Daily Market Digest: RBA minutes, UK CPI

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  • AUD weakens as RBA minutes hint at rate cuts in August, awaiting Q2 CPI data next week
  • UK inflation edges higher on Euro Cup, higher airfares and transport prices
  • ZEW Economic sentiment remains weak in Eurozone
  • US housing starts and building permits beat estimates

Today’s Economic events

  • RBA releases monetary policy meeting minutes
  • UK CPI y/y 0.50% vs. 0.40%; Core CPI y/y 1.40% vs. 1.30%
  • UK PPI input m/m 1.80% vs. 0.90%; PPI output y/y 0.20% vs. 0.10%
  • Germany ZEW economic sentiment -6.8 vs. 8.2
  • Eurozone ZEW economic sentiment -14.7 vs. 12.3
  • US building permits m/m 1.50% vs. 1.20%
  • US housing starts m/m 4.80% vs. 0.10%

Coming Up

  • MPC Member Broadbent speech
  • New Zealand GDT price index

Fx Market Performance

FX Market Performance (19/07/2016) - 1200 GMT
FX Market Performance (19/07/2016) – 1200 GMT

RBA looks to Q2 inflation for rate cuts in August

The RBA meeting minutes were released earlier today which showed that the Reserve Bank of Australia would review the inflation, housing and employment data in order to gain insights into whether a change of policy was needed. The Australian dollar fell on the meeting minutes following the central bank’s disclosure that it would keep its options for interest rate cuts open in the next policy meeting in August.

The meeting minutes were from the July 5th monetary policy meeting, where interest rates were held steady at 1.75%. The minutes said that the RBA would review its economic forecasts in August and that it could help the central bank to determine if a change to interest rates was required, with the minutes showing, “The board noted that further information on inflationary pressures, the labor market, and housing activity would be available over the following month,” adding that “this information would allow the board to refine its assessment of the outlook for growth and inflation to make any adjustment to the stance of policy that may be appropriate.”

The second quarter CPI data is due for released next week. The RBA had cut rates in May following weak Q1 inflation data. Therefore, investors are bracing for another low print in inflation which could see renewed bets on more rate cuts from the RBA in August.

Commenting on the meeting minutes, Chief economist at Westpac, Bill Evans said that the minutes cleared indicated to the RBA looking at rate cuts in August, with the final decision likely to come by based on the CPI publication. Westpac expects that the underlying inflation in the second quarter could rise 0.30% and that it could support the RBA’s view for another rate cut, pointing that the first half inflation would be rising only 0.50% in 2016.

UK annual inflation rate accelerated in June

Consumer prices in the UK accelerated at an annual rate of 0.50% in June, from a year ago, according to data from the Office for National Statistics. This was higher than the 0.30% increase in CPI seen a month ago. The inflation data reflects the consumer prices information that was collected before the UK’s EU referendum vote on June 23. Economists expect to see inflation continuing to pick up following the Brexit verdict led by a weaker sterling pushing import prices higher. On a month over month basis, consumer prices increased 0.20% in June, rising at the same pace as in May.

UK Consumer Price Index y/y 0.50% (June 2016) - Source: Tradingeconomics.com
UK Consumer Price Index y/y 0.50% (June 2016) – (Source: Tradingeconomics.com)

ONS statistician, Phil Gooding said, “The rising cost of European flights, possibly boosted by the Euro football championships, was the biggest reason for this month’s increase in inflation. Today’s figures were collected before the EU referendum, so recent falls in the value of the pound will have had no impact on them.”

The increase in inflation came with a surge in airfares as soccer fans traveled to France for the 2016 Euro cup. Besides airfares, inflation was also higher led by an increase in fuel prices and telephone services including video games. Transport prices rose 1.10% in June, higher than 0.20% increase seen for the same period a year ago led by fare hikes.

Producer price index on the other hand fell on a year over year basis in June. Prices for manufactured goods fell 0.40% compared to a year ago with raw material costs falling 0.50%.

Germany investor confidence falls after Brexit

Investor confidence in Germany fell in July as data from ZEW showed that investors were concerned that Britain’s decision to leave the EU would weaken the fragile economic recovery. The ZEW economic indicator for Germany which forecasts economic sentiment over a 6-month horizon showed that the index fell to -6.8 in July from 19.2 in June. It was the lowest level recorded by ZEW since November 2012. ZEW President Achim Wambach said in a statement that “the Brexit vote has surprised the majority of financial-market experts. Uncertainty about the vote’s consequences for the German economy is largely responsible for the substantial decline in economic sentiment.”

The Eurozone ZEW economic sentiment was also weaker, falling to -14.7 in July compared to 12.3 in June.

However, analysts believe that the ZEW economic sentiment was not a reliable gauge. Ralph Solveen at Commerzbank said, “the sharp decline in July is no reliable signal that economic activity will soon decelerate significantly, as the financial analysts surveyed by the ZEW tended to overestimate the effects of certain events on the economy in the past.” The German Bundesbank said earlier on Monday that the economic impact of Brexit would be limited in the short term but said that the fallout of the Brexit would be hard to estimate.

US housing starts and building permits rise more than forecasts

US home building saw a strong rebound in June, indicating that demand for housing continued at a healthy pace into the second half of the year. Data from the Commerce department released today showed that US housing starts increased 4.80% in June at a seasonally adjusted rate of 1.189 million, compared to a month ago. Demand for homes continued to rise with sales of both new and existing homes seen rising steadily since 2011. However, the housing market was under pressure as low inventory of new and existing homes weighed on further expansion in the sector. May’s housing starts numbers were revised lower to 1.135 million and was down from -0.30% as previously reported to -1.70%.

US Building Permits (June 2016): 1.115 million (Source: Tradingeconomics.com)
US Building Permits (June 2016): 1.115 million (Source: Tradingeconomics.com)

Applications for building permits also beat forecasts, rising 1.50% to 1.153 million following May’s downward revision to 1.136 million. Building permits continue to lag housing starts numbers since February this year.

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