Markets put-in a middling Monday

An overall quiet start

Global financial markets kicked-off the week in relatively lacklustre form. Stocks traded mixed. Asian and European indices edged higher after a Chinese data beat. But Wall Street was flat as a tack, despite the release of underwhelming Q2 results from Citigroup last night. IT stocks edged higher to keep the S&P 500 trading in line with its opening price. Bond yields dipped across the globe, as investors parked flow in safe havens ahead of a busy week. The US Dollar was a skerrick higher, but gold was flat, and the Aussie and Kiwi Dollar were the outperformers on the solid Chinese figures.

China data relief

The Asian session centred on Chinese economic data yesterday, and overall, it wasn’t as weak as expected. GDP met expectations at 6.2%, while Retail Sales, Industrial Production and Fixed Asset Investment beat economist estimates. Markets took well to the news, giving stocks and commodity currencies a modest lift, on an otherwise ambling day in the region’s markets. Although a welcomed development for market bulls, representing one risk temporarily removed, yesterday’s data will have little lasting impact. After all, the Chinese economy is still slowing down, and market participants have bigger issues to wrangle with as the week unfolds.

RBA Minutes heads local session

The highlight for local markets today will be the release of the RBA’s meeting minutes. Of course, as is well known, these minutes relate to the RBA’s last meeting, at which the central bank cut interest rates to a fresh record-low of 1.00%. Frankly, not much new is likely to come out of this document. But it should expand and clarify some of the key issues highlighted by the RBA at its last meeting. So though fundamentals are therefore unlikely to shift around this event, market participants have the opportunity to recalibrate pricing to reflect when the market thinks the RBA will cut again.

Judging the degree of uncertainty

The key word for central bankers globally right now is “uncertainty”. US Fed Chair Jerome Powell used it several dozen times during his testimony before US Congress last week. And the RBA adopted the same language in its press-release accompanying its last rate decision. In the Australian experience, this uncertainty is twofold: the first, the more general uncertainty plaguing the global economy amidst the ongoing US-China trade-war; the second, the more specific uncertainty surrounding the outlook for Australian households – and their propensity to spend the rate cuts and tax cuts coming their way, in light of high levels of private debt and sluggish wage growth.

Colouring the “spare capacity” issue

As such, again, the issue for market participants will be what the RBA says about the stubborn issue of “spare capacity” – the thing, right now, that stands in the way of its objective of restoring price growth, decreasing the unemployment rate, and driving overall economic growth. The question can be distilled as such: does the RBA think that another rate cut is necessary in order to achieve these goals, or are current interest rate conditions sufficient enough? It’s been the perennial concern for the central bank, and will likely remain so until the unemployment hits the 4.5 per cent it identifies as signifying “full employment”.

Rates markets suggest volatility possible

In the minds of financial market participants, the answer is skewed towards the need for another rate cut. As it stands, the market has baked-in a 70-75% chance of another cut by the RBA by December. Before that meeting, the implied probability of a cut is generally less than a fifty-fifty chance. It creates scope for volatility around future Australian economic events, as traders adjust to the new market-trends being shaped by the introduction of stimulus in the economy. The AUD will therefore be the centre of trader attention, especially as the currency attempts a foray higher, courtesy of a depreciating USD.

US Retail Sales to eventually steal the show

And that dynamic will soon come under scrutiny, too, meaning the markets attention on the RBA may prove fleeting. US Retail Sales are released tonight, with economists forecasting a paltry 0.1% expansion in sales for the US economy last month. US consumption is trending lower, and is expected to continue trending lower in the intermediate future, as the economic cycle unwinds. Considering consumption comprises nearly 70% of US GDP, and we are approaching a crucial US Fed meeting in two-weeks, tonight’s data will inform considerably the path of future Fed cuts – and by extension, the fortunes of the Dollar and global stocks.