Ahead of the game: July 10, 2023

After striving to overlook climbing yields in recent weeks, US equity markets were cornered this week as hawkish FOMC meeting minutes and robust labour market data saw Treasury yields surge.

Locally, the pivotal event was the RBA's monthly board meeting which maintained rates at 4.10%. The RBA's rationale for holding mirrored the reasons it paused its rate hiking cycle in April - to assess the impact of a cumulative 400bp of rate hikes over the past fourteen months. The RBA left the door ajar for future rate hikes, with an 88% chance of a 25bp rate hike priced into the rates market by September.

The ASX 200 responded favourably to the RBA’s decision to stay put early in the week, only to plummet in subsequent sessions following the release of weak PMI data in China and as bond yields soared. Whilst frail data in China does not bode well for the ASX 200 or the AUD/USD in the short term, it has heightened expectations of an imminent policy response from Chinese authorities.

From 10th July, the key events will encompass a speech from RBA Governor Lowe, inflation data in the US and China, and an interest rate meeting in Canada. Also, be sure to watch out for Fed Speakers Daly, Mester, Bostic, and Kashkari, who will make their remarks before the Fed's blackout period commences the following week.

• Fed Meeting Minutes emphasised need for further hikes due to persistent inflation and a tight labour market
• ADP employment report defied expectations, surging by 497k in June
• Australian RBA maintained interest rates at 4.10%
• Yields of US 10yr government bond and Australian 10yr bond climbed above 4% for the first time in months
• Weak Chinese data: significant drop in Caixin China Services and Composite PMI
• Amid Saudi Arabia and Russia's production cuts, WTI crude oil price rose 1.70% to $71.85
• Gold fell to $1911 and Bitcoin dropped below $30,000 due to risk sentiment and higher yields
• Volatility (VIX) index on Wall Street jumped 13.54% to 15.43.
  

• AU: Westpac Consumer Confidence (Tuesday, July 11 at 10:30 am AEST)
• AU: NAB Business Confidence (Tuesday, July 11 at 11:30 am AEST)
• AU: RBA Governor Lowe Speech (Wednesday, July 12 at 1:10 pm AEST)
  

• CN: CPI and PPI (Monday, July 10 at 11:30 am AEST)
• CN: New Yuan Loans (Tuesday, July 11, time TBA AEST)
• CN: Balance of Trade (Thursday, July 13 at 1:00 pm AEST)

• US: CPI (Wednesday, July 12 at 10:30 pm AEST)
• US: PPI (Thursday, July 13 at 10:30 pm AEST)
• US: Michigan Consumer Sentiment (Saturday, July 15 at 12:00 am AEST)
  

• UK: Unemployment Rate (Tuesday, July 11 at 4:00 pm AEST)
• GE: ZEW economic survey (Tuesday, July 11 at 7:00 pm AEST)
• UK: GDP May (Thursday, July 13 at 4:00 pm AEST)
  

Break down

• Australia

RBA Governor Lowe Speech

Wednesday, July 12 at 1.10 pm AEST

RBA Governor Philip Lowe is scheduled to deliver a speech titled The Reserve Bank Review and Monetary Policy at the ESA National Conference in Brisbane, a week after the last RBA Board meeting.

At the Board meeting, the Reserve Bank of Australia kept its official cash rate on hold at 4.10%. The RBA's reasons for staying on hold echoed partly why it paused its rate hiking cycle in April - to assess the impact of a cumulative 400bp or rate hikes over the past fourteen months.

"Interest rates have been increased by 4 percentage points since May last year", and today's pause "will provide some time to assess the impact of the increase in interest rates to date and the economic outlook."

The Governor's speech will be scrutinised for clues about what factors would prompt the RBA to act on its tightening bias next month and what factors might see the RBA extend its pause for another month. The rates market is pricing in a 92% chance of a 25bp RBA rate hike to 4.35% by September and is fully priced for two 25bp rate hikes by year-end.

RBA cash rate chart

• US

CPI data

Wednesday, July 12 at 10.30 pm AEST

Last month, headline CPI eased to 4% from 4.9% in April, driven by a decline in energy prices. Core CPI which excludes volatile items such as food and energy eased to a one and half year low of 5.3% from 5.5% in April.

This month US headline and core CPI are both forecast to rise by 0.3%. This would see the headline rate fall to 3.1% YoY from 4% in May, with base effects and falls in energy and food prices playing leading roles in the deceleration.

Core inflation is expected to fall to 5.0% YoY from 5.3% in May. Shelter inflation is expected to continue its downtrend, as are airfares and medical inflation, following a reset in health insurance inflation in October last year.

While inflation has likely peaked, core inflation has remained sticky, and the Fed will want to see more confirmation this month that downside progress is continuing and to ease market fears of further tightening.

US Core CPI chart

• CN

CPI data

Monday, July 10 at 11.30 am AEST

Subdued inflationary pressures in the world’s second-largest economy thus far have added to signs of a cooling economy, as soft domestic demand forced consumer prices to rise on average by just 0.3% over the past three months.

Another close-to-zero reading in June will likely echo recent calls for more to be done by Chinese authorities in the second half of this year, given that the PBOC Governor Yi Gang has previously downplayed deflation risks and highlighted “ample policy room” to support economic growth.

Over the past year, China’s consumer price index has matched or underperformed market expectations on 11 of the 12 previous readings. Given that China’s economic surprise index has recently reached a new low since January this year, the stage seems set for another lacklustre read.

The upcoming week will see a focus on China's trade data, set to be released on Thursday, 13th July 2023.

China CPI chart

• CA

Bank of Canada meeting

Thursday, July 13 at 12.00 am AEST

After keeping rates on hold for five months since January this year, the BoC threw markets off guard with a surprise 25 bp hike at its previous meeting, as policymakers conveyed their unease on the tight labour market, renewed strength in the housing market and still-elevated inflation.

Since then, fresh economic data has revealed some signs of a softer labour market and receding inflation, but market participants are not fully convinced. Rate expectations continue to lean towards the need for additional tightening, with a 25 bp hike expected at the upcoming meeting (55% probability).

Even if the policy rate were to be kept unchanged at the upcoming meeting, markets are now conditioned to believe that any rate pause could be to buy some time to assess the impact of policy tightening, as opposed to a clear end to the hiking cycle. Forward guidance from the central bank will be key in anchoring rate expectations, with any calls for additional tightening likely to be supportive of the CAD.

BoC official cash rate chart

Economics calendar

All times shown in AEST (UTC+10) unless otherwise stated