Daily Market Update 7 August 2013 - Taper talk overrides strong economic data
Charles Evans, Chicago Fed President, and Dennis Lockhart, head of the Atlanta Fed, were in action overnight with both suggesting that tapering of asset purchases could begin shortly, perhaps as early as their September meeting. Evans stated that it was ‘quite likely’ the Fed would begin tapering purchases later this year with an eventual end likely to occur when unemployment hits 7%, forecast for mid-2014. Ensuring that market focus remains solely on upcoming unemployment data, Lockhart suggested that tapering could begin in September although it was dependent on H2 economic growth along with job creation.
The US trade deficit narrowed to the lowest level seen since October 2009 in June with a decrease to $34.22b recorded<http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf>. The result was below both the downwardly-revised $44.1b deficit of May and expectations for a decrease to $43.5b with exports, +2.2% to a fresh record high, coupled with a 2.5% fall in imports, behind the surprise result.
Canada’s trade deficit shrunk modestly in June with a decrease to $470m reported<http://www.statcan.gc.ca/daily-quotidien/130806/dq130806a-eng.pdf>. The result was slightly below expectations for a deficit of $500m with imports and exports both rising modestly over the month.
German industrial orders surged in June with an increase of 3.8% reported. The figure was well above forecasts for an increase of 1.0% with May’s 1.3% decline also revised up to -0.5%. While the headline number was strong, the internals of the report were softer than what might have been expected with capital goods orders, up 6.8% on the back of increased aircraft orders, masking 0.2% contractions in both consumer and intermediate goods.
Italy’s economy continued to contract in the three months to June with a decline of 0.2% recorded<http://www.istat.it/en/archive/97267>. The result was half the 0.4% decline expected by economists with the year-on-year rate improving to -2.2%. While encouraging, the contraction took the run of successive quarterly contractions to 8, the longest period on record.
Italian industrial output rose modestly during June with an increase of 0.3% recorded<http://www.istat.it/en/archive/97247>. While below estimates for a rise of 0.4%, the result left the year-on-year contraction at -2.1%, up from -4.3% in May.
Continuing the economic revival seen of late, UK industrial output surged in June with an increase of 1.1% reported<http://www.ons.gov.uk/ons/dcp171778_322184.pdf>. The result was far stronger than both the flat reading of May and expectations for an increase of 0.6% with the annualised rate jumping to an 18-month high of 1.2%. Mirroring the improvement in PMI data seen late last week, manufacturing output was the chief catalyst behind the strong result with activity expanding by 1.9% after falling 0.7% in May.
UK house prices continued to accelerate in July with the Halifax house price index<http://www.lloydsbankinggroup.com/media1/press_releases/2013_press_releases/halifax/060813_HPI.asp> rising 0.9%. The result near-doubled the 0.5% increase expected by the markets and was above the 0.7% pace of June with the annualised rate in the past three months jumping to 4.6% from 3.7% in June.
UK economic growth is likely to have accelerated in the three months to July, at least according to the NIESR<http://niesr.ac.uk/sites/default/files/publications/gdp0813press.pdf>, with an increase of 0.7% forecast. The figure topped the 0.6% rate the group reported in the three months to June.
The Day Ahead (All times AEST)
The ASX 200 looks set to follow Wall St into the red with SPI futures pointing to a fall of 19pts on the open. With crude, gold, silver and most base metals finishing lower overnight, coupled with renewed concerns over the prospect of Fed tapering, if the index is to somehow buck the global trend, the catalyst will likely have to come from the movements in Chinese equities.
A largely uneventful session for the AUDUSD overnight as less-dovish rhetoric from both the RBA and Fed ensured a session of gentle range trading. While there is some event risk with Debelle speaking this morning, we wouldn’t be surprised to see more of the same today as traders await fresh clues on the strength of both the Australian and US labour markets tomorrow. Support is found at .8950 with resistance kicking in at .9000, .9018 and again at .9040.
Domestic data releases today include housing finance numbers for June along with the AIG Performance of construction index for July. Following their decision to cut interest rates yesterday, Guy Debelle, Assistant Governor of the RBA, will also speak from 11.30am. On the regional front, New Zealand Q2 unemployment data will be released at 8.45am while Taiwanese trade data for July, a good lead indicator for the Chinese numbers when not augmented by abnormal trade flows to Hong Kong, will be released at 6pm this evening.
Data releases this evening include consumer credit and MBA mortgage market index from the US, Ivey PMI and building approvals in Canada, consumer confidence and CPI from Switzerland, German industrial output along with French trade for June. On the policy front, the BoE release their quarterly inflation report with the wording doubly-important on this occasion given the inclusion of a specific forward guidance.