Australian Dollar Bashed by China

My charts are still skewiff so forgive the brevity. DXY was firm overnight and EUR fell:

The Australian dollar was bashed:

Gold and oil were strong, copper weak:

Treasury yields fell hard and Value stocks followed them lower. Westpac has the wrap:

Event Wrap

US CPI inflation in August was slightly weaker than expected, +0.3%m/m and 5.3%y/y (vs. est. +0.4%m/m and +5.3%y/y, prior 5.4%y/y), while the ex-food & energy measure rose only 0.1%m/m and 4.0%y/y (vs. est. +0.3%m/m and +4.2%y/y, prior 4.3%y/y). One interpretation is that supply chain disruptions may be starting to ease.

NFIB small business sentiment survey was slightly firmer at 100.1 (prior 99.7, est. 99.0). Employee shortages remained a key issue (job vacancies and wage increases at record highs).

UK labour data was broadly in line with expectations, with a strong underlying tone. Unemployment fell to 4.6% as anticipated, and jobs over the past 3 months rose 183k (est. 199k), while jobless claims fell (July -48.9k from initial -7.8k, and -58.6k in August). ONS cited a rise in job vacancies to 1.034m (a record), with the majority of UK regions citing employment above pre-pandemic levels.

Event Outlook

Australia: The WBC-MI consumer sentiment index will be challenged in September by the continuing NSW and Vic lockdowns.  

New Zealand: The Q2 current account should show the current account deficit returning to pre-pandemic levels (WBC f/c: -3.3% of GDP).

China: Restrictions imposed to stop COVID-19 are likely to weigh on August retail sales (market f/c: 7.0%) as global supply chain disruptions remain a material headwind for industrial production (market f/c: 13.5%). COVID-19 and regulatory reform are meanwhile expected to lead to a further slowing in fixed asset investment growth (August market f/c: 9.0%).

Euro Area: Supply bottlenecks likely restrained growth in industrial production in July (market f/c: 0.6%).

UK: The market is forecasting a 2.9%yr increase in the August CPI report owing to supply-chain constraints and economic recovery.

US: August industrial production growth is expected to be held back by parts shortages (market f/c: 0.5%).

US CPI came in weak, from BofA:

Core CPI inched up 0.1% (0.10% unrounded) mom in August, marking the softest sequential gain since February. This was below consensus expectations and led to the % yoy rate moderating to a still elevated 4.0% yoy clip, from 4.3% previously. Headline CPI rose 0.3% (0.27% unrounded) mom, boosted by a 2.0% surge in energy prices and solid 0.4% rise in food. Headline % yoy edged down to 5.3% yoy from 5.4%.

The winds of transitory inflation became crossed this month. On one hand, used car prices started to see a negative payback after the record smashing rally over the past year, declining 1.5% mom. The timing is consistent with wholesale used car prices, which began to turn lower in June and are now down 4.2% from the peak through August. Reopening pressures also saw a sharp reversal with lodging prices plunging 2.9% mom and airline fares collapsing 9.1% mom. The broader transportation services sector also fell 2.3% mom, pulled down further by a 2.8% drop in motor vehicle insurance (which reflects seasonal factors that will likely bounce by +2.0% mom in September) and an 8.5% collapse in car & truck rental prices. Together, these components sliced 26bp from core % mom.

On the other hand, there were signs of continued shortage related pressures as price gains were seen across commodity items. Both new car prices and household furnishings & supplies jumped 1.2% mom in August, recreation commodities soared 1.0% mom, apparel and other goods both rose 0.4% mom, and alcohol rose 0.3% mom. These categories added 16bp to core, meaning net transitory disinflation this month.

Despite the softer core reading, there was encouraging news from a persistent inflation perspective. Both OER and rent of primary residence rose 0.3% mom, the latter improving from its recent 0.2% trend and catching up to the former. Medical care services also held in at 0.3% mom. There was also broad price pressures across other major services, with labor constraints and resilient wages potentially playing a role.

We’re on the inflation downslope now.

Initially, this hammered DXY and lifted AUD on the hopes of delayed taper but that swiftly reversed as China worries overwhelmed everything. Its August data is out today and will suck. Moreover, Evergrande is going bust at astonishing speed and a reckoning is coming to the “world’s most important market”: Chinese realty.

Expect more downside for EMs, commodities the AUD as the Chinese growth scare, dare I say shock, develops.