Daily Market Digest: Yen unimpressed by fiscal stimulus plans

Market Summary

• RBA cuts interest rates by 25bps to new record low of 1.50%
• Japan’s Abe announces 28 trillion yen in fiscal stimulus spending
• NZDUSD rallies after New Zealand inflation expectations edge higher to 1.70%
• UK construction PMI contracts at the fastest pace in 7-years
• US Core PCE rises 1.60% on a year over year basis
• US personal spending rises 0.40%

Today’s Economic events

• Japan monetary base y/y 24.70% vs. 24.30%
• Australia building approvals m/m -2.90% vs. 0.90%
• Australia trade balance -3.20bn vs. -2bn
• New Zealand inflation expectations q/q 1.70% vs. 1.60%
• RBA cuts cash rate to 1.50%
• Japan consumer confidence 41.3 vs. 42.2
• Australia commodity prices y/y -2.0% vs. -10.0% previously
• Switzerland retail sales y/y -3.90% vs. -2.0%
• Switzerland manufacturing PMI 50.1 vs. 51.90
• UK construction PMI 45.9 vs. 44.2
• Eurozone PPI m/m 0.70% vs. 0.40%; y/y -3.10% vs. -3.40%
• PCE Price index core m/m 0.10% vs. 0.20%; y/y 1.60% vs. 1.60%
• PCE price index y/y 0.90% vs. 0.90%
• Personal income m/m 0.20% vs. 0.30%
• Personal spending m/m 0.40% vs. 0.30%

Coming Up

• New Zealand Global dairy trade index
• New Zealand unemployment rate q/q
• New Zealand hourly earnings q/q

RBA cuts interest rate by 25bps

The Reserve Bank of Australia, at its monetary policy meeting today, cut the benchmark interest rates by 25bps, bringing the interest rates to a new record low of 1.50%. The central bank rate cuts come as the RBA sought to revive growth, inflation outlook, and weak wage growth. The rate cut was in line with analyst expectations but was still a close call with many economists divided on the views. The RBA said that the prospects for sustainable growth in the economy and hopes of inflation returning to its target of 1% – 3% over time would be better achieved by easing monetary policy further. Inflation in Australia was recorded at an annual rate of 1% in the second quarter.

Governor Glenn Stevens said, “Low-interest rates have been supporting domestic demand, and the lower exchange rate since 2013 is helping the traded sector” after announcing the rate cuts.

The RBA said that labor market indicators continued to remain mixed but noted that it was in line with the central bank’s view of a modest pace of expansion in the labor market in the near term.

The markets continue to expect the RBA to remain in an easing with speculation that the next rate cut could come in November. Roy Teo, the currency strategist at ABN Amro, said, “The outlook for the labor market remains mixed, and inflation is likely to remain quite low. The RBA also seems less concerned on the housing market with supervisory measures strengthening lending standards. Hence the likelihood of lower interest rates exacerbating risks in the housing market has diminished.”

The Australian dollar was, however, unfazed by the rate cut and managed to recover from the intraday lows. James McIntyre, from Macquarie Bank, said, “Whilst there is no clarity on timing of further easing, what does appear to be clear from the Statement is that the RBA is no longer troubled by the potential impact of monetary policy on house prices,” speaking in reference to the RBA’s release of updated inflation and economic growth forecasts this Friday.

Yen strengthens as Abe announces stimulus package

As widely anticipated, Japan’s Prime Minister, Shinzo Abe announced plans to rev up spending on the economy. The fiscal stimulus package worth 28 trillion yen was announced today. “Not only to stimulate immediate demand, we aim to pursue sustainable economic growth led by private demand and ensure the creation of a society,” Abe told at the meeting of government and the ruling party officials. Abe pledged to maintain fiscal consolidation goal and expects to turn the primary balance into a surplus by 2020.

Finance Minister Taro Aso said that the BoJ was consulted on the measures and that defeating deflation and achieving growth remained a priority for both the government and the Bank of Japan. Aso said that the government would not be increasing the total amount of debt issuance, put to rest speculations about Japan launching 50-year bonds.

According to the report, from the proposed 28 trillion yen, 1.7 trillion was allocated to infrastructure building to boost tourism and agriculture while 2.5 trillion was allocated to welfare schemes, while 600 billion was allocated to help SME’s. As a way to boost consumer spending, Aso announced that his government would also distribute 15,000 yen in cash to low-income earners. However, some analysts remained doubtful on the cash handouts. Esther Reichelt, Fx analyst at Commerzbank, said that was looking to see if “the handouts boost consumption or result in additional savings, which does little to stoke the economy.”

The yen strengthened on the news as only less than a quarter of the budget (7.5 trillion yen) is expected to be directed at spending. Qi Gao, currency strategist at Scotiabank, said, “The market has started to doubt the effectiveness of monetary easing. The problem is investors are still worried about the Bank of Japan’s options after its meeting Friday, even though it announced some easing.”

UK construction PMI falls to 45.9

UK’s construction PMI posted the biggest monthly decline in 7-years, falling to lows of 45.9, data from Markit showed earlier today. The broad downturn was led by a drop in commercial property building which has come under pressure since the Brexit referendum verdict to leave the EU. Markit’s construction PMI showed that employment in the sector fell for the first time in three years as business optimism waned. Markit cautioned that the weak construction PMI adds significant downside risks to an economic contraction in the UK during the third quarter.

Chris Williamson, chief economist at Markit, said, “The Markit/CIPS Construction PMI edged lower from 46.0 in June to 45.9 in July, signaling a rate of decline not seen since June 2009.” He said that the all-sector PMI index fell to 47.3 in July, from 51.9 in June marking the steepest fall in business activity since April 2009.

Markit’s survey showed that construction companies noted weaker order books which put brakes on the business activity in July and marked a third consecutive month of decline in a new word. The survey respondents noted that the EU referendum had dampened client confidence leading to more risk aversion. As a result, hiring was slow with the employment declining for the first time since May 2013.

David Noble, CEO at CIPS said, “Though a marginal drop in the index compared to last month, the sector’s downhill course is a seriously disappointing development, with purchasing activity falling for the second consecutive month, and following another drop in new orders.”

US inflation remains subdued, consumer spending rises

Consumer prices in the US continued to grow at a sluggish pace, data from the US commerce department. The Fed’s preferred inflation gauge, the PCE price index grew at a pace of 0.10% in June compared to a month ago. The core PCE price index which excludes volatile components was also seen rising 0.10% in June. On a year over year basis, the PCE was seen rising 0.90% on the headline and 1.60% on the core, staying relatively unchanged since May and undershooting the Fed’s target rate of 2.0%. Inflation has been showing signs of stagnating after an initial rise during winter and continues to put to question the fate of US rate hikes.

In a separate report, the commerce department data showed that consumer spending continued to rise, at a pace of 0.40% in June, matching the pace of gains from May and slightly above forecasts of a 0.30% increase. After accounting for inflation, consumer spending was seen rising at a strong pace in the second quarter. Personal income increased 0.20% in June, the same pace as in May. It was slightly below forecasts of a 0.30% increase seen by economists.

The US dollar continued to post strong declines today with the ICE Futures US dollar index seen breaking below the 95.50 handle after the markets were unimpressed by Japan’s stimulus plans. The dollar continues to be weighed down by last week’s second quarter GDP data.