US Manufacturing PMI disappoints, Brexit drama unfolding, local GDP numbers in focus

A big week gets into full swing

Global markets are back online in earnest after the US Labor Day holiday, and trade has taken on a rather bearish-note. US President Trump stoked fears about US-China trade-relations in one of his trade-mark Twitter tirades. But of more lasting and fundamental concern, US ISM Manufacturing data was released overnight, and showed its first contractionary print in several years. And Brexit developments are taking a confusing turn, after UK Prime Minister Boris Johnson seemingly lost his majority in the UK House of Commons. The result of all this last night’s trade was typically anti-risk: stocks pulled back, bond yields have fallen, oil is down, and gold and the Yen are up.

US Manufacturing activity in contraction

The greatest shock to the market last night had to be the US ISM Manufacturing PMI numbers. It missed expectations quite considerably, printing at 49.1, and plunged into territory that marks a “contraction” in US manufacturing activity. A reminder: this data is one of, if not the best, forward indicators of US economic growth. It’s been weakening for some-time. But now, it would seem, US manufacturing activity has truly turned over – no doubt, in part, due to the impacts of the trade-war. Recession risk in the US is higher by virtue of the weak PMI numbers last night. That’s pushed Treasury Yields, the USD, and US stocks down.

Brexit a continued source of uncertainty

Britain’s Brexit soap-opera also provided a high-dose of uncertainty last night. That battle is approaching a very definite cross road now. Sentiment probably turned in relation to the matter during European trade, after UK PM Boris Johnson lost his majority in Parliament, raising hopes that the UK will avoid going to a general election that could potentially seal a “hard” Brexit at the end of the month. The Pound, as one might expect, has traded erratically in the past 24 hours, as traders gauge the mood of the House of Commons. It dipped briefly into the 1.19 handle yesterday, before rallying back towards 1.21 early this morning.

RBA dominated local trade on Tuesday

The RBA met yesterday, and as was assumed, opted to keep interest rates on hold at 1.00%. It was always going to be about the commentary from the RBA at this meeting, and judging by market pricing, the central bank delivered a slightly more optimistic message than expected. The RBA certainly highlighted the “downside risks” to their outlook from weakening domestic consumption and global “trade and technology disputes”. However, the RBA suggested it’s central thesis remains that growth ought to move back to trend levels in the years ahead, and that this would support the achievement of its employment and inflation targeting over time.

Economy okay, but rates lower for longer

Granted, this outcome, according to the RBA, would have to be achieved through a likely “extended period of low interest rates”. Nevertheless, the message delivered from the central bank yesterday was one that the market seemed to believe was a little on the “less-dovish” side. The AUD popped as the RBA’s policy press release was digested, as trader’s priced-out the roughly 15% chance implied in market pricing for a cut yesterday, and reduced their bets of a rate cut next month to about 50%. Bond yields climbed across the curve as-a-result, pushing the ASX 200 very modestly lower during yesterday’s local trading session.

Aussies spending less – sacrificing the fun-stuff

Australian economic data was also a large talking point locally, yesterday. The major story was last month’s Retail Sales data, which showed a disappointing quarterly decline of -0.1%. The AUD/USD pushed into the 66-cent level on the back of the news, while consumer stocks lagged the overall market yesterday. As flagged by the RBA, consumption in the economy is still sluggish, and perhaps even set for further declines. The sectors most plagued by soft consumption too was illustrative: general recreation and cafes, restaurants and takeaway outlets saw the biggest falls in sales, suggesting Aussies are cutting back on going-out and having fun.

Local GDP expected to underwhelm today

Local markets gear-up for the release of Australia’s quarterly GDP release today. Expectations are for a very underwhelming print. Annualized growth is tipped to come-in at 1.4%, in what would mark the weakest annualized growth number since 2011. Of concern, too, is there’s the slightly higher than usual risk of a downside disappointment today, with the quarter-on-quarter number estimated to print at a rather elevated 0.5%. There’s no shortage of folk calling for a disappointing set of figures. If that were to materialize, perhaps yesterday’s pricing-out of RBA rate cuts gets priced back in, pushing the AUD/USD back towards that 66-cent level.