However, US-China tensions remain fractious with China again vowing to retaliate against this latest tariff and called on the US to meet it "halfway" in finding a resolution, though comments from President Trump were less concilliatory in saying that any deal needed to be "on our terms". Adding to concerns this week were political uncertainties emanating from Italy and Argentina, escalating protests in Hong Kong, as well as unequivocally poor data from China and Europe pointing to a further deterioration in the outlook for the global economy.
In China, growth in retail sales (7.6% vs consensus 8.6%) and industrial production (4.8% vs 6.0%) over the year to July was much weaker than expected, while fixed asset investment just missed to the downside at 5.7% (vs 5.8%) on a year-to-date basis. The outturn for industrial production was the lowest since 2002 and highlights the pressures being faced by the manufacturing sector from a slowing global economy and weakness in exports prompted by trade tensions. The weakness from these reads together recent softness in credit data has increased expectations in markets that new stimulus measures will be required to ensure output growth does not falter below the 6-6.5% range targeted by authorities.
The second estimate of Q2 GDP growth in the euro area was unchanged at 0.2% quarter-on-quarter and 1.1% year-on-year. Most notably, growth in Germany -- the largest economy in the bloc -- contracted by 0.1% in Q2 and flatlined over the year, with the nation's sizeable export sector (more than 40% of GDP) struggling from the uncertainties abroad and from earlier structural adjustments working through the automotive industry. Initial signs from the German government were that it was reluctant to come forward with additional fiscal stimulus measures, though by week's end there were reports indicating more willingness to consider pulling away from their balanced budget rule imposed back in 2014 as a counter-cyclical response to support activity. Weighed by weakness in Germany, total industrial production for the euro area fell by 1.6% in June and by 2.6% over the year indicating the downturn in the manufacturing sector across the bloc is intensifying. Support will be forthcoming from the European Central Bank, with Governing Council member Olli Rehn saying on Thursday during an interview with the Wall Street Journal "it's important that we come up with a significant and impactful policy package in September".
Underlining concerns within markets regarding the global economic outlook and that the policy stance of the US Federal Reserve is too tight, the 10-year US Treasury yield traded below that for the 2-year Treasury on Wednesday for the first time since 2007. Inversion of the 2/10 yield curve was a psychological event for markets given it has portended each of the past 5 US recessions with an average lead time of a little more than 18 months, though the spread had turned positive again by the end of the week. While the Federal Reserve has already begun lowering rates, the rationale used at its last meeting to justify its 25 basis point cut of a "mid-cycle adjustment" is clearly misaligned with what markets deem necessary. However, there are also genuine concerns in markets that monetary policy will not be sufficient to remedy the current slowdown, with much more support needed from fiscal policy and structural reforms.
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The domestic economy added a net 41,100 jobs in July -- well clear of the consensus expectation for a gain of 14,000 -- and rebounded from a decline of 2,300 in June (revised from +500) that was its first monthly fall since September 2016 (see our full review here). Employment growth over the year strengthened from its already robust pace of 2.4% to 2.6% and has been predominantly driven by the full-time segment (3.0%Y/Y). However, with the participation rate rising to a new record high for the third time in the past 4 months reaching 66.1%, the unemployment rate was unchanged at 5.2%. Spare capacity remains prevalent with the key measures retracing some of the improvements achieved in the previous month as the underutilisation rate lifted to 13.6% and the underemployment rate increased to 8.4%.
Persistent and elevated spare capacity remains a headwind to wages growth, as confirmed by the Q2's subdued update of the Wage Price Index (reviewed here). While the quarterly outcome of 0.6% surprised to the upside of expectations (0.5%), that was boosted by a 0.8% rise from the public sector -- its fastest quarter-on-quarter gain in 5 years -- and was due largely to a 1.5% rise in Victoria reflective of a state government initiative to recalibrate wages to match the other states. Growth in the Wage Price Index through the year remained contained at around 2.3%, with the private sector just shy of that pace and trailing the public sector at 2.6%, which is shown as our chart of the week, below. With the underlying detail confirming broad-based softness across the industries and states, there was little to suggest inflation pressures will move materially higher. Furthermore, subdued wages growth continues to pose risks for the outlook for household consumption, which was again highlighted as the key uncertainty facing the domestic economy in a speech by RBA Deputy Governor Guy Debelle during the week.
Chart of the week
Also of note this week, Westpac-Melbourne Institute's Index of Consumer Sentiment rebounded by 3.6% in August to a 'neutral' reading of 100.0, which turned over most of the 4.1% fall from the previous month in which confidence fell to an outright pessimistic level of 96.5. Supporting the turnaround was a 9.6% rise for the sub-index measuring consumers' expectations for the economic outlook over the next 12 months, likely influenced by the RBA's June and July rate cuts. However, though overall views towards spending lifted, the gains were less constructive suggesting that the federal government's tax cuts and an improving housing market are yet to fully take hold. Views towards the housing market continue to strengthen, with the indexes for both purchasing (+3.0%) and price expectations (+5.1%) rising solidly in August, which is broadly consistent with the recent indicators from auction clearances, notably in the major markets of Sydney and Melbourne, and CoreLogic's price data.
In the business sector, NAB's Business Survey for July reported that confidence improved in the month (from +2 to +4) but remains at a below-average level and, matching with the weakness evident in the sector across the globe, is lowest for manufacturing firms. Overall business conditions eased from +4 to +2 and also remain below their long-run average level. Here, weakness was again notable in manufacturing together with the retail and wholesale sectors, while conditions are most buoyant in the mining sector supported by elevated commodity prices and a lower domestic currency. The survey's forward-looking indicators pointed to employment tracking at a modest +15,000 pace per month over the second half of the year, though note the employment data have largely run well above expectations so far in 2019. Meanwhile, forward orders remain very weak at a reading of -3 suggesting that business conditions will remain soft over the coming months, though capacity utilisation has improved to be around its average level.