Global Markets: US Treasuries were unsure what to make of yesterday's near consensus Consumer Price Index. The 2-year yield rose slightly (+2.6bp) and the 10-year yield fell (-0.8bp) to 3.835%. EURUSD broke through 1.10 and held there, briefly rising to 1.1047. Other G10 currencies were mixed. AUD dropped from yesterday's high of 0.6643 and is currently at 0.6594. CBL also fell to 1.2824 after falling below July's inflation rate, but James Smith does not believe this will trigger a September rate cut by the Bank of England. JPY also weakened slightly, rising to 147.34.
Asian currencies were bullish yesterday, but it is unclear if that will continue today. IDR remained bullish today, dropping to 15678. THB, MYR and TWD also saw reasonable gains. PHP lagged ahead of today's BSP meeting, where a slight majority are calling for a 25bp rate cut. US stocks were up or flat (NASDAQ) on the bearish S&P 500. Markets will shift focus from inflation to economic activity, as July retail sales will be the key release today. Chinese stocks fell again.
G-7 Macro: On the surface, the US CPI release was a less than spectacular event. Headline and core CPI both rose 0.2%, as expected, but both measures lowered the annual inflation rate by 0.1 percentage point. In fact, the data was better than it looked at first glance. Both were a “low” 0.2 month-on-month, or more precisely, 0.154 for headline and 0.165 (3 decimal places) for core CPI, both below last year's month-on-month increases, providing a bit more evidence that inflation is indeed cooling. However, there were some interesting increases in some subsectors, such as rent, and you can build whatever story you want out of the data. James Knightley explains in more detail.
The main focus today will be US retail sales data for July. Consensus expects the headline sales figure to increase 0.4% m/m, up from flat in June. Control group spending growth is expected to only increase 0.1%, after increasing 0.9% in June. Some of the recent consumer credit data has been quite soft, raising the possibility of weaker numbers being released. Provisional UK GDP data for Q2 2024 will also be released today. Consensus is expecting fairly solid growth of 0.6% m/m.
Philippines: The BSP will decide on interest rate policy today. Opinion is divided on the outcome, with a minority wanting to cut the policy rate by 25bp from 6.5% to 6.25%. Those in favor of this move are the recent resilience of the PHP (weakness in the USD) making it more likely. Those against are recent higher than expected inflation and recent market turmoil. Without a rate cut today, we expect it will not be long before inflation falls substantially, creating an opportunity for further rate cuts, and a rate cut is only a matter of time.
Australia: Australian employment data is a random number generator and is due to be released at 0930 SGT/HKT. After last month's big change in full-time employment (+43.3K) and sluggish part-time employment (+6.8K), the July numbers are expected to reverse, but no one knows what total employment will be. The consensus, with a very flat and wide spread, is for a median of +20K, a low of -5K, and a high of +50K.
China: China's macro data releases are chock full of this morning, starting with the People's Bank of China's release of the MLF rate. The MLF rate is expected to remain unchanged after the rate cut last month. The National Bureau of Statistics will then release key economic activity data, including housing price data for 70 cities, industrial production, retail sales, and fixed asset investment. We will be watching to see if there are any positive signs in the housing price data, such as whether there are signs of stabilization, whether the overall decline will narrow, or whether more cities will see increases. Retail sales are expected to recover slightly after hitting their post-pandemic lowest level last month due to technical factors, and industrial production and FAI may also be relatively stable this month. Japan: GDP growth in Q2 2024 was higher than expected (+0.8% q/q, +0.6% summary forecast) (Q1 2024 revised -0.6% +, market consensus +0.6%). The most notable figure will be private consumption, which recovered to 1.0%, marking the first increase in five quarters. Business spending also recorded a solid increase of 0.9% (-0.4% in Q1 2024 vs. market consensus of 0.8%). The contribution of net exports to GDP remains negative as imports (1.7%) grew faster than exports (1.4%).
Today's GDP data shows that the virtuous cycle of income and spending is more pronounced, but also that uncertainty around macro policy is growing.
Prime Minister Kishida Fumio announced yesterday his intention to step down as president of the Liberal Democratic Party in September. Given his low approval ratings, this is not a total surprise. However, with no strong candidate to succeed Kishida, it is difficult to predict the policy direction of the next administration. It is quite likely that the LDP will win the general election, regardless of Kishida's resignation. Also, although there is a wide range of political positions within the LDP, the party itself is seen as a typically conservative and pro-business party, so in that sense no sudden surprises are expected.
Meanwhile, monetary policy uncertainty is more pronounced than in July. The stronger-than-expected GDP growth in the second quarter supports the Bank of Japan's view that the economy is recovering, and the recovery in household consumption after four consecutive quarters of contraction is also broadly in line with the Bank of Japan's view. Wage growth is expected to remain robust and inflation to hover around 2% in the coming months. Production is expected to increase due to technical recovery of automobile production losses. Also, higher imports and lower inventory conditions in the previous quarter's GDP are also expected to boost GDP growth in the current quarter.
However, all of this will likely be used to justify the BOJ's July rate hike and may not give the BOJ any confidence to make further rate hikes. The BOJ's policy stance is likely to have become more risk averse amid recent market turmoil over the rollercoaster movement of the yen and stocks. We also believe that Kishida's recent announcements are also unwelcome for the BOJ's interest rate decision. As a result, we believe the chances of an October rate hike have become very low. However, we will wait for developments in the Japanese and US data, the Fed's decision, and market reaction before judging whether the BOJ's next action will be in December or after Q1 2025.
