Euro area PPI to confirm factory gate price pressures

Chris Scicluna
Emily Nicol

Markets mixed in Asia as investor attention now turns to tomorrow’s US payrolls report
While the S&P500 had appeared on course for a new record close on Wednesday, the market fell away in the final two hours of trade to leave the index virtually unchanged for the session. While the ISM’s manufacturing PMI unexpectedly inched up to 59.9 in August, the employment index fell to a 10-month low of 49.0 and the 374k lift in private payrolls reported by ADP for August was also far below the consensus expectations (albeit neither indicator pointing necessarily to a similar disappointment when the August payrolls figures are released tomorrow). So, after being a little weaker earlier in the session, the Treasury market also closed little changed with the 10Y yield nudging down to 1.29%. The FX market seemed more concerned about the ADP report, with the greenback weakening somewhat as the data were released and remaining softer when US markets closed.

Against that background, it has been a somewhat mixed session in Asia today, although most bourses remain near yesterday’s closing levels. After rising to a five-month high yesterday, Japan’s TOPIX is just a smidgen firmer today with no significant local economic data or news to provide direction. China’s CSI300 – which had also enjoyed a solid gain yesterday – has weakened somewhat today, although the Shanghai composite has firmed following yesterday’s late news that the PBoC would offer some additional low-cost funding to banks to on-lend to small and medium-sized companies. In South Korea, the KOSPI is currently down by around 0.8% after core CPI inflation unexpectedly increased to a 4-year high of 1.8%Y/Y in August and Q2 GDP growth was revised up 0.1ppt to 0.8%Q/Q. In addition, BoK Governor Lee expressed confidence in the durability of the recovery in a speech to a local conference, suggesting that last month’s rate hike might not be the last this year.

In the Antipodes, Australia’s ASX200 has declined ½% despite unexpected news of a new record trade surplus in July. Meanwhile, after underperforming yesterday, the 10Y AGCB yield fell 4bps to 1.2% today. New South Wales reported 1,288 new virus cases, just short of Monday’s record high, but announced a small easing of a restriction on exercising in the most infected areas of Sydney after the proportion of residents with a single dose of virus vaccine reached the interim target of 70%. The state has allocated a further A$3.9bn to maintain support payments to businesses and individuals impacted by the lockdown. Meanwhile, Victoria reported 176 new virus cases today – the most since August last year. This supports the state Premier’s conclusion yesterday that reducing case numbers was no longer possible, with the strategy now to contain the number of cases while ramping up the vaccination programme. Kiwi bonds yields continued to rise as new virus cases dropped back below 50 and officials expressed confidence that a downward trend would continue under the tight level 4 restrictions in place in Auckland.

Annual growth in Japan’s monetary base slows slightly in August
Following a busy couple of days, the only economic data in Japan today were the BoJ’s monetary base figures for August. In seasonally-adjusted terms, the monetary base increased at an annualised pace of almost 18%Y/Y, albeit following a contraction over each of the previous two months. However, with the monetary base having expanded at an even more rapid pace a year earlier thanks to the BoJ’s pandemic support policies, annual growth still slowed for a fourth consecutive month, reaching 14.9%Y/Y in August from 15.4%Y/Y in July.

Euro area PPI set to show that price pressures remain elevated
A relatively quiet day for top-tier releases, brings euro area producer price inflation numbers for July. In June, producer prices rose a hefty 1.4%M/M, the second-highest monthly increase in fifteen years and the sixth increase of 0.9%M/M or above in the past seven months. And that saw the headline PPI inflation rate accelerate a further 0.6ppt to 10.2%Y/Y – the highest level since the early 1980s. Pressures, however, remained concentrated in prices of energy and intermediate goods. Also due to be published shortly are Spanish unemployment numbers for August.

BoE monthly Decision Maker Panel survey only release of note
The UK economic data calendar is also light with just the publication of the BoE’s latest monthly Decision Maker Panel survey, which will provide further insight into firms’ sales expectations and employment intentions.

Q2 productivity revisions and July activity data ahead in the US today as investors await tomorrow’s payrolls report
Today’s US economic reports are likely to attract only passing interest, especially with tomorrow’s payrolls report looming. The second release of labour productivity and unit labour cost data for Q2 should contain only minor revisions given last week’s very small revision to GDP growth. Daiwa America’s Mike Moran expects a trade deficit of $70.5bn to be reported for July – a substantial $5.2bn narrowing, but already clearly indicated by last week’s advance report covering merchandise trade. Similarly, news of merely modest growth in factory orders in July should be no surprise to the market given the small decline in durable goods orders already reported last week.

Australia’s trade surplus sets another new record high July
Following yesterday’s firmer than expected GDP report, which pointed to strong growth in domestic demand amidst rapid growth in national income, today’s trade figures for July also cast the Australian economy in a favourable light. June’s record surplus of A$10.5bn was revised up to $A11.1bn, only to be beaten by an even larger surplus of A$12.1bn in July – around A$2bn above the consensus expectation. Moreover, both exports and imports grew strongly in the month, further illustrating the positive momentum in the Australian economy and incomes before the current virus outbreak.

In the detail, total exports increased 4.8%M/M in July and so were up 35.8%Y/Y. Exports of goods increased an even greater 6.4%M/M, 44.5%Y/Y, with very strong growth in shipments of metal ores, coal and LNG – all clearly benefitting from higher prices. Less positively, the suspension of the quarantine-free travel bubble with New Zealand saw exports of services decline 7.8%M/M, erasing the growth over the previous two months, with these exports also down 11.4%Y/Y and almost 47% lower than in December 2019. Meanwhile, imports increased 3.3%M/M in July and so were up 14.4%Y/Y. The monthly increase was driven by a more than 15%M/M jump in imports of intermediate goods, which according to the ABS was due to a lift in parts and accessories for communication equipment. Imports of consumption goods fell 3.4%M/M but still increased 5.4%Y/Y, while imports of capital goods were little changed this month but still increased 9.3%Y/Y. The closure of the travel bubble also impacted imports of services, which fell 2.0%M/M in July. And while these imports were still up 17.9%Y/Y, they were down by more than half from their December 2019 level.

Australian new housing loans approvals eke out new high, driven by investor activity
Today’s other Aussie economic news concerned new housing loan approvals, which according to the ABS increased a further 0.2%M/M in July. This was firmer than the small fall that the market had expected in light of the virus outbreak and lifted the series to a new record high. Growth was driven by a 6.6%M/M lift in approvals in New South Wales, which reflects the approval of applications submitted prior to the lockdown. Annual growth in nationwide approvals remained extremely strong at 68.2%Y/Y – a rate that is only slightly flattered by base effects associated with the onset of the pandemic but clearly influenced by the federal and state government support given in order to boost activity in response to the pandemic. Approvals for investor loans increased a further 1.8%M/M in July and so were up 98.7%Y/Y. However, the value of approvals for owner-occupier loans declined 0.4%M/M but was still up 58.3%Y/Y. And while off their high, these approvals remain more than 63% above the pre-pandemic level. Finally, after declining sharply during the previous month, approvals for personal fixed term loans rebounded 14.2%M/M in July and so grew 26.4%Y/Y.

Kiwi merchandise terms of trade returns to record high in Q2
The influence of higher commodity prices was also evident in today’s Kiwi data, which also cast light on net merchandise exports volumes during Q2. According to Statistics New Zealand, the country’s export price index jumped 8.3%Q/Q in Q2, driven by steep increases in prices for dairy products, timber and aluminium. So while import prices also increased a sizeable 4.8%Q/Q, driven by higher prices for fuel, the merchandise terms of trade still rose 3.3%Q/Q to return to the record high achieved a year earlier. Meanwhile, the volume of exports increased 2.9%Q/Q in Q2 and so was up 10.5%Y/Y. However, the volume of imports rose 4.4%Q/Q and 28.3%Y/Y, with large increases in imports of mechanical machinery and transport equipment driving the pick-up during the quarter – indicative of robust domestic demand. 

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