Australian dollar pretends it’s all good as China sinks

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Markets are beginning to send signals of increasing distress. The global growth scare is building and policymakers are behind the curve. DXY was stable as EUR fell:

The Australian dollar lifted a little on the pretense that China is stimulating which is isn’t:

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Gold was stable but oil weak:

Base metals too:

Miners were mixed:

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EM stocks barely held on:

EM junk spreads gave way. That’s an air raid siren going off:

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Bonds are unequivocal. There’s deflation dead ahead:

Not even tech could get a bounce as duration collapsed:

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Westpac has the wrap:

Event Wrap

US ISM manufacturing survey fell from 60.6 to 59.5 (vs 61.0 expected), breaking a five-month streak of strong prints, although it’s still in expansionary territory. Most of the survey components fell from elevated levels. Markit’s manufacturing PMI survey was finalised slightly higher at 63.4 (vs 63.1 previously) – a fresh record high (since 2007).

Event Outlook

Australia: The dominant topic of discussion at the August RBA Board Meeting will be the implication for the Australian economic outlook of the extended lock down in Greater Sydney. Given the sharp unexpected deterioration in the economy the Board should send a clear signal that it continues to be committed to supporting the Australian economy with an immediate increase of weekly bond purchases to $6 billion. It should also announce a deferment of the taper from $5 billion to $4 billion that was planned for early September, and should commit to maintaining the $6 billion purchase pace through to the November Board meeting.

We expect June to show a continuation of recent trends in June housing finance approvals, with a further HomeBuilder driven decline in construction-related owner occupier finance, a softening in first home buyer activity and another solid gain for investors. We expect the latter to be up around 8% with total owner-occupier loans about flat giving a headline rise of 2%. With disruptions from recent COVID lockdowns in the mix, monthly dwelling approvals could see some volatile moves, particularly through July-August when NSW and Vic lockdowns were in force. We expect to see a 5% decline for the June month, reinforcing the story around HomeBuilder effects.

New Zealand: We expect whole milk powder prices to rise at the upcoming dairy auction, regaining some of the lost ground over recent months (WBC f/c: +2.0%).

US: June factory orders should lift a further 1.1%, with core durable orders pointing to solid investment gains. The FOMC’s Bowman will give welcoming remarks at a Fed conference on low-income and marginalized workers.

So, the ISM has joined Chinese PMIs in rolling over, as expected. Ahead is big downside for both as their respective economies slow and the global inventory cycle deflates. The JPM global PMI has also rolled:

  • Global Manufacturing PMI at 55.4 in July
  • Supply chain issues drive up input costs
  • Output and new order growth both ease

The global manufacturing sector expanded at a robust clip at the start of the third quarter. However, rates of increase in output and new orders eased again, as record supply chain constraints stymied growth and drove up input prices. The challenging operating environment hit confidence, which dipped to a nine-month low.

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There is no upside here for the AUD. The global deflation and growth scare is steadily moving center-stage. It is being led by China but the US is about to join it.

Chinese bonds are on fire and, in my view, yields are going to record lows as the PBoC is forced to cut the cash rate when it eventually panics too late:

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Commodities, EMs and AUD are all setting up to be creamed as CNY rolls hard. If the Fed keeps edging towards taper, it will trigger a safe-haven bid for DXY and crisis arrive for broader markets.

AUD is still in trouble.

About the author
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.