It’s a huge week for the local market with the release of the latest RBA interest rate decision and second quarter GDP. But it’s also a massive week for traders as they try to digest the impact of the weaker-than-forecast US non-farm payrolls on US markets in this holiday-shortened week.
Friday’s data gives the Fed an out if they decide to leave rates on hold this month but for many, including Atlanta Fed governor Jeffrey Lacker, the data doesn’t change a thing.
So the debate will rage.
Friday’s non-farm payrolls failed to provide clarity around the FOMC meeting’s decision. Strategists and economists are going to have to earn their coin over the next few weeks as traders and the market count down to the FOMC decision on September 21. That’s after the 151,000 print for August non-farm payrolls undershot expectations. But the fact that August does undershoot expectations more often than not means the weaker than expected number was not actually unexpected.
That, along with a warning from Atlanta Fed president Jeffrey Lacker that “it appears that the funds rate should be significantly higher than it is now”, coupled with the factory orders rebound in July, and the latest guesstimate of the Atlanta Fed’s GDPNow for the current quarter of 3.5%, from the previous read of 3.2%, suggests the Fed could still be on track to raise rates this month.
Maybe that explains why the US dollar regained much of its lost ground in the immediate aftermath of the jobs data release.
Stocks rose on Friday – but this chart says that makes no sense. S&P 500 up, earnings down. That makes no sense. That’s unless the valuation metric for stocks is not earnings but the discount rate being used for future earnings: the bond rate. As the Fed said a month or two back, US stocks might be overvalued on a historical PE basis but that’s not the case against bonds. It means just like the immediate period before the GFC, and the market turmoil caused by the collapse of hedge fund LTCM in the 1990’s what happens is bonds are critical for stocks, and markets more broadly.
Australian Calendar – (courtesy NAB Economics, our enphasis)
Job ads Monday should show a reasonable bounce; remaining GDP partials to support a 0.3-0.4% q/q Q2 GDP outcome (released Wednesday) – close to the RBA’s expectations and of course following a very strong Q1 outcome. Tuesday’s RBA meeting is likely to be a non-event as the bank monitors the performance of the economy in reaction to the two recent rate cuts.
Australian Q2 GDP is out Wednesday
“It is very unusual for the quarterly data to dramatically change our view of the Australian economy. The RBA’s quarterly forecasts suggested the Bank is looking for a 0.4% q/q outcome, which is a fraction stronger than NAB’s 0.3% q/q prediction. This of course follows the strong 1.1% q/q increase in Q1.
“The accounts are likely to show an economy, where the non-mining economy continues to make forward progress, particularly in NSW and Victoria, with useful contributions from housing construction, services and consumption. Restraining growth will be the continuing drag from the completion of major mining projects, which is impacting on WA and parts of Queensland in particular. We’ll be watching the data closely to see if there are any indications that the drag from slower mining investment and lower commodity prices is beginning to lessen.”
International Calendar (courtesy NAB Market Economics)
Global : The G20 meets this weekend – there is no significant market expectation, but the IMF pre-meeting briefing paper is endorsing increased government fiscal spending.
US: There should be keen focus on the labour market trends revealed in the Fed’s Labor Market Conditions Index and Beige Book along with the message of the Non-Manufacturing ISM after last week’s disappointing Manufacturing ISM result for August.
China: A relatively quiet week on the Chinese data front, with most focus likely on Thursday’s trade data and Friday’s CPI.
NZ: Mainly second-tier economic data for NZ this week, but expected to support a strong Q2 GDP print. This week’s Global Dairy Trade auction may well show another 10% increase. There should also be interest in the Quotable Value House Price series mid-week to gauge the effect of recent tightened LVR restrictions.
Japan: A relatively quiet week, with perhaps the most focus on Labor Cash Earnings to see how wages are reacting to the continuing tightening in the Japanese labour market.
Euro: No change is expected from the ECB on Thursday, however, the message around the no change decision will be closely scrutinized for clues as to future policy actions.
UK: The main interest will be Monday’s Services PMI. Recent UK data has been stronger than expected and has shown little Brexit impact to date.
Canada: No change is expected from the Bank of Canada on Wednesday, but the market will be watching for whether the Bank is more concerned about recent low inflation readings or is relaxed about reasonable activity and labour market data.
Here’s the NAB’s excellent calendar of all the week’s big data and events.