Consumer confidence flat in Germany and softer in France

Chris Scicluna
Emily Nicol

Chinese equities broadly stable for now, but a weaker day in most other Asian equity markets as today’s FOMC meeting looms large
With the S&P500 having opened at a record high and earnings reports from some of the mega tech companies looming after the bell, investors seemed inclined to take profits on Tuesday, especially following another day of steep losses in Chinese markets. After being down more than 1% mid-session – this despite a much better than expected Conference Board consumer survey – the S&P500 eventually closed with a 0.5% loss, paced by weakness in info-tech, energy and consumer discretionary stocks. In the bond market, the yield on the 10Y note fell below 1.23% with Wall Street on its lows, recovering only slightly to close at 1.24%. A weaker session for the greenback saw it lose ground against sterling, the euro and the yen.

There was little overall market reaction to the post-close earnings reports of the likes of Microsoft, Apple and Alphabet. However, US equity futures and Treasury yields have begun to trade with a negative bias on the European open. After initially opening lower, equity markets in Mainland China were more stable today, with the CSI300 ending the day little changed after local media attempted to calm nerves, while the Hang Seng made late gains to be up a little more than 1% at the time of writing. But given the weakness in the US and local virus concerns, most other markets in Asia have taken a backward step today. In Japan, a three-day recovery in the TOPIX has ended with a 1.0% loss. In virus news, although the recent long holiday weekend likely contributed to a backlog of testing, new cases in Tokyo leapt to a record 2,848 just days after the start of the Olympics. Meanwhile, Chief Cabinet Secretary Kato said that the government would promptly consider new state of emergency requests in the prefectures of Kanagawa, Saitama and Chiba. Stocks are also somewhat weaker in South Korea, with a record 1,896 new cases discovered just a day after social distancing rules were extended for a further two weeks.

In a similar vein, with a further 177 new cases discovered in Sydney over the past day, Australia’s ASX200 declined 0.7%. New South Wales Premier Berejiklian confirmed that the city’s current month-long lockdown will be extended until at least 28 August, with the blow to be softened a little with expanded federal support payments to help small businesses and workers impacted by the lockdown (indeed, these support payments are now costing the federal government an estimated $A750mn per week). So with core CPI inflation simply matching market and RBA expectations in Q2, the 10Y AGCB yield fell 5bps to 1.16%, tracking the decline in yield experienced by its UST counterpart.

Consumer confidence flat in Germany and down in France, remaining below pre-pandemic levels in both countries; Italian survey results to come
Ahead of tomorrow’s European Commission economic sentiment indices for the euro area, today’s national surveys offer insight into conditions in the largest three member states. After the ifo business survey released at the start of the week suggested that firms were a little less upbeat, this morning’s German GfK consumer confidence survey suggested that household sentiment has levelled off some way below the long-run average. Contrary to expectations of a third successive increase, the headline GfK indicator moved sideways at -0.3, still down on the pre-pandemic levels. Expectations for future incomes and the economic outlook softened slightly, although the latter remained very high by historical standards. While willingness to buy rose to the highest since April, however, it still remained below the long-run average.

Likewise, the INSEE French consumer confidence survey results for July were a touch disappointing, with the headline index dropping 2pts to 101, still below the pre-pandemic levels albeit a touch above the long-run average. Probably impacted by the marked pickup in the spread of the delta variant, the share of households considering it is a suitable time to make major purchases fell back sharply, albeit also remained above the long-run average. Households’ assessment of their future financial situation also deteriorated The ISTAT Italian consumer and business sentiment surveys will be published later this morning.

UK house price growth slows in July, but remains elevated; intense competition maintains deflation on the High Street despite price pressures further up the supply chain
Having in June jumped to a 17-year high of 13.4%Y/Y, UK house price inflation moderated somewhat in July. According to the Nationwide house price indices, house prices fell 0.5%M/M, having risen by an average of 1.6%M/M between April and June. And given base effects, that left the annual rate of house price growth at a three-month low of 10.5%Y/Y. The tapering of the government’s stamp duty relief from this month likely played a role in slowing both demand and house price growth.

Separately, despite strong price pressures further up the supply chain (input producer prices rose 9.1%Y/Y in June with producer output prices up 4.3%Y/Y), the BRC shop price index released overnight suggested that prices on the High Street remained under downwards pressure this month. In particular, intense competition among retailers saw shop price inflation fall 0.5ppt to a three-month low of -1.2%Y/Y in July. The weakening was widespread. The survey measure of food inflation dropped 0.2ppt to -0.4%Y/Y while non-food inflation dropped 0.8ppt to -1.8%Y/Y.

Fed unlikely to add much clarity today; trade and inventory data to cast more light on Q2 GDP, while another very busy of corporate reporting lies ahead
The focus of a busy day for data and events in the US will be the outcome of the latest FOMC meeting. There is little prospect of any change in policy settings and the post-meeting statement is likely to contain little change in tone from that issued in June, with the economy maintaining good forward momentum and further upside inflation prices surely to be dismissed as temporary. Therefore, most interest will centre Chair Powell’s post-meeting press conference, where reporters will doubtless seek information on whether the committee has made any progress in plans for an eventual tapering of the QE programme. Unfortunately, investors can expect little clarity to emerge, with Daiwa America’s Mike Moran expecting Powell to remain very non-committal on a taper start date – perhaps especially so in light of the recent increase in local coronavirus cases. It also seems unlikely that the committee will have reached an agreement on whether to taper its MBS purchases ahead of a taper of its Treasury purchases.

Ahead of the Fed’s announcement, today will also see the release of advance merchandise trade and inventory data for June, which will help analysts fine-tune their estimates for tomorrow’s release of the advance national accounts for Q2. Mike expects the trade deficit to have narrowed slightly to $87bn, thanks to a likely pullback in imports from the above-trend levels seen in May. Meanwhile, close to 50 major corporates will report their earnings today, including the likes of Facebook, Boeing, McDonald’s, Pfizer and Ford.

Aussie CPI provides no surprises for either the market or the RBA, with core inflation still relatively subdued
While upside CPI surprises have been the norm across the globe in recent months, today’s Australian CPI for Q2 provided very little surprise with headline inflation printing only fractionally above the consensus estimate and the key measures of core inflation proving to be bang in line with expectations. And importantly, while headline inflation was a little higher than the RBA had figured when it last published forecasts in May, core inflation appears to have been in line with the Bank’s May forecast.

The headline CPI increased 0.8%Q/Q in Q2 – just a tenth above the consensus expectation. A 6.5%Q/Q increase in the price of automotive fuel contributed 0.3ppts to this outcome, following a similar contribution in Q1. Other noteworthy increases included a 2.4%Q/Q increase in medical fees (linked to annual increases in private insurance premiums) and an increase in electricity costs (due to the winding down of an electricity subsidy in Western Australia). On the other hand, subsidies paid by federal and state programmes continued to suppress housing construction cost inflation. Indeed, according to the ABS, the measured 0.1%Q/Q decline in prices for new dwellings would have been a 1.9%Q/Q increase in the absence of these subsidies – demand- and cost-driven inflation that will come through once these subsidies end. Meanwhile, with the CPI having slumped by a whopping 1.9%Q/Q in Q2 last year – a decline that was largely due to the impact of the free childcare package offered by the federal government during the first lockdown – the annual inflation rate increased by 2.7ppts to 3.8%Y/Y. While this is the fastest pace since 2008, it is worth noting that the cumulative increase in consumer prices over the five quarters since Q120 stands at just 1.9%.

Turning to the key analytical measures, reflecting the impact of higher fuel prices, tradeables prices increased 1.5%Q/Q and so were up 3.6%Y/Y (up from just 0.7%Y/Y in Q1). Importantly, non-tradeable prices increased just 0.3%Q/Q, although base effects associated with the aforementioned free childcare package mean that annual inflation increased to 4.0%Y/Y from 1.3%Y/Y previously. Given the influence of the various government programmes, as usual the underlying trend is best conveyed by the core inflation measures favoured by the RBA. Most importantly, the trimmed mean increased 0.5%Q/Q, so lifting annual inflation by 0.5ppts to 1.6%Y/Y – still a tenth lower than in Q120. The weighted median also increased 0.5%Q/Q, lifting annual inflation on this basis by 0.4ppts to 1.7%Y/Y. While the quarterly increase in the trimmed mean was the largest since Q120, underlying inflation momentum remains well below the midpoint of the RBA’s 2-3% inflation target. And as Governor Lowe has made abundantly clear, the RBA’s Board will not consider a rise in the cash rate target until actual inflation is comfortably within the target range and expected to remain there.

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