Australian dollar flogged again as global economy teeters

DXY was up last night. So was CNY but not EUR:

The Australian dollar was monstered across DMs:

EMs were even worse:

Gold hit new highs:

Oil was belted:

Metals hit:

Miners slammed:

EM stocks are at the brink:

EM junk is over it:

The Treasury curve cratered:

And bunds:

And Aussie:

Stocks were smashed:

Westpac has the wrap:

Event Wrap

Eurozone July industrial production missed weak expectations on m/m basis (-1.6%m/m, est. -1.5%m/m), but data revisions meant that there was a sharp miss in the annual level at -2.6%y/y (est. -1.5%), with Eurostat citing weak capital goods production and highlighting weak production in Germany. This overshadowed the as expected 2Q Eurozone GDP (+0.2%q/q, +1.1%y/y). However, 2Q employment growth was also weaker on an annual basis (+1.1%y/y, prior +1.3%y/y). National 2Q GDP in Germany (-0.1%q/q as est., +0.4%y/y vs est. +0.1%y/y) and Holland (+0.5%q/q, est. +0.3%q/q), solid French 2Q unemployment data (8.5% vs est. 8.6%) and final CPI for July (unchanged) had minimal market impact.

UK July inflation report was firmer than expected (headline CPI +2.1%y/y, est. 1.9%y/y; core CPI 1.9%y/y, est. 1.8%y/y, RPI as est. at 2.8%y/y) but by remaining close to BoE’s targeted 2% was not seen as disruptive.

FOMC member Bullard saw good macro outcomes for the US, including a near 50-year low on unemployment and low inflation, but wondered whether inflation could get stuck below target, noting Japan’s case where the policy interest rate hasn’t been above 0.5% over the last 20 years and inflation has been low or negative. He cited a range of policy tools, including negative interest rates. There will be little further Fed commentary ahead of next week’s Jackson Hole Symposium, where the topic is “Challenges to Monetary Policy.”

US President Trump again criticised the Fed for keeping interest rates too high: “…Our problem is with the Fed. Raised too much & too fast. Now too slow to cut…”

Event Outlook

Australia: Jul employment is expected to rise 14k and see the unemployment rate hold at 5.2% (note Jun was 5.24% at two decimal places). Westpac is forecasting a 5.3% unemployment rate with a smaller 5k increase in employment. RBA Deputy Governor Debelle speaks on “Risks to the Outlook” at the Risk Australia Conference, Sydney 9 am.

Japan: Jun industrial production data is released.

UK: Jul retail sales are seen to decline 0.2% after a 1.0% increase in Jun.

US: Jul retail sales are expected to rise 0.3% with control group sales up a solid 0.4%. Jul industrial production is anticipated to increase 0.1% following a flat read in Jun. Aug NAHB housing market index is released.

Data was not happy. Europe is at the brink. Industrial production sank 1.6%:

GDP is just holding positive at 0.2% but it’s still deteriorating:

German GDP contracted 0.1%.

But the bigger issue is the EZ’s comparison with the US where tariff-inspired inflation is warming up.

The source is obvious in tradable goods:

With more to come:

Notionally the Fed can look through this given it ought to be a one off lift, pig in the python style, so long as there is no wage push inflation response. But it’s still enough to spook markets. And the Fed does is in no hurry. Dove James Bullard was sanguine:

Federal Reserve Bank of St. Louis President James Bullard called current U.S. economic conditions “quite good” and said the goal of the central bank’s policy framework review should be to avoid a Japan-style deflationary trap.

“Unemployment is near a 50-year low. Inflation is low and stable,” Bullard said in an audio recording posted on the bank’s website Wednesday. “The economy’s not in recession, so it’s actually a good time to do strategic thinking for the future.”

The review has been underway for months and Bullard will host a Sept. 4 “Fed Listens” event at his bank to get community feedback.

Janet Yellen didn’t help:

Former Federal Reserve Chairman Janet Yellen said the markets may be wrong this time in trusting the yield curve inversion as a recession indicator.

“Historically, it has been a pretty good signal of recession, and it think that’s when markets pay attention to it, but I would really urge that on this occasion it may be a less good signal,” Yellen said on Fox Business Network. “The reason for that is there are a number of factors other than market expectations about the future path of interest rates that are pushing down long-term yields.”

Trump is tearing hair out:

And so the EUR sank and the US dollar rose which, as we know, is pure poison for emerging markets, commodities and global growth, especially in the middle of a Chimerican trade war.

Stocks will need to remind the Fed who is boss with good old fashioned puke.

More downside ahead for the Aussie dollar!

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

Latest posts by Houses and Holes (see all)


  1. Deutsche bank share price is in free fall, that will trigger a European banking crisis, bond yields around the world collapsing.
    I am bringing my forecast forward, Aust banks will go under before Xmas and require bailout, cash rate and Aussie bond yields at or below zero, QE and Aussie bank bail in 2019
    There is nothing they can do and they knows it, Deutsche bank share price is in free fall, that will trigger a European banking crisis, bond yields around the world collapsing.
    Stock market crash Q4
    Aussie house prices down at least 30/40% by end of 2020
    It’s awwwwwwnnnnn and it’s going to be very frightening


    • Mining BoganMEMBER

      We deserve it. Old Hummie says so…

      “The Messenger of Allah cursed the accepter of interest and its payer, and one who records it, and the witnesses, and he said: They are all equal in terms of sins.”

    • I think I wrote things twice by accident but it’s probably what I should have said, because it needs to said twice

    • Not really related but what’s the quickest way to get my money out of the bank? I’ve slowly been taking 1k out each day through ATMs, but will take another month or so to clear it out that way.

      • Mining BoganMEMBER

        Guns and balaclavas. Don’t hurt the staff. If you happen to find yourself in the C-suite open up.

      • MB you fool I need the cash out first before I can get a gun, the black market won’t accept my Visa.
        @Dom can always do a bit of both and have an Irish coffee

      • What for? The first and easiest thing that will be ‘outlawed’ if things get really nasty will be – cash. India gave us a prerun of that a few years back ( just made the existing notes expire via a new issue) and if ‘they’ need control of The System, cash will be the first commodity to be banned – bank accounts will be the only means of payment. (NB: Yes. We can trade it among ourselves – barter if you will, but that is unlikely to last)

      • Machines been spitting out 50s for me, got a whole stack of the new ones earlier this week. What’s the chance the bail in happens around Christmas, will become the most depressing Christmas ever.

      • Consider a diversity of defensive assets, as well as AUD cash. This might inlclude USD, AUS and US govt bonds, a bit of gold and/or gold shares.

        I wouldn’t go full “prepper”, personally, just be conservative for now.

        Not advice, just my 2c

        PS….I don’t think the AUD govt will bail-in cash; I think, instead, the RBA will perform QE and print, as required…..bailing-in would cause people to lose faith in the system really quick, and would cause all sorts of political and social problems. I think the LNP are dumb, but not that dumb…

      • Mining BoganMEMBER

        Asura, your thinking is too conventional. You don’t need money, just need to be with the right crowd. You’ll need to be to survive the coming apocalypse. See the Walking Dead for tips.

      • @janet I think if they wanted to outlaw cash they would give an offer to put it in the bank first. And if you have it in the bank then you will lose it in the bail in regardless. I would invest in gold but still haven’t got my application done yet and people also said that could be outlawed as well so not many choices regardless.

      • Looks like two pages could go up on the weekend. The traditional Weekend Links, and a new Weekend Preppers page.

      • Burbwatcher, you say “bailing-in would cause people to lose faith in the system really quick”. I disagree, this is straya, if anything it’ll put confidence in the system, take people’s savings and use the money to offset mortgage holders debt.

        A debt jubilee is almost guaranteed for Australia. i.e. take people’s savings, wipe off mortgages, people with new found equity will borrow more and housing will inflate.

        The legislation is already in place.

      • @zentao
        I tried to follow my banks guide on how to set it through the online account but for the life of me i couldn’t find it, only the setting for paying other people which i did increase just in case its the same setting but no such luck when i went to withdraw. its not too much a problem anyway, just frustrating i guess.

    • Geez mate, that’s a bit bleak. I was gunna start the day with a coffee but I may just skip that and hit the bottle instead.

      • Dominic it’s coming
        Make sure you have cash on hand
        $10,20,50 notes hidden
        $100s too big to change

      • Take your pills bcnich!

        I don’t think a depression is coming. Deutscheland will bail out Deutsche when needed. Then it’ll be more central bank innovation. Hopefully helicopter money variety.

        Garden variety global recession coming in 2020. Will be worse here owing to Hong Kong war.

      • I think that comment is very immature HNH
        If you look back at my comments I believe I have a reasonable track record over the last 24 months to be at least express and be listened to.

        In Australia every is entitled to express a view

        I do think you are right re Deutsche Bank rescued by ECB or Germany but it just makes the problem bigger
        The ECB hold 50% or so of Euro Sov Bonds
        The ECB isn’t truely a central bank with sovereignty over Europe
        So what happens when ECB can’t keep printing and interest rates soar in Europe
        I think you’ll see ECB potentially go under or in serious problem and Euro break up in next 18 months
        Time will tell and I’m happy to admit I’m completely wrong and make an apology on this site

        Also the nurse doesn’t give me medication until after breakfast
        And don’t forget, the people with the most foresight are all on medication or at least should be on medication

        Ps what’s a garden variety global recession ???
        PSS we had a Euro sovereign bond crisis in 12/13 around
        We had a GFC where the underlying problem were never fixed

        I think what I’m saying should nearly be obvious

      • Doesn’t it all depend on the size of the derivative book??? Wouldn’t want to be a counterparty. What are you like at valuing derivative risk?

      • Bcnich, I’ve been hearing about the collapse of DB for over a decade now. I don’t think it’ll happen.

      • @fitzroy
        The whole DB derivative situation is a little misunderstood. The issue for the bank is that it has huge amounts of capital tied up against highly illiquid, long-dated derivative positions. The profits on these derivative trades (10, 20, 30yr duration) were booked upfront. In other words, shareholders and traders all benefitted when these profits were booked (via dividends and bonuses) when they should have been distributed across the full duration of the trades. So you have all this tied-up capital unable to generate any earnings for shareholders, plus a litany of regulatory fines (running into tens of billions of dollars) since the GFC and what you have is an institution that has been ‘asset-stripped’, to coin a phrase (by employees and regulators).

        It is true that these derivative positions represent a huge threat if the bank were to fail, however, it is too systemically important and will be recapitalised some or other way but will remain a zombie institution until all these legacy trades roll off and free up the associated capital.

      • JB
        Because draghi had kept interest rates at zero and providing life support
        He’s gone in 2 months

      • 64 trillion Q
        CASH ON HAND

        Think you can sit very short 1 year USD treasuries
        Think you are ok in Aussie and US Bonds for a short term
        MB might have ideas

        Think GOLD is going to fall first

        At the right time you have to move to tangible assets

        Could someone give me ideas ???
        I’d like to know also

        CAPITAL PRESERVATION fxxx return

      • Just on the 250k guarantee I am ensuring none of my accounts at each ADI is more than 100k. I suspect it will be easy for the goal posts to be shifted once it is necessary.
        Also spreading risk of bank failure out. I think bail out more likely than bail in but good to be prudent…

      • BW
        I’ve thought so much about bail in and have debated and discussed with very smart people
        It all gets back to politics
        They cannot led a pensioner starve and freeze to death
        They have to protect to $250k
        I’m not sure if you can spread $250k over 4/5 banks like last time
        Don’t think scomo will take 100% over an amount
        Think haircut over $250k, your guess is as good as mine

      • bcnich
        I have to take issue with your stance on gold. Contrary to popular belief gold does well in both inflationary and deflationary periods. Any period of instability or uncertainty. It is no one’s liability. You can physically hold it – a bird in the hand is worth two in the bush etc. Gold does particularly well when the financial system is vulnerable. The thing with deflation (or the threat of it) is that you know, for dead certain, what the policy response will be. Helicopter money is coming and it won’t have a deflationary effect, let me tell you that for nothing

      • Dom
        Gold may go up in AUD
        I think in USD gold will go down first
        I really feel all commodities will fall first as global recession really takes
        Let’s see it’s going to be very hard to navigate through this
        If you have physical gold in AUD just shove it in a safe and don’t worry

    • Place your bets place your bets 2 months to go you got be in to win no country for old australians

    • Serious question : What makes you think central banks won’t bail out the system?

      Theyve done it before
      What would stop them doing it again ?

      My opinion is that bail in is a fantasy

      State governments, utilities and major corporations have domestic bank accounts

      There’s no way they’re allowed to get wiped out – it would be literal mad max if they can’t pay wages or suppliers

      • It’s going to be messy in Asia (here!) and the EU. Expect Japanese and European banks to finally be put out of their misery. Far from doubling down on NIRP, politics will head off any more CB lunacy. There ain’t gonna be no Merkels or Macrons post-2020 recession, only a whole lot of populist candidates fanning the rage of a whole lot of p!ssed off people. Mario will be the last of that vintage of CBers, and he’ll step out of the building having left it on fire.

      • Savings are to small a % of the outstanding I think it would be pointless, however this is what happened to Pyramid Building society in Geelong and it ultimately cost the Victorian taxpayer their highly profitable state bank.

        Then we had a very very hard recession much worse than other states I think. NB these are recollections from before I had the slightest understanding of financial systems, so could be very wrong…

      • How can savings be a small part?

        We’re talking about M1 aren’t we?

        It’s all somewhere in the Australian banking system

        As far as populism goes, nothing more populist than preventing people losing all their savings

      • Who said bailouts are dead, buried and cremated?

        If something happened once it can surely happen again.

      • I’m with BC here, play against autistic kids in online FPS games and they cream you, they just see sh$t we don’t

    • As HnH said “Take your pills bcnich!”
      This sell off happens every August. (European Summer)
      When central banks buy debt, the debt is wiped.
      ECB and FED will come to the rescue. It worked last time, so they know what to do this time, without hesitation.
      US companies are buying $1trn of their own stock every year. Thats 5% of market cap.
      Powell will cave in to Trump demands.
      When interest rates go to zero, no one defaults, not even Deutsche Bank.
      Search for yield means stocks go up.
      Buy the dip. (after you take your pills)

      • That definitely sounds like something that can go on forever with no long term consequences.

      • I have written at 6800 we would see 5800 and down 19000 to 22,000 in DOW
        I am buying again
        A crash can be defined as a fall of 20/25%, it is defined as a crash based on speed of the fall
        One of the big names said this about speed of fall
        You have to be joking re the default thing and some of the other things you said
        I think you’ll be disappointed re central banks saving you this time
        I believe ASX if we see 5700/5900 I’m buying again for 7,000 so agree
        My concern buying index is what happens to bank share
        Can RBA buy equity in banks to save them ????
        I have taken my pills and I feel even clearer and more certain of my views
        In fairness give me the time
        I said I’ll admit in wrong in 6 months if none of these things happen

      • Charts are for rearview mirrors.

        Anyways, both the directors and the upper management recently bought meaningful numbers of shares. She will be fine.

  2. Proving that it’s all about perspective:

    Seeking Alpha: Stocks extend declines

    Zerohedge: Carnage!

      • Undoubtedly: Seeking Alpha is jam-packed with deluded stock bulls who see no end in sight for the current run up.

        Stocks are cheep, cheep ..

    • Dom, are we able to back track to your comments about DB derivatives and without being negative I am no more across what these things are from all the discussion I have read and had. I have these questions you may like to comment on.

      Are derivatives speculative like an insurance agreement is? Im think hedging Im thinking Lloyds of London

      What is the utility or benefit on offer to the parties.

      Why are the transaction over the periods you mention, seeming to reflect bond and mortgage time frame, coincidence?


      • Tony I’ll be as brief as possible (with no intention to be rude):
        The original derivatives arose from a need to hedge risks, on both sides of fence i.e. corporate/commercial risks as well inside financial institutions. Investment banks are typically best qualified to supply ‘solutions’ to the market because they have the ability (most times) to lay off that risk to another counter-party. Sub-prime mortgages are not derivatives but the packaging of them and selling them as bonds to investors is an excellent example of dispersing risk.

        Can they be used speculatively? Definitely. If a trader takes a view on interest rates it’s often more efficient to do it via derivatives than say using bonds but they’d have to weigh up capital costs and other risks. Hedge funds too although these would be ‘macro’ views rather than a speculation (which sounds grubbier)

        Credit Default Swaps are the derivatives that most resemble ‘insurance’ i.e. the buyer of protection pays an ongoing fee and receives a payoff if things go t!ts up with company they’re exposed to. Banks often buy this type of protection if they’ve loaned a company a lot of money but more often if they’ve extended a bridging loan pre-bond deal where the risk will be dispersed.

        Other parties often want protection from risks – pension funds may want complex asset/liability matching using interest rate swaps, inflation swaps, credit exposure for yield enhancement. The list goes on. Corporates looking to raise a lot of money in the bond or loan markets may want rate locks to protect against rising yields while they market their deals. There are cashflow management tools, all sorts. It’s varied and extensive. The best insight is to speak to the Treasury department at a multi-national — FX hedging, rate hedging etc etc. The daily turnover globally in derivatives is just huge. Oh, and tax liability mitigation is hugely popular, you won’t be surprised to learn. Complex webs of companies around the world with a multitude of derivatives set up between them all — it’s seriously mind boggling.

        The time frames I was quoting are more likely to reflect complex bespoke transactions and linked to pension & insurance liabilities. Mortgage risk in most jurisdictions Aus, UK etc is pretty easy to manage as it is generally out to 5yrs max — risk can be packaged and sold off while interest rate risk can be hedged easily. The US is really the only country with 25-30yr fixed rate mortgages because they have a deep Treasury bond & swaps market with those kinds of tenors. These long-term transactions are massively difficult to hedge and therefore come with a high price tag. The ‘profits’ booked are colossal given they NPV a large notional over a long time frame. Goldman Sachs infamously booked a $700m profit on a single derivative trade they set up for the Republic of Greece to help hide their true indebtedness ahead of a suitability test before being admitted to the EU.

        I’ll stop there but if any other Q’s arise let me know

  3. Complex Carbon Unit

    No it’s not going to happen ! Iv booked my flight to fantasy island il be safe their !!!!
    Iv had a feeling the sh1t was going to hit the fan sooner or later, let’s wait and see !

    • I bought some US 30yrs a week ago… maybe now i can be in Burbwatcher’s Timing Club?!

      • C.M.BurnsMEMBER

        Arrow, did you buy newly issued 30 year Treasuries on the secondary market ?
        Or older 30 year Treasuries with a maturity date earlier than 2049 ?

      • The former (more or less) – bought on the secondary market, maturing Feb 2049. So i suppose they are really 29.5 year bonds 😉

  4. Janet Yellen:

    While the inverted yield curve has been a reliable recession indicator in the past, this time is different!

    If there is a God he (yes, it is a ‘he’, get over it ladies) would round up every central banker past (20 yrs) and present and toss them in the fires of hell.

    • So investors move into long term bonds pushing yield lower, Fed holds, yield curve inverts correct?
      For the US to be in recession needs 2 consecutive qtrs of GDP contracting, I don’t see this happening in this qtr or next, or am I missing something?

      • The way it works is this: the curve starts flattening then eventually inverts as an economic boom (growth period) gets long in the tooth. This dynamic occurs because the Fed raises rates at the short end to cool an expanding economy while the market then anticipates the cooling economy in the medium term future by buying the long end i.e. driving long rates lower. That’s how the curve inverts.

        The recession alarm goes off when the curve starts to steepen (post inversion) because the Fed starts the easing cycle to mitigate the impact of a slowing economy. The long end, meanwhile anticipates the easing cycle (loose money) by selling off i.e. yields start to rise. Official recession, on average, has only begun 6 or 7 months after the curve starts to steepen so, if past is prolog, a recession shouldn’t begin until 1st half next year. Bear in mind that we haven’t yet begun the steepening phase of the curve yet but this won’t be far off if the stock market continues to misbehave as Jay Powell will be forced to cut hard

        We live in strange times and with all this intervention by authorities in rates things may start to pan out in different ways but time will tell.

      • probably why several are calling for US recession in 2020. Inversion precedes recc by 6 to 18 mths historically ….. from what ive read

        ….yep like what Dom said

  5. BAML: “For the ten [2/10] inversions back to 1956, the S&P 500 topped out within approximately three months of the inversion six times (1956, 1959, 1965, 1973, 1980, and 2000).

    The S&P 500 took 11 to 22 months to peak after the other four inversions (1967, 1978, 1989, and 2005)

    Within 3 months sounds about right… how many months since the 3m/10s inverted? 5? With record treasury issuance and no foreign CB bid, equities (already floundering) will be starved of liquidity just in time for another historic September/October shake-out. Is the top in? Does it matter? Picking up pennies in front of a steam roller at this point.

  6. USD goes up and gold follows. In the past gold used to fall when USD was moving up. What if I am right and gold will not fall (not by a lot) and overall direction will be up.

    • If you look through history there are plenty of periods when gold and the USD have been positively correlated. When I hear people insist they are always negatively correlated I shake my head in dismay.

      And it makes perfect sense in certain circumstances: if all central banks were printing money furiously because of some crisis, the dollar would be strongest on a relative basis against its peers but as long as the dollar money supply was increasing at a faster rate than the gold supply was, then gold would naturally rally in Dollar terms and the two would (optically) be appreciating in tandem. The other way to look at it is that gold goes nowhere – the dollar does i.e. when gold goes up in price it means the Dollar (or other currency) is actually falling in value. The gold price is simply telling you what investors think of alternative currencies.

    • St JacquesMEMBER

      Yep, they are the world’s two havens, so they might not move in lock step up or down or even opposite directions,m but they both benefit from frayed nerves. Today “diversification” means having both. USD assets are the main game but gold is a kind of insurance policy, well that’s my guess, hence the both the gold doomsters and boomers prophecies have both been wrong for many years now.

      • 200b to be worth roughly the same lol.. but if we have an EMP strike and all electronic vehicles are broken. Probably a lot more. I remember seeing 1 get paddock beaten for hours and it never quit. Caught on fire twice, kept going… What a trooper.

      • St JacquesMEMBER

        btw when I said USD assets, I meant all assets held in USD, not just the currency itsefl. I’m not an fx trader and so just sit on the sidelines pleased that my USDs I purchased years ago get more valuable. Cheers

  7. And this is why I’ve been sitting on the sidelines. Everything got exciting overnight while I was sleeping…

    • Yeah.. sleeping soundly no doubt. My view on all this is not gold, but silver. 70% mined as a byproduct, needed by lots of different things. If mining for base resources drops due to recession, silver production will go off a cliff. inelastic supply meets inelastic demand in a good way (for some). fingers crossed 🙂

  8. Geesh you guys are soooo negative – just turn the notebook upside down and all the graphs are happy pictures. My guess that is why the RBA migrated employees to notebooks – a lot safer from a workplace health and safety perspective having them turn notebooks upside down than desktops and screens