Heavy declines across global equities reflected the ongoing weakness in sentiment amid concerns over China's economy and a reappraisal of the interest rate trajectory in the US. These influences contributed to further strength in the US dollar, supported also by Treasury yields continuing to claim at the long end of the curve.
Economic concerns in China continued to weigh on broad assets as a range of interventions from the authorities fell short of improving sentiment. Of note, the PBoC injected the equivalent of around US$55bn of one-year funding via its bank lending facility and lowered the interest rate on these loans by 15bps to 2.5%. Further signs of faltering growth were evident as retail sales (2.5%Y/Y) and industrial production (3.7%Y/Y) came in weak relative to expectations in July, and the unemployment rate ticked up from 5.2% to 5.3%. The downturn in the housing market appears to have intensified, increasing default risks for some major developers. Plunging sales have contributed to property investment contracting by 8.5% over January-July from a year earlier; home prices meanwhile fell by 0.2% in July, their largest monthly fall this year.
Events through the week in Australia added support for the RBA to extend its tightening pause. The minutes from the RBA's August meeting revealed that the Board elected to hold as it saw there was "a credible path back to the inflation target with the cash rate staying at its present level". The Board remains data dependent and has left the door open to tightening further; however, underwhelming wages growth and a weak labour market report points to its pause being maintained. The Wage Price Index lifted 0.8% in the June quarter (vs 0.9% expected) as the pace eased from 3.7% to 3.6% year-ended (reviewed here). July's Labour Force Survey was weak across the key details (reviewed here), summarised by the unemployment rate lifting from 3.5% to 3.7% on an unexpected 14.6k decline in employment (vs +15k forecast). While seasonal volatility looks to be behind the weakness in the July report, it supports the RBA's stance of remaining on the sidelines to monitor developments.
Strong upside surprises in US retail sales in July (0.7%m/m vs 0.4% exp) - underpinned by momentum in the control group (1%m/m vs 0.5%) - reaffirmed the resilience of household spending, indicating the economy remains on track for a soft landing. However, it also prompted the market to reassess its pricing for 2024 rate cuts, based on the view that the Fed will need to keep rates at a restrictive level for longer.
Taking a step back, the minutes of the Fed's meeting late last month detailed its shift to a data-dependent outlook for policy. Noting that the announced 25bps hike in July to 5.25-5.5% lifted rates further into a restrictive range, the FOMC was mindful that risks to achieving both sides of its mandate for 2% inflation and full employment had increased. In that respect, future decisions would need to carefully weigh up the risk of an "inadvertent overtightening of policy against the cost of an insufficient tightening".
Europe remains quiet amid its summer recess but in the UK hotter than anticipated price and wage data sealed expectations for further tightening from the BoE. The SONIA curve now prices a further 75bps of hikes to a peak rate of 6% by the end of the year. Headline CPI inflation was down sharply from 7.9% in June to 6.8% in July (vs 6.7%); however, the core rate was unchanged at 6.9% (vs 6.8%). Falling energy prices and goods disinflation have driven headline inflation down from 10.1% a year ago. By contrast, services prices continued to firm (7.4%) and this is underpinning elevated core inflation. Despite a rise in the UK unemployment rate from 4.0% to 4.2% over the 3 months to June, wage pressures lifted. Earnings growth accelerated between April-June to be 8.2% higher over the year, the pace slightly softer at 7.8% excluding bonuses; both measures were expected at 7.4%.
