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What You Need To Know For Friday, Aug 10th - Major Themes By Geolocation

Summary

Focus shifts towards the US CPI data this Friday.

NZD main loser, USD and JPY holding up well.

China vs US trade war main driver for weeks to come.

Australia/NZ:

The New Zealand Dollar got annihilated after the Reserve Bank of New Zealand left its official cash rate unchanged as expected at 1.75%, despite issuing a worrying outlook for inflation and growth. The Bank downgraded its outlook for rates as well as the economic activity. RBNZ Governor Orr said "We expect to keep the OCR through 2019 and into 2020 longer than we projected in our May Statement. The direction of our next OCR move could be up or down."

Meanwhile, RBNZ assistant governor John McDermott in an interview even touched on the possibility that a rate cut outcome has increased going forward. In today’s RBA Monetary Policy Statement, the Central Bank will be providing more detail over the decision to leave the cash rate unchanged on Tuesday. Lowe will dive deeper into economic and financial conditions, with some volatility expected in the Aussie Dollar. The market will be most keen to understand new snippets of information regarding the growth, labour and inflation outlook, while not being too concerned on the exchange rate. At present time, the market is pricing over 70% chances of a rate hike by Sept next year.

China:

China’s July CPI came a tad higher than expected at 2.1% vs 2%, with food CPI ar 0.5% y/y, while non-food hit 2.4% y/y. As a reminder, China aims for a 3% CPI goal this year, hence the data is within comfortable limits. As per the PPI, it came at 4.6% y/y vs 4.5% expected. The risk on tone post data release boosted the Aussie, although it failed to gain much follow through heading into the US session.

The handling of U.S. trade dispute by Chinese authorities is causing a rift in the Chinese leadership, according to Reuters. The report states that “an overly nationalistic Chinese stance may have hardened the U.S. position, according to four sources close to the government.” The article argues that the ongoing tick for tack trade ware is revealing some rare cracks in the ruling Communist Party.

China’s stock index Shanghai Composite continues to recover, up by 0.75%, after the slight uptick in Chinese inflation. Meanwhile, some stabilization in the USD/CNY is lending support and should keep risky assets buoyant, especially if one analyzes the Yuan against a basket of G10 currencies, extending gains quite significantly and further anchoring a temporary ease over the excessive one-sided Yuan short bets.

Japan:

Japan Q2 preliminary GDP data came at 0.5% q/q vs 0.3% exp, which is a solid beat on estimates. Additionally, the GDP annualized (seasonally adjusted) for Q2, preliminary y/y, also saw a positive reading of 1.9% vs 1.4% expected and -0.6% last. The data is music to the ears of BoJ officials, hoping that a benign growth outlook may result in greater underlying price pressures in the economy. However, when one has such a cyclically horrendous demographic problem as Japan does, achieving such 2% annual CPI objective still appears elusive.

According to the latest Bloomberg survey on 42 economists: BOJ watchers now see less chance of future policy changes in 2019 with 57% of respondents expecting the BOJ taking action after 2019 vs a previous survey in July that showed in only 41% expecting action beyond 2019. The survey also reinforces the view that the inflation target appears to be increasingly unattainable with almost 75% of respondents expecting a 2% target reached after 2022.Japan Core Machinery Orders for June saw a massive disappointment, coming at -8.8% m/m vs -1% expected. Appeasing the nerves was the fact that preliminary data published for July came upbeat. The series of orders numbers tend to lead capex by up to 9 months, so it’s a good predictor of the economic health.

Thursday marked the start of U.S.-Japan trade talks. Both parties are having a collaborative approach, with a proposal on the table to setting up a sovereign wealth fund to invest in U.S. infrastructure projects as well as U.S.-Japan joint projects in third countries. Further details will be obtained during this week.

Europe:

The ECB published the release of its economic bulletin for its July meeting, pointing at the heightened risks to the global economy, despite identifying the current indicators as still suggesting broad-based growth. Other headlines included the threat of protectionism remains prominent, risk of heightened market volatility. There was an absence of narrative towards monetary policy, which was reflected in the Euro’s muted reaction.

In Turkey, the Lira has been on free-fall, reaching fresh record lows. The weakening of the currency is fueled by a tougher stance by the Trump administration towards Turkey's duty-free access to the U.S. market, which may see as much as $1.66 billion of Turkish exports affected. The market is therefore factoring in a decrease in international demand flows for the Turkish Lira. Earlier this week, the Turkish central bank announced that the upper limit of foreign currency reserve was cut while adjusting the reserve requirement ratio lower.

UK:

BOE McCafferty, who steps down this month as a member of the Central Bank, said that the UK wage growth is expected to near 4% next year, according to a Guardian interview. She added that sees a need for 2 rate hikes in the next 18 months to 2 years, BOE hasn't left rate increases too late. According to Business Insider sources, the EU is rumoured to offer a major Brexit concession to UK PM May, which may involve keeping Britain as part of the single market. Judging by the reaction in the Sterling in the hours that followed, the market appears to be taking the news with a pinch of salt, as it would be largely conflictive with the very own views of the main EU Brexit negotiator Barnier, not to mention that it would most likely not sit well by parliamentary representatives in the UK.

A data-rich day in Britain, with the release of the monthly as well as the preliminary Q2 GDP figures. While the former is expected to come slightly lower than last month, the q/q look set to have increased by 0.4%, which would represent a 0.2bp improvement from the figures seen in Q1. Manufacturing production, trade balance and business investment will also be published at the same time.

US/Canada:

Fed’s Evans took his hawkish stance a notch higher, which in turn allowed the US Dollar to see an increase in buy-side flows on Thursday. Evans said the economic fundamentals are strong, the labor market is still improving, adding that the economy is generating inflation close to Feds 2% goal. Importantly, he said the Fed may become restrictive in 2020 but could be 2019, while recognizing that trade tariffs add uncertainty.

Mexico's economic minister Guajardo sounded optimistic on NAFTA talks as they aim to nail an auto deal. He said "definitely encouraged to keep on working, covering all the items that we have to cover."

The Atlanta Fed Q3 GDPNow model is currently at 4.32% vs 4.37% prior. The new updated note read: “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2018 is 4.3 percent on August 9, down from 4.4 percent on August 3. After this morning's wholesale trade report from the U.S. Census Bureau and this morning's Producer Price Index release from the U.S. Bureau of Labor Statistics, the nowcast of the contribution of inventory investment to third-quarter real GDP growth declined from 1.95 percentage points to 1.91 percentage points.”

Ahead of Friday’s US CPI data, the US June PPI came on the soft side, last at 0.0% vs +0.2% m/m exp, with the subcomponents not boding well either. Today’s headline and core inflation data out of the US are anticipated to come at 0.2% m/m, which would represent a slight uptick from last month’s headline figure.

In Canada, the June new housing price index stood at +0.1% m/m vs +0.1% exp. The main focus has completely shifted towards the country’s latest employment numbers, set to inject the usual volatility in the Loonie. The market expects over 18k new jobs to have been created in July, while the unemployment rate is seen dropping to 5.9% vs 6%. If the data is firm enough, it should solidify the case for further rate hikes by the BoC. Canada finance minister talked to reporters, noting that the Saudi Arabia situation remains fluid. Canada is watching situation carefully, adding that Canadian-based assets have not seen significant market reaction to Saudi moves. The minister also said he cannot yet fully quantified impact of Saudi measures.