Australian Dollar Bashed by China

Treasury yields fell hard and Value stocks followed them lower. Westpac has the wrap:

Event Wrap

US CPI inflation in August was slightly weaker than expected, +0.3%m/m and 5.3%y/y (vs. est. +0.4%m/m and +5.3%y/y, prior 5.4%y/y), while the ex-food & energy measure rose only 0.1%m/m and 4.0%y/y (vs. est. +0.3%m/m and +4.2%y/y, prior 4.3%y/y). One interpretation is that supply chain disruptions may be starting to ease.

NFIB small business sentiment survey was slightly firmer at 100.1 (prior 99.7, est. 99.0). Employee shortages remained a key issue (job vacancies and wage increases at record highs).

UK labour data was broadly in line with expectations, with a strong underlying tone. Unemployment fell to 4.6% as anticipated, and jobs over the past 3 months rose 183k (est. 199k), while jobless claims fell (July -48.9k from initial -7.8k, and -58.6k in August). ONS cited a rise in job vacancies to 1.034m (a record), with the majority of UK regions citing employment above pre-pandemic levels.

Event Outlook

Australia: The WBC-MI consumer sentiment index will be challenged in September by the continuing NSW and Vic lockdowns.  

New Zealand: The Q2 current account should show the current account deficit returning to pre-pandemic levels (WBC f/c: -3.3% of GDP).

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China: Restrictions imposed to stop COVID-19 are likely to weigh on August retail sales (market f/c: 7.0%) as global supply chain disruptions remain a material headwind for industrial production (market f/c: 13.5%). COVID-19 and regulatory reform are meanwhile expected to lead to a further slowing in fixed asset investment growth (August market f/c: 9.0%).

Euro Area: Supply bottlenecks likely restrained growth in industrial production in July (market f/c: 0.6%).

UK: The market is forecasting a 2.9%yr increase in the August CPI report owing to supply-chain constraints and economic recovery.

US: August industrial production growth is expected to be held back by parts shortages (market f/c: 0.5%).

US CPI came in weak, from BofA:

Core CPI inched up 0.1% (0.10% unrounded) mom in August, marking the softest sequential gain since February. This was below consensus expectations and led to the % yoy rate moderating to a still elevated 4.0% yoy clip, from 4.3% previously. Headline CPI rose 0.3% (0.27% unrounded) mom, boosted by a 2.0% surge in energy prices and solid 0.4% rise in food. Headline % yoy edged down to 5.3% yoy from 5.4%.

The winds of transitory inflation became crossed this month. On one hand, used car prices started to see a negative payback after the record smashing rally over the past year, declining 1.5% mom. The timing is consistent with wholesale used car prices, which began to turn lower in June and are now down 4.2% from the peak through August. Reopening pressures also saw a sharp reversal with lodging prices plunging 2.9% mom and airline fares collapsing 9.1% mom. The broader transportation services sector also fell 2.3% mom, pulled down further by a 2.8% drop in motor vehicle insurance (which reflects seasonal factors that will likely bounce by +2.0% mom in September) and an 8.5% collapse in car & truck rental prices. Together, these components sliced 26bp from core % mom.

On the other hand, there were signs of continued shortage related pressures as price gains were seen across commodity items. Both new car prices and household furnishings & supplies jumped 1.2% mom in August, recreation commodities soared 1.0% mom, apparel and other goods both rose 0.4% mom, and alcohol rose 0.3% mom. These categories added 16bp to core, meaning net transitory disinflation this month.

Despite the softer core reading, there was encouraging news from a persistent inflation perspective. Both OER and rent of primary residence rose 0.3% mom, the latter improving from its recent 0.2% trend and catching up to the former. Medical care services also held in at 0.3% mom. There was also broad price pressures across other major services, with labor constraints and resilient wages potentially playing a role.

We’re on the inflation downslope now.