Australian dollar soars on hot RBA air
The Forex markets are once again in range trading. Except for the Australian dollar which took off on RBA hot air. The DXY was firm and the euro soft:
The Australian dollar has hit highs in all areas:
The goods were everywhere:
But the big miners sagged with the iron ore:
Emerging market equities surged:
And the junk is serene:
Despite the steepening of the curve:
Equities relaxed but have always been growth-driven:
Westpac has the wrap:
USMNI Chicago PMI fell more than expected to 66.9 (68.0 est., before 73.4). The most important factors in the survey were supply shortages, both in labor and goods, and arrears (“the highest since 1951”), leading to a decline in production. Prices paid rose to 93.9 – “the highest since 1979”. S&P CoreLogic House Prices for June were on target, up 1.8% m / m (1.8% m / m est), for an annual rate of 19.1% y / y.
Eurozone CPI inflation in August surprised on the upside, with overall figures of + 0.4% m / m and 3.0% y / y (the highest annual rate for a decade) against estimates of 0.2% m / m and 2.5% a / a (before 2.2% a / y). Core CPI also rose, to 1.6% y / y (est. 1.5% y / y, before + 0.7% y / y).
Among others European According to published data, German unemployment in August fell to 5.5% (est. 5.6%, before revised to 5.6% from 5.7%), French consumer spending was weak in July at – 2.2% m / m (est. + 0.2% m / m), but France’s second quarter GDP increased to + 1.1% q / q from the initial reading of +0, 9% t / t.
Following ECB officials reported a decrease in quantitative easing. Holzmann said the central bank is expected to discuss reducing support for the crisis at next week’s meeting. Tie also indicated that the ECB can afford to scale back the PEPP program as financing conditions are now favorable. He said the pandemic program was close to hitting its target and the program could end as planned in March 2022. The comments follow earlier signals from Guindos and Lane regarding the possibility of a slight moderation in monthly purchases at next week’s meeting.
Outlook for the event
Australian GDP is now expected to grow just 0.1% in the second quarter, down from our preliminary forecast of 0.5%. According to the revised vision, the risks appear to be on the downside. Indeed, the measure of GDP expenditure is expected to contract by 0.1% in the second quarter. The other two variants of GDP (output and income), however, are expected to experience positive growth, supporting the average aggregate measure. Corelogic House Prices August is expected to post another large gain despite disruptions from current lockdowns.
In China, Caixin August PMI will provide insight into the performance of small and medium-sized manufacturers. While the official NBS PMI index (which focuses on large companies) held steady above 50 in August, signaling continued expansion, the Caixin measure is clearly at risk of falling to a contracting reading due to the disruption in industry due to aggressive restrictions recently imposed to stop small delta outbreaks in China.
In the we, the August ISM manufacturing survey will be at the center of concerns, in particular the price paid and the sub-components of employment. August ADP private payroll will also be assessed as a risk tilt guide for Friday’s nonfarm wage release – this despite the ADP recently being a poor indicator of the official series. Construction spending in the United States for July is also due.
The Australian dollar took off yesterday afternoon after the RBA released a new document that modeled looming wage inflation:
How wages react to very low unemployment rates remains a key source of uncertainty in Australia, in part due to the lack of historical evidence to draw on. To help fill this gap, we study data on unemployment rates and wage growth in local labor markets over the past 20 years. The considerable variation in economic conditions in local labor markets allows us to infer the strength of the relationship between unemployment and wage growth (i.e. the Phillips curve of wages) at very high unemployment rates. low which are seldom observed at the national level. We find strong evidence that the Phillips wage curve is indeed a curve, rather than a straight line. When the unemployment rate exceeds 7½ percent, the Phillips curve is flat and wage growth does not respond to changes in unemployment. Wage growth then becomes increasingly sensitive to changes in the unemployment rate as the unemployment rate falls to lower and lower levels, notably below 4%. These findings have implications for monetary policy, especially in the current environment, given the Reserve Bank of Australia’s central forecast that the unemployment rate is expected to drop to decades-long lows over the next several years.
I wonder what this model of rearview mirror has to say about the developing terms of trade shock. If we wait ten years, he can tell us.
In the meantime, let’s look out the window at the analogous post-2012 experience that directly resulted in:
- crushing of nominal growth;
- collapsing wages and inflation;
- chronic underperformance of both for a decade.
Now back to the model that says a wage explosion is imminent …
The half-full RBA glass is still stupid.