Daily Market Digest: French industrial production, BoE bond buying, US dollar weaker

Market Summary

• Australia home loans rise 1.20% in June
• RBA Gov. Stevens talks about fiscal policies in his farewell speech
• Industrial production in France fell 0.80% in June
• Manufacturing production in France fell 1.20% in June
• US dollar trades weaker following Tuesday’s nonfarm productivity data
• GBP recovers from 4-week low as BoE bond buying faces hurdles

Today’s Economic events

• Japan core machinery orders m/m 8.30% vs. 3.40%
• Japan PPI y/y -3.90% vs. -4.0%
• Australia Westpac consumer sentiment 2.0% vs. -3.0% previously
• Australia home loans m/m 1.20% vs. 2.40%
• RBA Gov. Stevens speech
• Japan tertiary industry activity m/m 0.80% vs. 0.30%
• French industrial production m/m -0.80% vs. 0.30%

Coming Up

• The US crude oil inventories
• RBNZ rate statement
• RBNZ official cash rate

Australia home loans rise 1.20% in June

Data from the Australia Bureau of Statistics showed that the number of dwelling commitments in June gained 1.20% to a seasonally adjusted 57.24k. The headline print was short of the market consensus of an increase of 2.30%. Home loans in May were revised from initially reported -1.0% decline to show a revised 0.80% contraction instead.

Investment lending jumped 3.20% in June after surging 5.30% in May to 11.785 billion, while loans for construction of dwellings increased 2.10% and purchase of new homes climbed 2.70% during the month. The total number of first-time home buyers rose to 14.3% in June.

In a separate report, data from Westpac Bank and Melbourne Institute showed that consumer confidence gained pace in August, with the index seen rising over 2% to 101.0, following July’s decline to 99.10. The increase in consumer confidence was attributed to the RBA’s recent rate cut, lowering the lending rate from 1.75% to 1.50%. The RBA has been watching the developments in the housing sector after the central bank noted the risks with rising credit and an increase in prices.

The RBA, which released its statement on monetary policy last Friday said, “The board had taken careful account of developments in the housing market, noting the effects of supervisory measures to strengthen lending standards, the easing in housing credit growth and the abatement of strong price pressures.”

RBA Governor, Glenn Stevens in a farewell speech told reporters earlier today that the Australian economy’s slowing trend in growth rate will make it difficult to repair the economy’s budget but reiterated the RBA’s commitment to targeting inflation. In comments that touched upon various aspects, Stevens said that central bank policies alone were not sufficient to “dial up the growth we need” and expressed concerns on relying too much on monetary policy alone. His comments echo most other central banks, including that of ECB President Mario Draghi who has urged leaders in the EU to build a consensus for strong fiscal policies as well. “Challenges remain for Australia, not least sustaining a stronger growth outlook over the longer term,” Stevens said, who will be stepping down as the RBA Governor next month.

French industrial production falls 0.80% in June

Industrial production in France contracted for the second month. Data from statistics agency, Insee showed on Wednesday that industrial production fell 0.80% on a month over month basis in June, accelerating the declines of 0.50% from May on weakness in both manufacturing and construction sectors. The decline in June’s industrial production was the biggest contraction in four months. On a year over year basis, industrial production was down 1.30%

Manufacturing output was down 1.20% after rising 0.10% in May while construction output fell 0.20% in June, down from 0.60% declines in May. In the second quarter, French industrial output fell slightly, with the manufacturing industry seen lower by 0.20% and industrial production falling 0.10%.

Further data showed that there was a sharp drop in the output of food and beverages, which fell 2.30%, while manufacturing output of transportation equipment jumped 1.70%, while machinery and equipment goods increased 0.50%. Mining and quarrying made up the tail end, rising 0.30% during the second quarter.

Sterling recovers from 4-week lows on BoE bond buying snag

The British pound managed to recover from a 4-week low after prices fell briefly below $1.30 earlier this week. GBPUSD pared losses after it was revealed that the Bank of England had failed to buy government bonds, just two days after the central bank revived its asset purchase program. The BoE data showed that the central bank was able to buy only £1.12 billion worth of gilts or UK bonds, against the expected £1.17 billion, a short fall of nearly £50 million. The BoE said that it would make up for the shortfall from Tuesday’s reverse auction in the second half of its bond purchase program. The 10-year yield was trading at 0.532%, down over 8% on the day today.

The shortfall in bond purchases, although minuscule in comparison to the £60 billion bond purchases of the 6-month program, underscores the problems that the central bank is facing.

The shortfall arose after UK-based pension funds, and insurance companies refused to sell enough gilts t the central bank, despite receiving prices with a significant mark up above the market levels. While the BoE hopes to raise bond prices and this lower yields in order to push investors to look elsewhere for higher returns and also to boost lending in the economy, pension funds, on the other hand, need income from the long date bonds to pay the pensioners.

Mitul Patel, head of interest rates at Henderson Global Investors said, “The fact that their [BoE’s] first attempt to buy long-dated gilts has failed raises significant question marks. That is a segment of the market that is typically more tightly held.”

GBPUSD was seen trading at $1.305 by mid-European session, with the US dollar seen trading weaker as well following Tuesday’s reports showing weak nonfarm productivity quarterly growth in Q2, 2016