The focus on the US data side has firmly been on the retail sales report for July and the print hasn’t disappointed those who have been warming to buying USD’s in a ‘phoenix from the ashes’ type trade. Retail sales grew 0.6%, with the annualised print a very impressive 3.2% pace. Strong contributions from auto’s and home improvement store sales have helped.
Importantly, the core retail control group (the element of consumer purchases that feed directly into the Q3 GDP calculation) increased 0.5%, while the June control group figure was also revised higher and economists would have raised their Q3 GDP tracking estimates by 20-30 basis points on this development, with consumption driving this change.
We have seen another reasonable sell-off in US fixed income markets across the curve on both nominal and ‘real’ (or inflation-adjusted) yields, with the US ten-year treasury (by way of example) currently sitting at 2.27% (+5bp on the day). The market was still taking some inspiration from New York Fed President Bill Dudley comments, who suggested he was still in eyeing a December rate hike. However, add in the good retail sales print and we can see interest rate markets responding and the the probability of a December hike has risen back to 40%. Recall, this sat at 26% on Friday.
With the move higher in US yields, we have seen further signs the USD has put in a base, but there is still not the conviction to really cover what are huge short USD positions as of yet. Traders are saying that if they want exposure to a strengthening USD then they do it on a selective basis and the gains are not going to be broad-based.
Technically, the USD index broke above and closed through the July downtrend on 4 August has been consolidating since. However, overnight we saw the index making an attempt to break through the 8 and 9 August highs. We did see a wave of supply coming in at 93.92 and this would have been on a number of radars USD/JPY longs are working nicely, with the pair hitting a session high of ¥110.82, but again, haven’t been able to hold the highs here. GBP/USD has also been well traded and the pair is looking vulnerable for a move into $1.2811 (the 12 July low), helped by a slight below expectations core CPI print.
AUD/USD has seen modest downside and this should be on the radar, as the bears are getting an upper hand here and there are small signs of technical damage. Price is now trading just below the $0.7850/35 area (representing the April 2016 high and 38.2% retracement of the 2014 to 2015 sell-off). As mentioned yesterday, the pair has been trending lower since late July, but now a weekly close through $0.7835 would open up greater downside.
All eyes on Aussie quarterly wage data at 11:30am AEST and while the prospect of an in-line print of 1.9% is high, the risks are probably to the upside here. With this in mind, a print of 1.8% would be a surprise to the market and see the interest rate markets pricing out some of the 11 bp of tightening priced through to May.
As mentioned, US equity markets closed unchanged, and by way of sector guides for Australia we can see energy down a touch, with financials unchanged. SPI futures have moved in a 16-point range in the night session and sit two points higher than where they were at 4:10pm AEST and the close of the ASX 200. So the call as we stand is for a fairly uneventful open, although our ASX 200 call sits at 5742 (-15 points) and this accounts for CBA going ex-dividend and subtracting a chunky 17 points from the index. Keep in mind that it’s going to be a report-heavy morning with names including CPU, CSL, FXJ, ILU, ORG, SEK, SGP, SHL, VCX and WPL in focus.
On the commodity front, spot iron ore has dropped 1.4% to $73.68 and iron ore futures continue to trade with a heavy tone. Gold has reacted negatively to higher US real yields and USD/JPY, with price likely to weigh on the gold miners and the GDX ETF (gold miners ETF -1.3%). Copper is also lower by 0.9%, while US crude closed unchanged at $47.61 and is eyeing the weekly inventory data tonight, with the market looking for another sizeable drawdown in stocks.
In a market where moves have been limited, Bitcoin remains the poster child of volatility and range expansion. The session range of $615 has put every other market to shame. We have seen strong flows here and technically, we can see price just holding Monday’s low and avoiding a bearish key day reversal. The weekly chart of Bitcoin is what interests the most here and price action is showing massive indecision to push price higher here. A battle is underway and really needs to resolve itself. I suspect a move into $5000 or below $3577 (last week’s high) materialising soon enough.