More Questions Than Answers

By Jane Foley, senior FX strategist at Rabobank

Yesterday’s release of the US July CPI inflation report may have paved the way for a Fed rate cut in September, but it did little to resolve the debate as to whether the Fed could opt for a 50 bps move in preference to a 25-bps cut. While US stock indices ended the day in the green, the slight reduction in hopes for a 50-bps rate cut meant that activity in equities lacked real firepower. The ‘problem’ for those advocating a larger move was the acceleration in the cost of housing. That said, core CPI inflation did moderate to 3.2% y/y, which highlights the disinflationary trend. The continued question mark over whether a 50-bps move is a realistic prospect for the Fed next month underscores the importance of today’s US data releases, and particular the retail sales number. The market is expecting a 0.4% m/m bounce in the July release which is a function of the slump in auto sales in June. Beyond that, investors will be looking for any signs of fragility in consumers’ spending decisions and whether there are signs that they are using savings to purchase essential goods. Adding color to today’s retail sales data will be the earnings reports from Walmart. (Rabo is expecting a 25 bps Fed rate cut in September)

The growth outlook in Japan received a boost on the release of better-than-expected Q2 GDP data this morning. The economy grew by a seasonally adjusted annualized 3.1% q/q (0.8% sa q/q), though this did follow a downward revision to the previous release. Within this, private consumption grew by a quicker than expected 1.0% q/q, and business spending by 0.9% q/q.  Following on from last week’s news of an unexpected recovery in real wage growth, the data will help to vindicate the BoJ’s hawkish policy moves on July 31. Ahead of that meeting, the majority of BoJ watchers had expected policymakers to wait for the publication of improved economic data before hiking rates. Despite the improved economic outlook, the market volatility that followed the BoJ’s policy action argues for a very cautious and well communicated policy stance going forward. This suggests little expectations of another rate hike before the end of the year at the earliest.  The better Japanese economic data allowed the Nikkei 225 to push a little higher this morning. Chinese stocks also rose moderately this morning supported by better-than-expected domestic retail sales data at 2.7% y/y. That said, growth in fixed asset investment slowed in July and Chinese industrial production missed expectations with a 5.1% y/y increase.

This morning’s slew of UK data releases included an as expected reading of 0.6% q/q for Q2 GDP.  According to Rabo’s UK strategist Stefan Koopman “it’s clear that robust GDP growth isn’t driven by consumer strength. Real household spending saw a modest rise of 0.2% q/q. The main growth driver was government spending, which increased by 1.4% q/q, reflecting higher activity in public administration, defence, and education, despite a decline in health spending. Business investment detracted from growth, falling by 0.1% q/q and 1.1% y/y”. Not only that, but according to the ONS, real GDP in Q2 dropped by -0.1% y/y owing to changes in the UK’s population size. The lacklustre performance of the consumer sector will focus attention on how much more the BoE may be willing to cut interest rates this year. Yesterday’s CPI inflation data showed an encouraging softening in UK services inflation. However, this is at 5.2% y/y, which in Rabo’s view suggests no room for consecutive rate cuts. We expect one more BoE rate cut this year. 

The market’s view on the outlook for RBA rates has swung wildly in recent months. While the recent easing in inflation data wiped out speculation of a rate hike ahead of the August 6 RBA meeting, Governor Bullock subsequently signalled that she was not ruling anything out.  According to Rabo’s strategist Ben Picton, this morning’s release of Australian employment data “provided something for everybody. Employment growth was +58k vs est of 20k (Rabo’s estimate was +37k) and the skew was 100% to full-time positions, but the unemployment rate rose 1-tick to a new cycle high of 4.2%. The RBA expects unemployment to average 4.3% in Q4 of this year, so today’s numbers are broadly in line with their expectations. Strong employment growth (for the fourth month in a row) means that there is no smoking gun for a rate cut this year, but the continued gradual rise in the unemployment rate probably diminishes the chances of a further hike, especially now that many other central banks have initiated cutting cycles and iron ore prices have been falling sharply in recent days”. Rabo’s expectation is for the RBA to leave the cash rate unchanged until May 2025, which would make it one of the most hawkish G10 central banks.

While a hawkish RBA is supportive for the AUD, the continued slump in iron ore prices is not.  Reports that China is cutting back on steel production due to weak demand and soft prices have pushed iron ore prices back to multi-month lows. The AUD is the worst performing G10 currency on a 1-month view, though AUD/USD has recovered some ground in the past couple of weeks.