Australian dollar sinks as US consumer powers on

See the latest Australian dollar analysis here:

Macro Afternoon

DXY was firm last night as EUR and CNY fell:

The Australian dollar was weak against DMs:

But EMs were even weaker:

Gold hit new closing highs:

Oil held on:

Metals too:

Big miners were mixed:

EM stocks are still at the brink:

Junk is not well:

Bonds were bid everywhere:

Stocks eased:

Mush of the data for the evening was in US consumer and housing markets. Consumer confidence held up well against the volatility:

The Conference Board Consumer Confidence Index® declined marginally in August, following July’s rebound. The Index now stands at 135.1 (1985=100), down from 135.8 in July. The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – increased from 170.9 to 177.2. The Expectations Index – based on consumers’ short-term outlook for income, business and labor market conditions – declined from 112.4 last month to 107.0 this month.

“Consumer confidence was relatively unchanged in August, following July’s increase,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions improved further, and the Present Situation Index is now at its highest level in nearly 19 years (Nov. 2000, 179.7). Expectations cooled moderately, but overall remain strong. While other parts of the economy may show some weakening, consumers have remained confident and willing to spend. However, if the recent escalation in trade and tariff tensions persists, it could potentially dampen consumers’ optimism regarding the short-term economic outlook.”

Perhaps because property markets are too. House prices are rising around the pace of income, aided by the bond bid:

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 3.1% annual gain in June, down from 3.3% in the previous month. The 10-City Composite annual increase came in at 1.8%, down from 2.2% in the previous month. The 20-City Composite posted a 2.1% year-over-year gain, down from 2.4% in the previous month.

…Before seasonal adjustment, the National Index posted a month-over-month increase of 0.6% in June. The 10-City Composite posted a 0.2% increase and the 20-City Composite reported a 0.3% increase for the month. After seasonal adjustment, the National Index recorded a 0.2% month-over-month increase in June. The 10-City and the 20-City Composites did not report any gains. In June, 19 of 20 cities reported increases before seasonal adjustment, while 17 of 20 cities reported increases after seasonal adjustment.

“Home price gains continue to trend down, but may be leveling off to a sustainable level,” says Philip Murphy, Managing Director and Global Head of Index Governance at S&P Dow Jones Indices.

“The average YOY gain declined to 3.0% in June, down from 3.1% the prior month. However, fewer cities (12) experienced lower YOY price gains than in May (13).

From Goldman:

Our estimate of the lag time between changes in interest rates and housing activity suggests the bulk of the boost is yet to come. … we update our outlook for the growth boost from housing via both the home building channel and the impact of refinancing, mortgage equity withdrawal, and housing wealth effects on consumer spending. Our model points to a healthy rebound to a 4% growth pace of residential investment in 2019H2 and an increase in the total contribution from housing to GDP growth from -0.05pp in H1 to +0.15pp in H2.

That makes sense so long as the global slowdown does not shock stocks. Finally, the regional Fed surveys are still OK, via Calculated Risk:

The New York and Philly Fed surveys are averaged together (yellow, through August), and five Fed surveys are averaged (blue, through August) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through July (right axis).

It’s all definitely slowed but isn’t collapsing by any stretch. And the bond bid has already injected huge stimulus.

It’s still wait and see for the Fed on anything more aggressive that insurance cuts. Adding to AUD downside risk. And given the most likely shock to really harm US growth will come from China’s direction, there’s a natural hedge in the AUD if the Fed is forced to slash and burn.

David Llewellyn-Smith
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  1. The only big thing is US 10 year bond and Gold
    It’s telling us something big is close
    AUSSIE gov bond yields are getting close to cracking lower
    Once we break this 0.80s level in the 10 year our bond yields are going down quickly
    There is simthung very big coming SEPT OCT
    We need to Be prepared

  2. The smart money invested in bonds/gold etc a couple of years ago when certain indicators started heading in the wrong direction, even though employment and other lagging indicators were strong.
    At the moment, it is the usual late to the party guests who will have to climb a wall of worry to make money.

    In the short term, gold investors will need to consider the likely outcome of Trump’s trade dispute with China, and long term bond investors will have to focus on whether a change in government in the US will see changes to the Federal Reserve Act.

    There is certainly a lot more risk now.

  3. +1 to all of the above

    Not just bonds, but the RUT is well off its high (put that high in a year ago!). Even the other indexes, they’re just treading water; we’ve had the bullish “mid cycle” cut, but they are still sucking wind.

    The global economy seems absolutely knackered to me. Hard to see where the next burst of global growth comes from. Too much dead weight accumulated over a very long cycle, with too little room to stimulate.

    I think we’re just waiting for a low liquidity environment to coincide with a risk-off event (will later be dubbed the black swan event of this cycle). Will tighten financial conditions and blow-out credit spreads in a self-fulfilling loop.

  4. Why does everyone think there’s no room for fiscal stimulus ?

    That’s what they’ve been building towards with talk of UBI, MMT, AGW amelioration

    They have plenty of room to stimulate even though neither unemployment nor inflation are that low

    But that’s the thing: the real economy is actually going quite well

    This is a financial crisis (again) – not a real one
    hopefully we see them nationalise the banks this time

  5. US has already done the fiscal stimulus, which is why they’re running record deficits at present. They could do more, like infrastructure, but the Dems will certainly block it this close to an election.

    Re: MMT, Lacy Hunt on Macrovoices @ 40:00 says it best:

    The MMT push will come during the next recession as political will is hardened

    As for China, they’ve already been doing fiscal stimulus. The problem is that they’ve done so much fiscal stimulus that they are now massively overbuilt, with new debt immediately equating to bad debts. You can see it in the lack of traction on current stimulus.

    The real economy is doing horrible, not only is it showing up in global PMIs, but it is even showing up in global GDP now (lagging). We have the #4 and #5 economies in outright contraction. The #1 & #2 economies rapidly slowing. The #3 economy in stagnation, probably contracting.

    The ONLY thing holding up at present is US equities… for how long?

    • Arrow2, I am, but I have reduced my exposure.
      I always find it harder to sell, so I do it in stages.
      Finding another investment is not easy in today’s market.
      Even though yields have crashed, I still think that they can go lower with the US joining the global slowdown.
      Slower/contracting growth, declining rate of inflation, falling bond yields and official rate cuts – that is my bet.
      That could be wrong, but it has been right so far.
      As a result, I am still on long term government bonds, gold and some stocks.
      Anyone talking about inflation in this environment is simply incorrect.
      If we all end up like Japan, yields could stay low for a long time.
      The danger to this scenario is the strategy Governments/central banks implement.
      QE doesn’t work, so bond yields may rise initially, but then decline.
      However, MMT is very bond unfriendly.

      • Thanks mate. (I took some profits on US 10 yrs at the lows a few weeks back, kept a few, and still have the 30 yrs begging me to sell them!)