Fear vs. Greed

August 06, 2024

Elias Haddad

Fear vs. Greed

Fear will continue to dominate greed until we get top-line data that shows the US economy is holding up reasonably well.

There are no policy relevant US economic data releases today.

RBA delivers a hawkish hold.

USD recovered some of yesterday’s losses mostly versus JPY. US equity futures point to a positive open and Treasury yields are up across the curve. The improvement in the US ISM Services index eased concern about a sharp deterioration in US economic activity. The Services ISM rose more than expected to 51.4 in July (consensus: 51.0, prior: 48.8) indicating sector expansion.

Meanwhile, US credit condition remains broadly healthy. The July 2024 Senior Loan Officer Opinion Survey (SLOOS) on Bank Lending Practices showed the net percentage of business and households reporting tighter credit conditions continue to edge lower.

San Francisco Fed President Mary Daly noted overnight a “policy adjustments will be necessary in the coming quarters” but pushed back against concerns the Fed was reacting too slowly to the slowdown in the US labour market. Daly highlighted that “underneath the hood of the labor market report, there’s a little more room for confidence — confidence that we’re slowing but not falling off a cliff.”

Regardless, financial market fear will continue to dominate greed until we get top-line data that shows the US economy is holding up reasonably well. Today’s US June trade data (1:30pm London) is not policy-relevant but next week’s July retail sales report is.

USD/JPY retraced some of yesterday’s losses while the Nikkei and Topix indexes rebounded by roughly 9%, after plunging by over 12% yesterday. Nonetheless, Japan’s June cash earning data somewhat validates last month’s Bank of Japan (BOJ) hawkish rate hike and can lead to a further unwind in the yen-carry trade (closing stale short JPY position).

Japan nominal cash earnings surged more than expected to 4.5% y/y in June (consensus: 2.4% y/y, prior: 2.0% y/y), reflecting the results of the annual spring labour-management wage negotiations. As such, real wages rose 1.1% y/y which was the first rise in 27 months and the highest since August 2021. The less volatile scheduled pay growth for full-time workers remained unchanged at a series high of 2.7% y/y in June (consensus: 2.9% y/y).

Officials from Japan’s Ministry of Finance, the Bank of Japan and the Financial Services Agency held a three-way meeting this morning to discuss recent market action. Nothing specific was announced. Instead, Japan’s Vice Finance Minister for International Affairs Atsushi Mimura said the government agreed with the BOJ to closely monitor developments in the economy and financial markets with a sense of urgency.

AUD/USD is firm around 0.6500 supported by a modest upward adjustment to Australian interest rate expectations. The RBA left the policy rate unchanged at 4.35% (no surprise) and stuck to its neutral policy guidance. Specifically, the RBA reiterated that “the Board is not ruling anything in or out” and “that it will be some time yet before inflation is sustainably in the target range”. The RBA also warned again of “the need to remain vigilant to upside risks to inflation.”

Importantly, the RBA reminded market participants it is in no rush to loosen policy. First, the RBA projects Australia inflation to be more persistent. Trimmed-mean and headline CPI inflation are now expected to approach the midpoint of the 2-3% band in late 2026 versus June 2026 at the time of the May forecasts.

Second, RBA Governor Michele Bullock pointed-out during her post-meeting press conference “the Board did consider rate rise” and rate cuts are “not in the agenda in the near-term.” Bullock added that expectations for rate cuts are “a little ahead of themselves”. The money market reaction was swift, Australian interest rate futures went from pricing almost 50bps to 25bps of cuts by year-end.

EUR/USD is trading sideways around 1.0950. Eurozone June retail sales is up next (10:00am London). Retail sales volume is expected to fall -0.1% m/m in June after rising 0.1% m/m in May.

GBP ignored the UK BRC same retail sales report. Same store sales recovered 0.3% y/y in July after falling -0.5% y/y in June. Overall, the recovery in UK real incomes and rising consumer confidence are expected to support consumption growth. This suggests the bar for an aggressive Bank of England easing cycle high.

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