due to strong competition in the supermarket sector. Most of the upward pressure came from components linked to growth in discretionary spending such as restaurants and hotels and recreation and culture.”

German economic sentiment recovers in August

The German Indicator of Economic Sentiment in August gained 7.3 points, rising to 0.5 in August, following a decline to -6.8 in July. August economic sentiment showed a moderate recovery after the initial Brexit shocks. ZEW President Professor Achim Wambach said, “Political risks within and outside the European Union, however, continue to inhibit a more optimistic economic outlook for Germany. Furthermore, uncertainty about the resilience of the EU banking sector persists.”

German ZEW Economic Sentiment: 0.5, August 2016 (Source: ZEW)
German ZEW Economic Sentiment: 0.5, August 2016 (Source: ZEW)

The assessment of the current situation was also seen improving with the sub-index rising 7.8 points at 57.6 with financial market experts’ sentiment also seen rising considerably. In a separate report, the Eurozone economic sentiment also showed a recovery, rising to 4.6 after the ZEW economic sentiment index plunged to 14.7 in July. Analysts expected the recovery to continue but still penciled in a negative index reading at -6.3.

Eurozone’s trade surplus data was also released, which showed that trade surplus in the euro area decreased unexpectedly in June led by rising imports. On a seasonally adjusted basis, trade surplus fell to 23.4 billion euro in June, compared to 24.6 billion in May. Exports were seen rising 0.50% over the month, but imports were higher, rising 1.50%. On a non-seasonally adjusted basis, euro area exports were down 2.0% compared to a year ago while imports declined 5.0% during the same period.

Consumer prices in the US softer than expected

Inflation in the US remained muted in July, matching estimates. After headline inflation jumped to 0.40% in April this year, the declining trend continued with inflation later falling to 0.20% for two consecutive months. In July, inflation was seen flat, data from the US labor department showed on Tuesday. While prices increased for shelter and other items, it was offset by falling gasoline and grocery prices. Excluding food and energy, US core inflation rose 0.10% on a month over month basis, missing estimates of a 0.20% increase.

US CPI and Core CPI: 0.80% and 2.30% y/y, July 2016 (Source: BLS)
US CPI and Core CPI: 0.80% and 2.30% y/y, July 2016 (Source: BLS)

US headline inflation was seen at 0.80% in July from a year ago while core inflation was seen at 2.20% in July. Both the inflation prints were weaker compared to June’s 1.0% and 2.30% respectively. The US dollar remained muted to the inflation report but maintained its strong pace of declines.

The US economic release also included data from the housing sector. The number of permits for home construction or building permits fell to a seasonally adjusted 0.10% in July. However, the number of new homes or housing starts increased 2.10%, data from the commerce department showed. New homes continued at a steady pace of 1.2 million on an annual basis which was same as the pace seen in April.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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