RBA Minutes express concern about choking off demand/confidence with a premature rate hike


MAJOR HEADLINES – PREVIOUS SESSION

US Aug. Empire Manufacturing Index out at 12.08 vs. 3.00 expected and -0.55 prior

US. Jun Net Long-term TIC Flows out at +90.7 bln vs. 17.5 bln expected and 19.4 bln prior

US Jun. Total Net TIC Flows out at 31.2 bln vs. 23.0 bln expected

US Aug. NAHB Housing Market Index out at 18, as expected, vs. 17 prior

JP Jun. Leading Index revision out at 79.9 vs. 76.9 prior

JP Jun. Coincident Index revision out at 88.0 vs. 87.1 prior

JP Jul. Tokyo Dept. Store Sales out at -13.4% vs. -11.4% prior

JP Jul. Nationwide Dept. Store Sales out at -11.7% vs. -8.8% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

UK CPI/RPI (0830)

GE ZEW Confidence (0900)

US Housing Starts/Building Permits (1230)

US PPI (1230)

US Weekly ABC Confidence (2200)

Market Comments:

A scaling down of risk was the dominant theme overnight, even though US data releases held some positive surprises. Losses in Chinese stock markets of almost 6% spilled over into Europe and the US, and were sufficiently powerful to overcome better-than-expected Empire State Manufacturing numbers (+12.08 vs. +3.0 expected) and positive longer-term inflows in the latest TICS data. In addition, homebuilder sentiment in the NAHB index continued to improve, though still holds at depressed levels.

So, inspite of the positives, risk appetite remained on the ropes and the S&P once again reverted to sub-1,000 levels. With the customary correlation between weaker equities, a stronger USD and JPY and higher bonds showing its hand, risk-bloc currencies continue to be battered while other majors were not spared either. Lower levels in most pairings were tested – 1.4050 in EURUSD, 1.6275 in GBPUSD and 132.50 in EURJPY while AUD continued to bear the brunt of liquidation, touching 0.8156.

Activity so far has seen Asia spending most of the session marking time, though slight profit-taking in major pairs was seen from early on. This coincided with a marginal rebound on Asian bourses but this soon gave way to closings at flat or marginally in the red. The minutes of the last RBA meeting at which it dropped its year-long easing bias halted the AUD’s rally in its tracks. Hawks were disappointed that discussions centred around the risk that demand and confidence would be choked if rates rose too early. The RBA said it needed to balance the risk of overstating a very accommodative policy with hiking too soon. It stated that current rates were appropriate and further interest rate cuts were unlikely. Speaking in Parliament, Australian Treasurer Swan also maintained his cautious stance even though he commented that the local economy was performing well, adding that global economic conditions remain volatile.

Into the European session today, the German ZEW sentiment index will grab the spotlight today, particularly poignant following the disappointing sentiment seen in the US last week. Bearing in mind that Germany’s GDP flipped back into growth territory in Q2, a number below forecast will certainly make a test of 1.4000 on the cards. Note surveys suggest the market is looking for an impressive improvement to 45.0 from 39.5. In the UK we will see CPI and RPI data, with prices expected to maintain their benign downward path. More housing data from the US follows yesterday’s NAHB index, with housing starts and building permits on tap. Will they show a similar, more positive, result?. The weekly ABC consumer confidence may also spark more interest than usual given the recent headlines about consumer confidence.