Weekly Fundamental Bulletin: RBNZ & Powell’s Testimony

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Last Week’s Highlights

US Retail Sales Rise 0.6% in August

The monthly retail sales report showed that American consumers continued to increase spending on retail items in August.

The report showed a fourth consecutive monthly increase, but the pace of gains has been slowing.

Official data showed a 0.6% increase on a monthly basis in retail sales for August.

Clothing sales rose by 2.9% while furniture sales jumped 2.1% from July. Retail sales for July were revised down to show a 0.9% increase compared to the initial estimates which reported a 1.2% increase.

Australia Unemployment Rate Falls to 6.8%

The monthly jobless rate for Australia saw a decline to 6.8%, beating estimates of an increase to 7.7%.

The unemployment rate also fell from 7.5% in July. The economy added 111,000 jobs during the month, to rise to 12.5 million.

The monthly jobs data also beat estimates. Economists forecast that the economy would lose 50,000 jobs during the period.

Full-time jobs increased by 36,200 while 74,800 part-time jobs were added. There was also a slight increase in the participation rate from 64.7% to 64.8% during the period.

New Zealand Economy Contracts 12.2% in Q2

The latest revised GDP numbers from Japan showed that the economy fell at a faster pace than initial estimates. The data covers the second quarter of the year, with capital investments posting the sharpest decline.

Japan’s gross domestic product fell by 7.9% on a sequential basis. This was slightly more than the initial estimates showing a 7.8% decline.

On an annual basis, Japan’s economy is down 28.1% compared to 27.8% in the first quarter.

Capital investment was revised down from -1.5% to -4.7% while private consumption fell 7.9%.

Fed Leaves Interest Rates on Hold

The Federal Reserve held its monetary policy meeting last week.

As widely expected, the central bank left the key interest rates unchanged. However, as part of the meeting, the Fed also released its economic projections.

According to this data, the Fed does not see any rate hike until 2023.

Investors were hoping that the Fed would come out dovish following Fed Chair Powell’s comments at the Jackson Hole symposium. However, the Fed maintained a broadly neutral tone, which led to a brief strengthening of the US dollar.

BoE Keeps Policy Steady as it Hints at Negative Rates

The Bank of England held its monetary policy meeting on Thursday.

As widely expected, the BoE left interest rates as its asset purchases unchanged. However, in a dovish forward guidance, policymakers noted that they were open to negative rates.

The BoE is one of the few central banks among the G7 nations that have refrained from toying with the idea of negative rates. The bank also said that it was hard to assess the impact of the COVID-19 pandemic which has plunged many economies into a recession.

Upcoming Economic Events

RBNZ to Leave Interest Rates Unchanged

The Reserve Bank of New Zealand will be holding its monetary policy meeting this week.

The widely expected consensus is for the central bank to leave monetary policy unchanged while maintaining an easing bias.

The central bank’s meeting in November will include the Monetary Policy Statement which could add further information for the monetary policy course.

Given that the RBNZ expanded its large-scale asset purchase program in August, no big changes are expected at this week’s meeting. At the previous meeting, the RBNZ signaled that it was actively preparing a series of instruments, the details of which are only likely to come at the November meeting.

Furthermore, with the New Zealand elections due on October 17, the RBNZ is unlikely to announce new measures in the near term.

Eurozone Flash PMIs in Focus

This week, IHS Markit will be releasing the flash PMI numbers for the Eurozone.

In August, the euro area composite PMI slowed to 51.9. This came as both Italy and Spain’s respective PMIs fell below 50, suggesting a contraction.

The flash PMIs for the region could see a modest pick up in September, consistent with various other business surveys.

It is also possible to eventually push the composite PMI, especially for the two countries, above 50. Overall, the forecasts are for manufacturing PMI to remain steady around 51 while services should rise slightly to 51.0.

German Ifo Survey to Hold Steady

The Ifo business survey is one of the most closely watched forward-looking indicators for the German economy.

So far, the Ifo survey has not registered any strong rebound following the pandemic-led shutdown. However, there are signs of a modest rebound in economic activity in the region, despite the pace of increase remaining weak.

Economists forecast that the Ifo will rise only slightly to 93.9, up from 92.6 previously.

Investors Look to Fed Powell’s Testimony

The markets this week will get another glimpse into the Fed’s thinking.

Fed Chair Jerome Powell will be giving his semi-annual testimony on Congress. This offers investors another chance to hear about the Fed’s policy.

Following the comments at Jackson Hole, the central bank has opted for inflation to overshoot the Fed’s target. This meant that the Fed was open to the economy overheating as well.

At the recent FOMC meeting, the central bank’s projections indicated that interest rates would remain near zero at least until 2023.

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