Australian data a mixed bag – weak retail sales causes a review of rate expectations


MAJOR HEADLINES – PREVIOUS SESSION

  • CA Jul. Building Permits out at -11.4% m/m vs. +0.4% expected and revised +1.2% prior

  • UK Aug. NIESR GDP estimate out at +0.2% vs. revised -0.3% prior

  • US Jul. Consumer credit out at -$21.6 bln vs. -$$4.0 bln expected and revised -$15.5 bln prior

  • US Weekly ABC Consumer Confidence out at -48 vs. -44 expected and -45 prior

  • NZ Aug. Card Spending out at +0.2% m/m vs. +0.8% prior

  • UK Nationwide Consumer Confidence out at 63 vs. 62 expected and revised 61 prior

  • AU Westpac Sep. Consumer Confidence out at 5.2% vs. 3.7% prior

  • AU Jul. Retail Sales out at -1.0% vs. +0.5% expected and revised -0.8% prior

  • AU Jul. Home Loans out at -2.0% vs. -1.5% expected and revised +0.4% prior

  • JP Jul. Leading Index out at 83.0 vs. 81.9 expected and revised 80.9 prior

  • JP Jul. Coincident Index out at 89.6 vs. 89.0 expected and revised 88.6 prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • JP Machine Tool Orders (0600)

  • GE Final CPI (0600)

  • EU ECB’s Tumpell-Gugerell to speak (0710)

  • Sweden Industrial Production/Industrial Orders (0730)

  • UK Trade Data (0830)

  • US MBA Mortgage Applications (1100)

  • US Fed’s Evans to speak (1200)

  • CA Housing Starts (1415)

  • EU ECB’s Gonzalez-Paramo to speak (1415)

  • US Fed’s Fisher to speak (1755)

Market Comments:

Various reasons were flying around to explain the dollar’s heaviness, and break lower, at the European open yesterday – gold’s break higher, Chinese concerns about US macroeconomic plans and UN calls for a new global reserve currency among them. Regardless, the dollar’s slide was broad-based and was enough to force a few currencies out of their recent tired ranges.

Commodity-bloc currencies were in demand amid rising prices and risk appetite, with the AUD the star performer. CAD took a knock backwards however after a terrible release of building permits data for July, down a whopping 11.4% m/m versus an expected 0.4% increase. GBP was slow out of the starting blocks despite some strong data on the industrial production front, but eventually regained the 1.65 handle as the USD retreated.
Overnight data from NIESR also lent some support as it suggested the UK may be finally coming out of recession with its estimate for August growth rebounding to +0.2% from -0.3% previously.

As if any more were needed, an additional reason for dollar-bashing came in the Asian morning when local press reported that a noted academic had urged China to diversify its FX reserves as the economic crisis is expected to result in a long-term decline of the dollar. Huang Yiping stressed however that near-term the dollar would continue to be the world’s foremost reserve currency but over time the EUR, JPY, Yuan and even Rupee could gain greater prominence.

The other major events in the Asian session centred around Australia and provided mixed outlooks and volatile reactions. First off, Westpac’s reading of consumer confidence blew expectations out of the water, coming in at 5.2% versus 3.7% expected. This was its highest level in over two years and was led by consumer assessments of the economic outlook. Given that stock markets are rallying, house prices are rising and a general improvement in economic fundamentals (or so they thought – more on this later) it is not surprising that the index has risen a staggering 30.9% since May. The data confirmed the recent bullish trend, and breakout, for the AUD and those holding longs felt assured. Barely 30 minutes later, the retail sales data came out to spoil the party. Granted they are from July, but sales fell 1.0%, completely missing the +0.5% expected and the AUD reversed tack, challenging sub-0.86 levels again. A modicum of comfort could be drawn from an upward revision to June’s data, falling only 0.8% rather than the 1.4% previously broadcast. Nevertheless, the early boost from fiscal stimulus payments, which saw retail sales swing into positive territory in the March-may period, appears to be winding down.

The sharp decline prompted a general review of rate expectations, with those anticipating the first hike at the October meeting turning slightly more dovish. The RBA has also said it want to see sustainable retail sales without stimulus before it hikes rates. July’s data certainly does not give that impression and expectations for an October hike have now been trimmed back to 30% from 50% prior to the data, with possibly more trimming to come.
Tomorrow’s unemployment data is now probably taking on a more important role in determining further rate expectations, and hence the AUD.

Does this mean that the recent “breakout” will once again confound momentum traders and we revert back into earlier ranges? As mentioned in the US update yesterday there were certain factors that questioned the recent risk rally – US treasuries auction results, Canada’s building permits and US consumer credit – now we have Australian retail sales questioning the validity of the healthy rebound theory. There is very little out in the way of data for the European and US sessions, German final CPI and UK trade data the major event for Europe while Canada’s housing starts awaits the North American session. There appears to be a growing risk that the breakout may run out of steam and we revert back into our shells – we will probably know by the end of today’s session.