There was a lot of fuss about energy prices yesterday. Gas prices along with electricity and oil jumped amid a looming/unfolding European energy crisis. Natural gas (UK futures) eventually finished the day 7.5% higher while a barrel of Brent oil again closed north of $75 for the first time since end-July. Energy-related stocks unsurprisingly outperformed hugely. That didn’t provide a strong enough counterweight for European indices (finished +/- 1% in red) where o.a. utilities fell amid European governments intervening to cap surging market prices. There were less such concerns on WS (+ <1%). Core bond yields initially fell but reversed course after the US joined and judged that rising commodities is still part of a reflationary rather than stagflationary environment. The US yield curve bear steepened with changes ranging from 0.4 bps (2y) to 1.5 bps (10y). German yields inched 3.4 (10y) to 4 bps (30y) higher. The US greenback was sold both on rising commodities and improving sentiment (during US dealings) though ended off intraday lows thanks to a very strong Empire Manufacturing (34.3 from 18.3). EUR/USD closed marginally higher (1.182). The DXY fell to 92.55. Sterling whipsawed on stronger-than-expected August CPI and switching risk appetite. EUR/GBP declined from 0.855 to 0.853. PM Johnson’s cabinet reshuffle came without impact on the pound.
Following the US performance, things could have been more bright on Asian markets this morning. Stocks trade mixed at best with China underperforming. We suspect the looming Evergrande default story and the Chinese government now focusing on (Macau) casino regulation to be dampening the mood. Commodities stabilize for now. Core bonds trade sideways while the USD together with the JPY is among the better-bid on FX markets. The AUD and NZD part ways on diverging economic news (see below). The NOK eases after bursting out yesterday.
We see risks for today’s US August retail sales slightly tilted to the downside as consumer sentiment tanked last month (U. of Michigan, Conference Board) on inflation and Deltavirus worries. The unexpectedly very poor July report provides some counterweight in our assessment as it (statistically) lowers the bar. In case of a disappointing August reading, it may cast more market doubts on the Fed’s tapering intentions ahead of the Sept 22 FOMC meeting. This could weigh on US yields and keep the dollar in a defensive position. We’re also keen to see whether commodities extend their furious rally. That would be an additional dollar negative. EUR/USD 1.1848 is a first resistance area. UK retail sales are due tomorrow. It’ll serve as one of the final inputs to the BoE meeting on Sept 23.
New Zealand growth in the second quarter accelerated 2.8% Q/Q, more than double the pace expected. The New Zealand economy grew 1.4% in Q1. Activity in the country was 17.4% higher Y/Y. Primary industries (5.0%), goods-producing industries (1.3%) and services (2.8%) all contributed to the rebound. Amongst others, the rebound in activity was strongly supported by tourism related activities after the reopening of the trans-Tasman bubble with Australia. However, this was suspended again after a new corona outbreak both in New Zealand and Australia in August. This might result in a new setback/contraction of activity in Q3. Even so, given higher Q2 inflation (3.3%) and unemployment falling back to 4%, today’s data reinforce the case of the RNBZ to start raising rates soon. The market already discounts a 25 bps rate hike next month after the Bank delayed a rate hike in August. The kiwi dollar temporarily gained modest ground after the GDP release, but currently trades little changed at NZD/USD 0.7115.
Somewhat of a different message came from the Australian August labour market data. Employment declined 146K, while only a more modest setback (-80K was expected). The unemployment rate dropped to 4.5% from 4.6%. However, the unemployment rate is distorted as many people dropped out of the labour force due to the new lockdowns. The participation rate declined from 66.0% to 65.2%.Current trends might still continue in September. The Aussie dollar is losing modest ground this morning, with AUD/USD near 0.7325. Today’s data probably won’t change the RBA’s wait-and-see bias.
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