8 Jul 2022
US dollar rockets on hawkish Fed
Markets
- A mixed week for equity markets with a strong lead from the US as investors shook off concerns about a looming recession, while Europe remained under pressure with a looming central bank rate increase. Aussie investors preferred the lead from the US.
- The gold price fell sharply after the US dollar rocketed higher as economic conditions between US and the rest of the world continued to diverge and the US central bank minutes reaffirmed their commitment to fighting inflation. The move in the US dollar also saw the Aussie dollar fall to levels not seen since Q2 2020.
- The oil price ended the week lower following a sharp fall earlier in the week on significant demand concerns, before mounting a small comeback on tight global supply concerns.
Economics
- The Reserve Bank of Australia raised the cash rate by 0.50% to 1.35% at its July meeting in line with expectations. No real surprises in their statement – i.e., commitment to fighting inflation while keeping a watchful eye on economic trends.
- Australia’s trade surplus widened to a record high of $15.97 billion in May from an upwardly revised April figure, easily beating market forecasts of a surplus of $10.73 billion. It was the largest trade surplus since January, with exports increasing by 9.5% (coal and LNG) and imports increasing at 5.8% (fuel and lubricants).
- Building approvals rose by almost 10% in May, well above expectations, but sit more than 20% lower over the year. Private apartments drove the increase, while private detached housing fell. WA, TAS, and QLD saw the strongest gains.
- The value of new housing lending excluding refinancing surprised on the up, growing by 1.7% in May against market expectations of a 2.5% fall. TAS and VIC drove the increase. New housing lending for owner occupiers rose by 2.1% in the month but is down almost 10% over the year. Only 11.9% of new lending in the month was at fixed rates, which means June and July rate rises have hit most of the new borrowings.
- Australian job vacancies rose by 13.8% in the three months to May 2022, with 253,000 more vacancies than pre-Covid. NSW and VIC recorded the biggest increases, with interstate migration not helping. Some immigration could help right about now.
- Australian private sector credit rose by 0.8% in May, following a 0.9% increase in April, with business credit the biggest contributor and now showing fastest annual rate of growth since October 2008. Housing credit maintained its April pace of growth while personal credit showed a small increase to remain lower than its level a year ago.
- A key US manufacturing indicator fell sharply in June, coming in below market expectations, and pointing to the slowest growth in factory activity since June 2020. New orders contracted for the first time in two years while employment declined further. Supplier deliveries also slowed.
- Germany posted its first monthly trade deficit in more than 30 years in May due to a 28% rise in its import bill. Exports also suffered as supply chain constraints and soaring energy prices constrained key manufacturing sectors.
- A report indicated that the European central bank intends to end a long running subsidy for the banking sector that has allowed banks to pad their profits simply by parking their excess liquidity at the central bank. The unconfirmed report saw European government bond yields rise (ie. prices fall), particularly in the periphery.
- The annual inflation rate in the Euro area increased to a new record high of 8.6% in June, coming in above market expectations, while the European central bank president confirmed that a 0.25% rate rise should be expected at their upcoming July meeting.
Politics
- China-US tensions rose after the US government blacklisted five Chinese companies for allegedly helping Russia’s military, while NATO decided to single out China as a threat for the first time. Not sure more sabre-rattling is what the world needs right now.
- US President Biden is reportedly considering a near-term move to rollback some of the US tariffs on Chinese consumer goods in moves to fight inflation. At the same time, there have been reports the US is pushing the Netherlands ban one of the world’s largest chip componentry providers (ASML) from selling mainstream technology to China that’s essential in making a large chunk of the world’s chips.
- French President Emmanuel Macron is under increasing pressure to introduce a “windfall” tax on oil, gas, and transport giants to fund his bill aimed at protecting consumers’ purchasing power. The move comes after these sectors were starved of investment for the last decade, and are now finally making sizeable profits.
- UK Prime Minister Boris Johnson has quit after he dramatically lost the support of his ministers and most Conservative lawmakers but said he would stay on until his successor was chosen.
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