The RBA left its policy rate unchanged at 4.1% for a third consecutive month at Philip Lowe’s final meeting as governor, and although the result was as expected, the Aussie plunged almost 1.5% against a stronger US dollar. Longer term Australian bond yields rose in line with the increasing trend across the G7, as investors are becoming less convinced the inflation battle is entering its final stage.
China real estate still on the canvas
China’s Caixin services PMI was disappointing, falling to 51.8 in August from 54.1, but news from the real estate market lifted hopes that stimulus measures may be bearing fruit. The city of Shenyang followed Shenzhen in announcing a relaxation of mortgage restrictions intended to support the market, while developer Country Garden avoided defaulting on two of its dollar bonds by paying coupons within the grace period.
Despite the mildly positive news, the sector remains deeply challenged and the Hang Seng index of China property sector stocks closed 2.7% lower after rebounding 4.2% on Monday. Offshore bonds from 34 of the top 50 private-sector developers by bond issuance are delinquent, and the remaining 16 developers, including Country Garden, face a combined $1.48bn of principal and coupon payments this month.
Elsewhere in Asia, inflation in South Korea unexpectedly accelerated in August after 6 months of declines, to 3.4% from 2.3%. The consensus estimate was 2.9%, and although core inflation was unchanged at 3.3%, the upside surprise for headline suggests that after leaving its policy rate unchanged since January at 3.5%, the central bank may have more work to do.
Summer sunshine sets on eurozone service sector
In Europe, the only important releases came from Italy and Spain which do not provide flash estimates for the HCOB PMIs. Like the manufacturing sector reports on Monday, the August services PMIs were also below estimates, leading to a downward revision to the final eurozone services PMI from 48.3 to 47.9. The Italian services PMI fell from 51.5 to 49.8 and the Spanish PMI from 52.8 to 49.3, suggesting the services sectors in both countries are now heading for a mild contraction.
The employment components of the eurozone composite PMI remained positive in August but signalled a near stalling of job creation after 31 consecutive months of growth, with Italy pointing to a outright contraction.
US factory orders hint at stabilisation
US factory orders unwound much of the 2.3% surge in June with a decline of 2.1% in July, but the details were better than expected. Aircraft orders placed at the Paris air show in June led to a 71.1% surge in civilian aircraft orders, and the volume of new orders fell back 43.6% in July to roughly the same level as in May. Excluding transportation, orders rose .8% against the median estimate of .1%, and the prior month’s increase was revised a tenth higher.
It is too soon to declare the manufacturing recession over, but there are promising signs of a turning point forming.
Markets
Fixed income
Equities
Commodities
News that Russia and Saudi Arabia plan to extend their voluntary production cuts lifted crude prices, with front-month Brent futures rising 1.7% above Friday’s close to $90.04/brl – the highest since November last year and roughly 20% higher than where it traded through most of June.
Today’s macro agenda
Germany factory orders July, EU retail sales July
US ISM services index August, weekly MBA mortgage applications