It was a busy week for repricing monetary policy expectations, as central bank meeting minutes and top-tier data prints supported a longer period of high-interest rates for the major economies.
Meanwhile, concerns over China’s growth and stability translated to limited risk-taking and even selling in the markets.
Riskier assets like equities, commodities, and comdolls as well as non-yielding safe haven counterparts like CHF and JPY took a backseat to the demand for the U.S. dollar and British pound.
Before I tell all the deets, lemme show you the biggest headlines first:
Notable News & Economic Updates:
🟢 Broad Market Risk-on Arguments
New Zealand removed the last of its COVID restrictions including mandatory masks and isolation for those who tested positive.
Euro Area Flash GDP estimate for Q2 2023: +0.3% q/q vs. 0.0% q/q previous
German ZEW Economic Sentiment Index for August: -12.3 (-15.0 forecast; -14.7 previous)
U.K.’s Headline inflation cooled from 7.9% y/y to 6.8% y/y as expected in July; core inflation remained at 6.9% y/y (vs. 6.8% y/y expected)
Australia’s wage price index grew by 3.6% y/y in Q2 (vs. 3.7% expected, 3.4% previous) supporting another RBA rate hike pause in September
Japan’s GDP grew by 1.5% q/q in Q2 (vs. 0.8% expected, 0.7% previous); annual GDP was up by 6.0% (vs. 3.6% previous) as auto exports and tourist arrivals helped offset slowing consumer recovery
🔴 Broad Market Risk-off Arguments
Over the weekend, China’s largest private property developer Country Garden suspended the trading of 11 of its onshore bonds starting Monday.
PBoC unexpectedly cut the rate on 401B CNY ($55.25B) worth of one-year MLF loans by 15bps to 2.50%, its second cut in three months.
FOMC meeting minutes: “Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy” but “a couple” of participants pushed to leave rates unchanged in July.
RBA August meeting minutes: There’s a “credible path back to the inflation target with the cash rate staying at its present level”
Canada’s CPI for July: 0.6% m/m (0.4% m/m forecast; 0.1% m/m previous); core CPI was 0.5% m/m (0.5% m/m forecast; -0.1% m/m previous)
Flash Euro Area employment estimate at 0.2% q/q vs. 0.5% q/q previous
The U.K.’s unemployment rate rose from 4.0% to 4.2% in the three months to June, the highest since October 2021.
As expected, the RBNZ kept its official cash rate unchanged at 5.5% in August, and said rates “need to remain at a restrictive level for the foreseeable future”
RBNZ Gov. Orr said mild inflation is the “bare minimum we need to see” before considering rate cuts. He added that “We don’t feel a rush to be changing rates anytime soon”
Japan services inflation rose to 2% in July for the first time in 30 years, raising the argument for policy normalization.
Global Market Weekly Recap
Dollar, Gold, S&P 500, Oil, U.S. 10-yr Yield, Bitcoin Overlay Chart by TV
With not a lot of top-tier reports scheduled on Monday, traders took liberties extending their “soft landing” bets for the U.S. following a strong U.S. PPI update last Friday.
Unfortunately, the optimism was limited by negative reports from China. First, Country Garden – China’s top private property developer – missed some bond payments AND suspended the trading of 11 of its onshore bonds. Yikes! Word also got around that the largest private wealth fund in China may have missed payments on its maturing funds. Double yikes!
The sentiment see-saw left assets like gold, AUD, and NZD in wide ranges throughout the day while JPY and U.S. crude oil prices started turning lower.
Tuesday saw A LOT more drama, starting with the People’s Bank of China (PBoC) cutting not one, not two, but THREE lending rates to boost liquidity.
Take note that the medium-term lending facility (MLF), standing lending facility (SLF), and seven-day reverse repurchase agreement rates influence short and medium-term borrowing by banks and institutions. By cutting all three on the same day, the PBoC is showing it means business in encouraging borrowing and economic activity.
The benchmark one-year MLF rate was cut from 2.65% to 2.5%; the SLF rates were cut by 10bps across ALL tenors, and the interest rates on seven-day reverse repurchase agreements were reduced from 1.9% to 1.8%. Overkill much?
Ehhhh, probably not. Reports printed on the same day showed China’s economic data missing market estimates. Retail activity and industrial output, in particular, supported the weak business activity markers that we’ve been seeing in the past few days.
As if AUD traders didn’t have enough problems, the Reserve Bank of Australia (RBA)’s meeting minutes suggested that the central bank is cool with not raising its rates further. RBA said that there’s already a “credible path back to the inflation target with the cash rate staying at its present level.” Ouch.
Luckily for risk assets, the U.K.’s jobs data did support further rate hikes. While the U.K. unemployment rate ticked higher, average wages also marked their fastest increase since July 2021.
The pro-rate-hike party extended to the U.S. session when a hot U.S. retail sales growth provided room for the Fed to tighten its policies some more.
Not surprisingly, U.K. and U.S. bond yields shot higher, and USD and GBP were kings of pips that day. Meanwhile, comdolls like AUD and NZD took hits while U.S. equities and U.S. crude oil prices started their intraweek downtrends.
Wednesday provided more of the same themes, though with different data points.
RBNZ’s “hawkish hold” decision provided a nice bump for NZD during the Asian session, but risk takers were soon spooked by the PBoC injecting more moolah via the seven-day repurchase contracts AND setting its yuan fixing about 783 pips stronger than the average estimates.
U.K.’s core inflation released later that day reinforced bets for a 25bps BOE rate hike in September. Even the closely watched FOMC meeting minutes showed that members see enough upside inflation risks to “require further tightening of monetary policy.”
Not surprisingly, USD and GBP extended their upswings against their counterparts while commodity-related currencies and safe haven counterparts like gold, JPY, and CHF dipped further. U.S. crude oil prices even hit a weekly low at $79.00 as growth concerns trumped a tight oil market!
Thursday wasn’t much better for AUD bulls after Australia printed surprisingly weak July jobs numbers. It also didn’t help that the PBoC set its fixing for the yuan at 7.2076 per dollar when estimates only saw the USD/CNY fixing at 7.2994. That’s the largest gap against estimates since October!
Who needs a YEN-tervention when we have a YUAN-tervention, amirite?
There were few data releases aside from Australia’s labor data, so it was probably partly due to the PBoC’s yuan-tervention that we saw pullbacks from the week’s trends during the Asian and European sessions.
USD lost some pips, gold traded higher, and crude oil recovered to $81.00 before risk aversion came back during the U.S. session.
Hawkish Fed expectations and risk aversion pushed U.S. 10-year government bond yields to new intraweek highs near 4.30%, and gold and the S&P 500 saw new weekly lows.
Bitcoin even saw extra (downside) action after Wall Street Journal reported that Elon Musk’s SpaceX sold some bitcoins and wrote down the value of its crypto HODLings by $373M. BTC/USD dropped from its consolidation just above $29,000 all the way to its $26,300 lows.
Friday’s price action was a bit more muted with no major catalysts on the calendar to strongly influence broad risk sentiment. We did get the latest U.K. retail sales to bring in some volatility, drawing in the bears after a much weaker-than-expected read AND a downgrade to the June number from +0.7% m/m to +0.6% m/m.
Without a major catalyst, broad price action was observably choppy, but of note was the pullback in bond yields, with the 10-yr U.S. Treasury yield falling from 4.322% on Thursday to a 4.221% low on Friday. Oil, gold and equities benefited momentarily from the move, but not enough to crown the Greenback as king of the major asset classes by the Friday close.