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Daily Market Digest: Australia retail sales, BoE rate decision

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Market Summary

  • Australia retail sales rise less than forecast at 0.10% in June
  • Yen stays muted to BoJ officials’ comments on monetary policy assessment
  • Chicago Fed Evans says one more rate hike in 2016 is appropriate
  • Bank of England cuts interest rates to 0.25%
  • BoE expands QE by 60 billion GBP
  • BoE announces new Term Funding Scheme for banks
  • BoE to buy 10 billion GBP in corporate bonds starting September
  • US jobless claims rise 269k, more than expected

Today’s Economic events

  • Australia retail sales m/m 0.10% vs. 0.30%
  • Bank of England cuts interest rates to 0.25%
  • BoE expands asset purchases to 435bn
  • BoE Gov. Carney speech
  • US initial jobless claims 269k vs. 266k

Coming Up

  • The US factory orders
  • Australia AIG construction index

Australia retail sales rise 0.10% in June

Retail sales in Australia grew at a slower than expected pace in June, data from Australian Bureau of Statistics showed on Thursday. The total value of retail sales advanced just 0.10% in June to 25.04 billion. This was below forecasts of a 0.30% increase and down from May’s 0.20% gain. Still, retail sales continued to post gains, now into the fifth consecutive month.

Australia Retail Sales 0.10% m/m, June 2016 (Source: ABS)
Australia Retail Sales 0.10% m/m, June 2016 (Source: ABS)

Clothing, footwear, and personal accessory retailers added 3.50% while household goods and department store sales added 0.30% and 0.70% respectively. Offsetting the gains was a 0.60% decline in food retailing, 0.10% decline in food and other services. Online retailers added 3.40% to the total turnover.

On a quarter over quarter basis, Australia’s retail sales advanced 0.40% to 72.68 billion, which was lower than forecasts of 0.50% and down from the first quarter’s 0.50% increase. On a year over year basis, retail sales were seen to be the weakest since July 2013, rising only 2.76%. The quarterly sales volumes were also weaker, rising only 0.41%. Consumer spending is expected to pick up after the RBA cut interest rates earlier this week, lowering the benchmark rate to 1.50% and marking a second rate cut in four months. Consumer spending has been one of the biggest drivers of the Australian economy, which continued to expand at an annual rate of 3.10%, marking the fastest increase in three years.

Yen stays flat on BoJ officials’ comments

The Japanese yen was seen pulling back from the lows of 100.749 yesterday. Although still bearish, the yen did not react much to comments from Bank of Japan’s deputy governor Kikuo Iwata. The senior official was cited by news sources where he reportedly said that the central bank had no agenda for its comprehensive assessment of its monetary policy, due to be scheduled for the September meeting. In a speech to business leaders in Tokyo, Mr. Iwata said, “Let me make it clear that we do not have any specific future directions of monetary policy at this moment.” He said that the BoJ and the government’s monetary and fiscal policy mix, was different from helicopter money, noting that “We would like to work with an open mind so that we can make an assessment from various perspectives and have a discussion in a productive manner on what should be done for the price stability target of 2% to be achieved at the earliest possible time.”

The comments come after last Friday; the Bank of Japan failed to match market expectations in terms of policy easing. The BoJ expanded its ETF purchases but left the remainder of the tools unchanged, including leaving its QE purchases steady at 80 trillion yen.

The central bank, however, suggested that it would hold a review of its monetary policy by September. Market chatter has already given rise to some speculation that the BoJ could opt for tapering its QE, which began in early 2001 or possibly lead the BoJ to lower its inflation target rate, which currently stands at 2.0%.

Fed Evans: One more rate hike for 2016 is appropriate

Charles Evans, president of the Chicago Fed, said to reporters yesterday that he expects one more rate hike in 2016 to be appropriate. “We ought to have more confidence that inflation is headed up to 2%,” he said as the Federal Reserve runs the risk of markets questioning the central bank’s commitment to reaching the 2% mandated inflation rate. The Chicago Fed president is a non-voting member of the FOMC, but participates in the FOMC deliberations.

“I think the real economy is doing quite well in the U.S., especially given all the headwinds we are facing. I do think that perhaps one rate increase could be appropriate this year” he said. His comments come after the FOMC meeting in late July saw the central bank leave the Fed funds rate unchanged at 0.50%, giving little hints that the next rate hike could come in September. Esther George, Kansas City Fed was the lone dissenter at the meeting who favored a 25bps rate hike in July.

But the markets are yet to buy the Fed’s view on the September rate hike. The futures markets on interest rates continue to price in only one rate hike by December 2016.

The comments from Charles Evens echoes those from Atlanta Fed’s Dennis Lockhart who earlier this week said that it was too early to rule out a rate increase in September. NY Fed President Dudley was, however, cautious, noting that negative shocks were likely to prevail for the rest of 2016.

The markets will be looking to tomorrow’s payrolls report for the month of July, which is likely to be shape the market sentiment in the coming weeks.

British pound falls as BoE cuts rates, expands asset purchases

At the Bank of England’s monetary policy meeting today, the central bank decided to cut interest rates to new record lows of 0.25%, delivering a 25bps rate cut. The BoE also expanded its asset purchases from 375 billion to 435 billion, effectively expanding its asset purchase program by 60 billion. The monetary policy decision to cut rates was taken by a unanimous vote with no dissenters while the MPC had 3 members voting against more stimulus. The central bank also launched a new 10 billion corporate bond purchase and left the door open for more stimulus.

GBPUSD fell over 1% on the news after trading higher at 1.3319 while the London FTSE100 spiked on the news.

The key points from the BoE’s decision today were:

  • BoE approved Term Funding scheme to provide loans to lenders. The TFS is intended to ensure that the rate cut benefits were passed on to businesses
  • BoE loans to banks and building societies to be charged at ‘close to’ bank rates of 0.25%
  • Issuers of corporate bonds are expected to make “material contribution” to the UK’s economy
  • BoE expects government bond purchases to take six months to be completed
  • Central bank expects inflation at 2.1% in 2017 and 2.40% in 2018 on a weaker exchange rate
  • BoE expects declines in business investments during 2017 and 2018
  • BoE MPC noted that they are not contemplating a move to negative interest rates, effectively leaving all of the heavy lifting from QE
  • Majority of MPC members expect room for another rate cut
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