9th September 2019 - China exports slump may curb risk on gains



Good morning


OVERNIGHT DATA & HEADLINES


• US non-farm payrolls in August showed an easier pace of jobs growth at +130k (vs +150k expected), but even that is flattered by +25k census hiring. The last 2mths saw -20k in downward revisions too. The underlying pace of jobs growth in 2019 is settling at lower levels vs recent years: the 12mth average pace now +173k - the weakest in almost two years. More encouragingly, the industry breakdown showed August weakness concentrated mostly in retailing (-11k, 8th consecutive decline) and education (+32k vs a 6m avg of 57k); otherwise manufacturing, construction, temp help, and leisure/hospitality held up. The alternative household survey portrayed a lot more strength too: +590k jobs created, following +283k the previous month. Wage earnings at 0.4% in the month were encouraging, leaving the annual pace throttling above 3% for yet another month (3.2%). The main takeaway for the Fed is that the underlying pace of jobs growth is easing, though still respectable, and is enough to absorb new entrants, while earnings growth is settling in the low 3s. This should cement a 25bp rate cut in two weeks.

• Fed Chair Powell said the Fed is not forecasting or expecting either a US or global recession. The US labour market is still tightening at the margin, and the consumer is in good shape. However, there are risks which the Fed is monitoring very carefully, including slowing global growth, trade policy uncertainties that are weighing on business decisions, and persistently low inflation. He sees growth around 2% to 2.5%, and repeated the Fed will continue to act as appropriate to maintain the expansion.

• Germany’s July industrial production fell -0.6%m/m (est. +0.4%m/), -4.2%y/y (est. -3.9%y/y) and underscored the softening of the economy in front of next week’s ECB meeting (12th). This should strengthen the hands of the doves who have intimated substantial stimulus despite recent dissent from ECB hawks.

• Eurozone final 2Q GDP at +0.2%q/q was unchanged from its initial reading, though there was a minor lift in the annual level to +1.2%y/y from +1.1%y/y. Components were discouraging. Despite a minor lift in Fixed Capital Investment, the prior quarter was notably marked lower.

• During European trading hours, the PBoC announced reductions to banks reserve ratios (the amount of cash a bank must hold as reserves): a cut of 0.5% for all banks (to the lowest level since 2007) from 16 Sep,and an additional cut of 1% for some provincial-based banks from 15 Oct. The cuts will release CNY900bn of liquidity, the PBoC emphasizing the easing was not considered large.

• China's trade balance for August fell from CNY310bn to 240bn (market expected 299bn), with export growth less than expected. Shipments to the US fell 16% vs a year earlier, suggesting the trade war is having an impact.


INTEREST RATES


• US 2yr treasury yields fell from 1.57% to 1.51% following the jobs data, closing at 1.54%, the 10yr yield falling from 1.60% to 1.54% and closing at 1.56%. Markets are pricing 25bp of easing at the 19 September Fed meeting, and a terminal rate of 0.93% (Fed funds rate currently 2.13%).

• Australian 3yr government bond yields fell from 0.85% to 0.81%, the 10yr yield from 1.13% to 1.04%. Markets are pricing 11bp of easing at the 1 October RBA meeting, and a terminal rate of 0.50% (RBA cash rate currently at 1.0%).

• Market pricing for RBNZ is for 3bp of easing on 25 September, with a terminal rate of 0.60%.


COMMODITIES


• Gold fell 1% - Spot gold was down 0.7% to $1,508 per ounce, after falling more than 1% earlier in the session.

• China's iron ore futures snapped a six-session rally, but firm demand from mills fuelled the first weekly gain since late July. January 2020 delivery, plunged 3.9% to 629 yuan ($88.28) a tonne.

• Copper failed to respond positively to China boosting bank lending because the trade dispute between the biggest metals consumer and the United States still weighed on the market. Benchmark LME copper slipped 0.2% to $5,834 a tonne.

• Oil prices rose above $61 a barrel after the head of the U.S. Federal Reserve said the central bank will act "as appropriate" to sustain an economic expansion in the world's biggest economy that has been pressured by uncertainty over global trade. Brent crude settled at $61.54 a barrel, up 59 cents, or 1%, while U.S. WTI crude ended 22 cents, or 0.4%, higher at $56.52.


CURRENCIES


• The USD was marginally lower, holding above a one-week low. The DXY was 0.03% lower at 98.386 after hitting a one-week low of 98.085 on Thursday.

• CNY had its first weekly gain in three weeks, CNY finished domestic trading at 7.1243, the strongest close in two weeks.

• EUR fluctuated between 1.1020 and 1.1057, reversing US jobs data gains to close little changed.

• USD/JPY fell from 107.00 to 106.62 post jobs data but later retraced to 106.90.

• AUD extended earlier gains, from 0.6830 to 0.6862 – a one-month high.

• NZD similarly rose from 0.6380 to 0.6444.

• AUD/NZD fell from 1.0670 to 1.0633 before closing at 1.0656.


EVENT RISK TODAY


• NZ: Q2 manufacturing activity will provide another input into the Q2 GDP estimate but won’t ruffle the markets.

• Australia: Jul housing finance is expected to show the number of owner occupier approvals up 1.5%, consistent with stabilising conditions.

• Europe: Sep Sentix investor confidence is released.

• UK: Jul GDP follows a flat read in Jun.


AUD thoughts :


AUD showed little reaction to weaker-than-expected China trade surplus, highlighting the US-China trade war impact, as it took bids to 0.6850 during this morning’s open.

The USD weakness on the back of the downbeat Nonfarm Payrolls (NFP) on Friday acted as an additional force behind the AUD’s run-up.

China released its August month trade data during the weekend and marked the impact of the US-China trade war as its exports to the US fell 16% YoY following a 6.5% drop in July while imports from the US slumped 20% on a yearly basis.

Given the mostly silent economic calendar, except July month Australian Home Loans, investors are more likely to keep eyes on trade/political headlines for fresh direction.


Technical Analysis :

AUD opens -0.15% as China's Aug exports unexpectedly shrink. News to curb rise after robust rally Fri on back of China RRR cut, CNH gains.

Hopes of more China stimulus, Fed rate cut to underpin as risk mood improves. Offshore events to dictate moves this week as tier-1 AU economic data absent.

Investors overly optimistic on outcome of US-China trade talks - Resistance 0.6865, 0.6876-80; support 0.6825-30, 0.6805-10





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