Employment prospects looking better despite soft patch
The Westpac-Melbourne Institute unemployment expectations index was flat in August, after strong gains in the previous three months.
The annual pace continues to ease, dropping from 3.2% in Jul to a contraction of 0.7% in August. However, as there has only been one decline in the last three months, the trend is still rising.
The trend level of the index is 23% higher than its long-run average. It suggests we are still in a soft patch for the labour market and that unemployment is set to continue to rise in the year ahead.
By city, the largest deterioration has occurred outside Sydney and Melbourne.
WA is now the most pessimistic about the labour market and Queensland is not far behind.
The Melbourne Institute survey of consumer inflation expectations eased 0.2 percentage points to 2.2% in the year to August. Inflationary expectations remain anchored around the midpoint, or lower half, of the RBA's target band.
In addition, the net balance of those households expecting price rises versus those expecting falls has eased back to 64.1% and is below the longer-run average of 75.6%.
Tapering fears were initially to the fore during a volatile evening. Amid the large batch of US data overnight the market focussed on a near six-year low in US jobless claims and an inflation outcome that was in line with market expectations.
That pushed US interest rates and the US dollar higher, but US equities lower. The US dollar then sold off.
Geopolitical concerns with unrest in Egypt escalating likely played a role.
The S&P 500 share market index in the US had the biggest one-day percentage drop since late June as forecasts from Cisco Systems Inc and Wal-Mart Stores Inc.
Disappointed and improving US economic data pushed bond yields higher amid concern the US Federal Reserve will soon start tapering its quantitative easing program.
The S&P 500 index finished down 1.5% and the Dow Jones closed down 1.4%.
US 10-year Treasury bond yields initially surged from 2.70% to 2.82% - a two-year high - in response to the jobless claims data, but then retreated to as low as 2.73%.
An influential advisory firm opined the Fed would start tapering in September.
A Reuters poll released on Wednesday showed a majority of economists expect the US Fed to reduce bond purchases at its September 17-18 policy meeting, with a consensus expecting that the central bank would reduce purchases by US$15 billion initially.
AUD/USD experienced some sharp swings overnight, rising from 0.9120 to a high of around 0.9191 and then dropping quickly to 0.9059 before moving back up to 0.9140.
It reflected the volatility across the broader fx market overnight, as markets digested the big batch of US economic data and rising geopolitical problems in the Middle East.
The 0.9200 level remains resistance for the AUD. Any near-term break above it would see the AUD target 0.9300. Any weakness, on the other hand, should be capped to above 0.9000 in the short term.
The US dollar index initially rose on the jobless data, but later reversed lower. EUR/USD initially fell from 1.3300 to 1.3206 but then rose to 1.3363. USD/JPY rose and fell, tracing 97.60-98.65-97.25.
Commodity prices experienced a choppy session overnight. Both gold and oil closed higher at the end of the trading session, boosted higher by tensions in Egypt.
Gold benefited due to safe-haven flows and oil benefited because there are worries in the market that the Suez canal could be impacted if the escalation continues. Instability in Libya is also contributing.
A story was released by Shanghai Securities yesterday which cited a bank report suggesting China will cut bank reserve requirements once or twice more this year.
Job advertisements rose by 0.3% in June, taking the annual growth rate to 4.5%.
The performance of manufacturing index published by the Bank of NZ and Business NZ rose to 59.5 in July, from a revised 55.2 in June.
It is the highest since June 2004 and with the reading above 50, it indicates that manufacturing is expanding.
Meanwhile, the ANZ measure of consumer confidence index rose to 123.0 in August, from 119.8 in July.
The gauge remains near the three-year high of 123.9 recorded in June.
Retail sales rose 1.1% in July, due to a 2.5% surge in food sales.
There was a large batch of data released overnight in the United States.
Employers fired the fewest workers last week in the US since before the recession began nearly six years ago.
The number of claims for jobless benefits fell 15k to 32k in the week ended August 20, the least since October 2007.
The data suggests jobs hiring might accelerate in coming months.
Consumer prices rose 0.2% in July. Energy prices rose 0.2% (gasoline 1.0%), food was up 0.1% and the core rate rose 0.2%.
This data is benign but not weak, with falls in auto and apparel and flat drug prices in the July PPI, not showing up in the CPI yet.
The annual pace of gain for the headline accelerated to 2.0%, while the core annual rate edged up to 1.7%.
Industrial production was flat in July and revised to a weaker 0.2% rise in June. Factory output fell 0.1%, led by falls in auto and machinery production.
Separate reports showed manufacturing in the Philadelphia and New York regions continued to expand but both indices fell from their previous levels.
The New York Empire manufacturing index fell from 9.46 in July to 8.24 in August, but remained above the critical zero level which indicates manufacturing is expanding.
The Philadelphia Fed index also fell in August to 9.3, from 19.8 in July.
The NAHB housing market sentiment index soared from 56 in July to 59 in August, the highest level since November 2005.
This index is a strong leading indicator for US housing activity.
TIC data for June showed net long-term outflows of $67bn, the largest o five consecutive months of outflow, and total outflows of $19bn.
Private foreign investors were net sellers of all types of long-term assets, seeking higher risk and return outside the US.