Retail gains ground and labour market stays soft

Australia:

Retail spending continued to recover over the winter, after a soft patch over March to May. In July, retail sales grew by 0.4%, following a 0.6% gain in June. 

Consumers appear to have shrugged off the bulk of their concerns over the Federal Budget. Low interest rates and a further lift in household wealth should continue to support household spending.

While soft labour market conditions and subdued wage growth could limit the recovery, the high level of household savings suggests that there is plenty of scope for further growth in consumer spending.

Australia's trade deficit improved for the second consecutive month, narrowing $205mn to $1.4bn in July.

While the improvement is encouraging, Australia's trade position remains well in deficit and has exceeded $1 billion for four consecutive months. It largely reflects the impact of falling commodity prices on export values. Exports of goods and services rose 1.0% in July, outpacing a 0.3% gain in imports.

The recovery in exports suggests that net exports will provide healthy contributions to growth over the remainder of the year.

These early pieces of data over Q3 are hinting at a stronger quarter of GDP growth after a modest outcome in Q2.

Share Markets: 

US share markets ended lower overnight, with the S&P 500 and Dow Jones both retreating from intraday record highs.

A sell off in energy shares sapped an earlier rally following the new stimulus measures from the European Central Bank (ECB). 

At the close, the Dow Jones fell 0.1% and the S&P 500 index closed 0.2% lower.

Interest Rates:

US 10-year treasury yields initially fell from 2.43% to 2.38% on the ECB news but reversed once the US economic data stream started, reaching 2.46%. German 10-year yields similarly fell from 0.96% to 0.90%, before rebounding to 0.98%.

Australian 3-year government bond future yields bounced with US yields, off 2.67% to 2.73%. The 10-year yield similarly bounced off 3.40% to 3.47%.

Foreign Exchange:

The US dollar index surged to a fresh 14-month high after the ECB unexpectedly cut rates and announced quantitative easing measures.

EUR/USD plunged from 1.3150 to a 14-month low of 1.2920 in the largest one-day fall since November 2013. The EUR is likely to remain under selling pressure.

USD/JPY rose from 104.80 to 105.37. AUD/USD reacted positively to the ECB, rising to 0.9393 but later succumbed to higher US interest rates and fell back to 0.9349.

NZD/USD similarly rose to 0.8351 before falling back to 0.8297. AUD/NZD climbed further, from 1.1220 to a 10-month high of 1.1272.

Commodities:

The price of West Texas Intermediate crude oil fell after a government report showed that US refineries reduced operating rates as the peak driving season came to an end. 

Gold also fell overnight to an 11-week low, as gains for the USD cut demand for the metal as an alternative asset.  Meanwhile, the widely-watched basket of commodities, the CRB index, dropped nearly 2 index points overnight.

Europe: 

The ECB cut benchmark rates by 10bp overnight, taking the main refinancing rate to 0.05%, the marginal lending facility rate to 0.30% and the overnight deposit rate to -0.20%.

An asset-backed securities (ABS) purchase program was also announced.  ECB President Mario Draghi said overnight that the ECB will start buying securitised loans and covered bonds next month to help unblock lending in the euro zone. 

He said the bank would buy broad porfolios of simple and transparent asset-backed securities and of euro-denominated covered bonds from October, with full details of the new programmes to be given after the ECB's next meeting on October 2. 

Japan:

The Bank of Japan (BoJ) left monetary policy settings unchanged as widely expected.

However, the assessment on the BoJ was relatively upbeat, particularly given the recent run of weak economic data. The Japanese economy has yet to recover from weakness due to the sales tax hike in April.

United Kingdom: 

The Bank of England (BoE) left its Bank rate unchanged at 0.50%.

United States: 

The Institute for Supply Management (ISM) services index rose to 59.6 last month, from 58.7 in July, and was the highest reading since its inception in January 2008. 

While the index only dates to 2008, an examination of subcomponents with a longer track record indicate the August reading was the highest level of activity since August 2005.  A reading above 50 indicates expansion in the sector.  Its index of business activity rose to 65.0 in August, the highest since a matching December 2004 reading.

The employment index also rose, hitting 57.1 in August, the highest since February 2006.

Payrolls processing firm ADP said private-sector payrolls increased by 204k last month, after rising by 212k in July, with gains spread across a range of industries. 

While the report was a bit softer than economists expected, it marked the fifth straight month of gains above 200k. 

The upbeat jobs market picture was also captured in another report that showed initial claims for state unemployment benefits last week held at levels consistent with a tightening of labour market conditions.

The US trade deficit fell from US$40.8bn in June to US$40.5 billion in July, its smallest size since January.

When adjusted for inflation, it reached its narrowest point since December 2013, prompting economists to raise their estimates for third-quarter gross domestic product (GDP). 

In July, exports rose 0.9% to a record high, with automobile and non-petroleum exports surging to all-time highs.  That eclipsed a 0.7% rebound in imports.

The rise in imports, which was driven by food and autos, is a sign of underlying strength in domestic demand.


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