- Market sentiment is ending the week on a sour note; the dollar remains under pressure
- US July retail sales data will be the data highlight;
- UK expanded the 14-day quarantine to travelers from France, the Netherlands, and Malta; eurozone Q2 GDP was unrevised; Poland and Hungary reported Q2 GDP
- RBA Governor Lowe provided dovish testimony to parliament; Chine reported weaker than expected July retail sales and IP
Market sentiment is ending the week on a sour note. The combination of rising infections, increased European travel restrictions, and the lack of a stimulus bill in the US is weighing on global equity markets and boosting demand for core government bonds. Weaker than expected data from China isn’t helping matters either, though we note that US-China tensions may be leveling off, at least for now. Ahead of a planned virtual meeting, economic advisor Kudlow said that USTR Lighthizer is “satisfied” with China’s commitment to the Phase One trade deal.
The dollar remains under pressure. DXY is down three straight days and the break below 93.05 yesterday sets up a test of last week’s low near 92.52. The euro is struggling to stay above $1.18 but we see an eventual test of last week’s high near $1.1915. USD/JPY continues to see stiff resistance around 107 and will likely move lower if risk-off impulses continue.
US bond yields moved higher yesterday after the lukewarm 30-year auction closed out the quarterly refunding. The $26 bln auction saw the yield rise to 1.406% vs. 1.33% at the previous sale, while the bid to cover ratio fell to 2.14 from 2.50 previously, the lowest this year. Indirect bidders took 59.8% vs. 72.0% previously, suggesting weaker foreign interest. The post-auction yield of 73 bp was the highest since late June, though today’s risk-off trading has pushed it back below 70 bp.
US July retail sales data will be the data highlight. Headline sales are expected to rise 2.1% m/m vs. 7.5% in June, while sales ex-autos are expected to rise 1.3% m/m vs. 7.3% in June. The so-called control group used for GDP calculations is expected to rise 0.8% vs. 5.6% in June. Whatever the readings are, we are assuming that August will show renewed weakness due to the loss of enhanced unemployment benefits. The labor market continues to heal slowly, but the loss of this income is likely to swamp any positive impulses from the modest job growth.
There are plenty of other data today to keep markets busy. IP is expected to rise 3.0% m/m vs. 5.4% in June, while preliminary August University of Michigan consumer sentiment is expected at 72.0 vs. 72.5 in June. Keep an eye on the inflation expectations component of the survey, as market-based indicators (TIPS break-evens) continue to tick higher. Q2 productivity and unit labor costs and June business inventories will also be reported.
The UK expanded the 14-day quarantine requirement to travelers from France, the Netherlands, and Malta. The Foreign Office is also advising against “all but essential travel” to these countries. Infections in Germany and Spain are rising, and the fear is that travel restrictions will continue to mount, making efforts to reopen more difficult across Europe. While we remain constructive on the eurozone economy, these developments are a sobering reminder that even countries that crushed their curves face an uneven and uncertain recovery ahead.
Eurozone Q2 GDP was unrevised. Advance GDP report showed contractions of -12.1% q/q and -15.0% y/y, and there were no changes. Q2 employment fell -2.8% q/q and -2.9% y/y. These are record drops but would have been much worse if not for the generous employment schemes offered. Eurozone also reported June trade, with a surplus of EUR17.1 bln reported vs. EUR14.5 bln expected.
Poland and Hungary reported Q2 GDP. Poland contracted -8.9% q/q and -8.2% y/y vs. -9.5% and -9.0% expected, respectively. However, Hungary contracted -14.5% q/q and -13.6% y/y vs. -10.7% and -10.1% expected, respectively. We note that Polish outperformance may not last, as the nation struggles to contain the virus. August is seeing record daily infection rates, though at 843 remain relatively low in absolute terms.
RBA Governor Lowe provided dovish testimony to parliament. He is confident that the cash rate will stay at the current 0.25% for three years, adding that its possible it could be cut to 0.10%. However, Lowe said the economy is not at a point where easier policy would help. Lowe wouldn’t rule out negative rates, but stressed it remains “extraordinarily unlikely.” He added that he’d like the currency to be weaker to support growth but added that it is broadly at fair value and the bank won’t intervene unless the exchange rate were misaligned.
China reported weaker than expected July retail sales and IP. Sales fell -1.1% y/y vs. expectations of a 0.1% gain, while IP rose 4.8% y/y vs. 5.2% expected. The divergence here is stark, and underscores how much more difficult it is to get consumers shopping than it is to get factories humming. Clearly, the virus upends Say’s Law, which posits that supply creates demand. Monetary policy will not help much here and we believe that it may take another round of fiscal stimulus to reignited stronger consumption. We also note that China will not be alone here, as countries around the world will struggle to move back to any semblance of normal as long as the viral threat remains.