Get out there and shop

US Retail Sales stronger than expected

Americans got out there and answered that shopping call overnight, as US Retail Sales for August surprised to the upside, climbing 0.70% versus an expected fall of -0.70%. Markets ignored the 0.70% adjustment to the July numbers concentrating on the August headline and the steep climb of the Philadelphia Fed Manufacturing Index to 30.7. And, admittedly, all of the regional manufacturing indexes have outperformed this week.

Of course, retail sales do not encompass the leisure side of the consumer equation, where the delta variant has probably wrought havoc. But in a week where sentiment has flip-flopped on a daily basis, that mattered not. The Fed taper was front and centre once again, with equities finishing mixed, the US dollar rallying powerfully and US yields creeping higher. Next week’s FOMC is the key inflection point for the taper trade now. Markets will be looking for a signal that the November meeting will be live for the announcement of the taper.

I am still not ruling out a taper-tantrum, as having got the world addicted to bottomless amounts of zero per cent money, the world’s central banks will struggle to put that genie back in the bottle. Notably, Asia’s monetary policy is still in life-support mode and totally out of sync with the US, and to a lesser extent, Europe. Most importantly, nobody seems to be considering the possibility of a taper-tantrum, a warning signal it could happen if any. Q4 could be a torrid one for Asian currencies.

We do have conflicting signals internationally though. Iron ore tanked again last night and has nearly halved in price since the start of August. Amazingly, the Australian resources sector equity prices have yet to link on that, perhaps illustrating the power of the global QE money wave.  Recent data out of China, regional Asia and even the US has been softer on the consumer side, even as Manufacturing PPIs continue climbing skyward, as do input costs. Stagflation is starting to be mentioned more widely, but I don’t believe this is a done deal.

In Asia, China property giant Evergrande’s shares, and bonds have tumbled once again today. With USD 300 billion in debts, a collapse by Evergrande might be enough to even stay the Fed’s hand, such are the wider shockwaves it would cause. I continue to believe that China will engineer some sort of bailout with the mother of all debt/equity swaps occurring. The fallout if the wider property sector, along with the ongoing regulatory interventions across a swath of China industries will keep China equities on the back foot. China injected a net CNY 90 billion through the repo market today. Ostensibly ahead of the China holidays next week, but no doubt, also to calm nerves. Evergrande appears to be reaching an endgame and readers should watch weekend developments closely.

Singapore’s Non-Oil Exports has disappointed today, falling by 3.60% MoM in August, led by falls in Pharmaceuticals. Electronics held up though, and admittedly, the data is a volatile series. Concerns that Singapore’s recovery might be slowing, a club that seems to get bigger by the week, is weighing on local equities, offsetting any positivity from the announcement of a governmental package to encourage Singapore unicorns to list on the SGX, instead of seeking the IPO riches of Wall Street.

The data calendar is now empty in Asia today with Eurozone Inflation and Core Inflation data to come this afternoon. The ECB denied a story circulating overnight that its models indicated its 2.0% inflation target would be reached in 2025. That caused a flurry in European fixed interest markets, but I don’t know why; three years may as well be a lifetime these days. While taking three years to reach 2.0% inflation would probably impress the Japanese, I doubt it would anybody else. It is perhaps a measure of how much Eurozone sovereign debt they have monetised. Italy and Greece being able to raise money near zero per cent never sat right with me.

Next week will be dominated by global central bank decisions, headlined by the Federal Reserve, but also including the likes of Norway, Japan, the UK, and Switzerland. EM heavyweights Brazil, South Africa and Turkey also announce policy decisions and the list is by no means exhaustive. The FOMC will be the one ring to rule them all of course, but don’t rule out hikes from Norway, Brazil and possibly South Africa and Turkey. Asia markets will be heavily distorted by national holidays. Regional heavyweights, mainland China, Hong Kong, Japan, and South Korea are all pencilling in a couple of days holiday across the week next week. That will reduce liquidity substantially in Asian markets and if Evergrande finally goes down next week, that could exacerbate any reactions in asset markets. Canada also slips in a federal election on Monday which could see some sharp moves in USD/CAD in Asia on Tuesday where liquidity is never overly special.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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