Investors await Friday's speech by Fed Chair

Emily Nicol

Wall Street ekes out new record high; Asian markets mostly just a touch firmer as investors continue to await guidance from Powell on Friday
Following a very quiet session on Wall Street – with investors clearly awaiting direction from Jay Powell at the end of this week – the S&P500 closed with a modest 0.15% gain yesterday, which was nonetheless sufficient to tick the index over to a new record high. The economic data were mixed, with favourable revisions helping to boost the level of new home sales in July above the consensus estimate, but the Richmond Fed’s manufacturing index declining significantly more than expected in August to a 13-month low. However, the latter survey still pointed to increasing upward pressure on wages and output prices so, after marking time on Monday, Treasury yields moved higher with the 10Y note closing up 4bps at 1.29%. Commodity prices were again firmer, helping to boost the likes of the AUD and NZD despite their current virus outbreaks.

Against that background, with US equity futures little changed and very little local economic data, it has been a quiet day in Asia. For the most part, the region’s major equity markets are only slightly firmer. For example, in Japan the TOPIX is up just 0.1%. In virus news, Japan’s public broadcaster reported chief government Covid advisor Omi to have opined that he has seen no signs of a reversal of the trend in Tokyo, whilst also implicitly criticising the government for its over-optimistic assumptions. PM Suga is expected to hold a press conference at 9pm local time at which, according to Kyodo News, eight new prefectures will be added to the current state of emergency. Stocks are also modestly positive in Singapore and South Korea – the latter as investors await the outcome of tomorrow’s BoK policy review, with a significant minority of analysts expecting the Bank to tighten policy. Taiwan is currently seeing larger gains, while stocks are unchanged in Mainland China and down slightly in Hong Kong.

In the Antipodes, thanks to further gains in raw materials and tech stocks, the ASX200 has also posted modest gains today. However, despite the lift in UST yields, AGCB yields have lifted only fractionally with New South Wales reporting a record 919 new virus cases over the past day and the Q2 construction work report pointing to a much smaller lift in activity than analysts had expected. New Zealand’s equity market and bond yields rose a little more following a solid July trade report. While its own virus outbreak widened with a further 62 new cases reported today, new cases appear predominantly to be exposures prior to the lockdown.

Germany’s ifo survey likely to point to moderating sentiment in August
In an otherwise quiet day for major European data, today brings the release of the German ifo business sentiment survey for August. Consistent with Monday's flash PMIs, these are likely to show that confidence moderated again this month as the recent rise in coronavirus cases and persistent supply bottlenecks weigh. Indeed, the headline business climate is expected to have fallen to a three-month low (circa 100.4), although this would remain considerably higher than the average level seen over the past two years.

Another quiet day ahead in the US with July advance durable goods orders the focus
As investors await patiently Friday’s speech by Fed Chair Powell to the Jackson Hole symposium, today’s US economic diary features just the advance release of durable goods orders for July. Since May last year core capex orders (non-defence ex-aircraft) have increased in 12 of 13 months to a record high, and given the still favourable outlook for the US economy the consensus is that this very positive trend likely continued in July.

Aussie construction work increases by less than expected in Q2
The countdown to next week’s release of Australia’s national accounts for Q2 continued today with the ABS releasing news on construction activity. The total volume of construction work undertaken increased 0.8%Q/Q – significantly less than the market consensus estimate of 2.8%Q/Q and the unrevised 2.4%Q/Q increase reported in Q1. And so given the slowdown in work during the second half of last year, annual growth improved to just 0.4%Y/Y from -0.3%Y/Y previously. By state, a relatively week 0.3%Q/Q lift in construction output in New South Wales and a 1.9%Q/Q contraction in Western Australia weighed on the nationwide figures, with construction lifting 2.7%Q/Q in both Victoria and Queensland.

Most surprisingly, residential construction edged down 0.1%Q/Q in Q2, albeit annual growth still improved to 8.9%Y/Y from 4.9%Y/Y previously as last year’s Q2 slump fell out of the calculation. Non-residential construction – which lags the cycle – increased just 0.3%Q/Q. Nonetheless, this marked the first increase since the pandemic struck and caused the annual decline in output to ease to 6.0%Y/Y from 8.7%Y/Y previously. The strongest component this quarter was engineering-related construction (i.e. infrastructure), which increased 1.8%Q/Q but was still down 2.7%Y/Y.

Further information on non-construction investment will be released tomorrow in the Q2 CAPEX survey, which just as importantly will also cast light on how firms’ investment intentions are being impacted by the current virus outbreak.

Kiwi exports recede from record high in July, while import rebound continues
After surging more than 9%M/M in June to a record high, New Zealand’s merchandise exports declined 2.1%M/M in July but remained up more than 15%Y/Y. Dairy exports slowed in July but were still up 27.4%Y/Y and so accounted for around 40% of the total growth of exports. Further significant contributions were made by a 27.4%Y/Y lift in exports of meat and a 39.8%Y/Y lift in exports of forestry products, which like the dairy sector are benefitting from strong global prices. Imports increased 2.6%M/M and were up almost 35%Y/Y, with passenger motor car imports rebounding almost 150%Y/Y from last year’s depressed levels and imports of crude oil returning to trend-like levels following zero deliveries in July last year. Imports of plant and machinery increased a very encouraging 19.3%Y/Y – indicative of the capacity pressures facing the economy – and imports of consumer goods increased 13.1%Y/Y. Given these figures, the seasonally-adjusted trade deficit widened to NZ$0.3bn, which is similar to the average level in recent years.

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