U.S. consumers, China's data, and RBNZ

August 8, 2016

Friday incredibly impressive U.S. jobs report sent U.S. dollar and equities higher, with S&P 500 and Nasdaq ending the week at new record highs. The 255,000 jobs added in July and 292,000 in June, made markets look beyond the weak release in May of 24,000 jobs only. Unemployment rate held steady at 4.9%, this was largely due to the increase in labor participation rate, which suggests that Americans are getting encouraged to enter the workforce. Wage growth was another bright spot, rising 0.3% in July from a month earlier and 2.6% on annualized basis. The inspiring data will likely provide Fed hawks valid reasons to hike rates sooner than later, but markets seem not yet convinced that a rate hike will occur in 2016.

U.S. consumers, are they spending enough?  

U.S. retail sales figures are the only tier-one economic data release on the U.S. calendar. Unfortunately, traders have to wait until Friday for the data to be out. Should the improved labor market translate into more spending is the key question now. Economists are looking for a 0.4% increase in retail sales in July, after a 0.6% rise in June, and core retails sales which excludes automobiles, gasoline, food services and building materials is also expected to slow by 0.1% to 0.5%. However, given the strength of the labor market I expect to see a slight surprise to the upside.

China’s data to take center stage

There’s a lot of data coming out from China the week ahead that will shed the light again on the health of the second largest economy. Trade data will be released on Monday, with both imports and exports expected to continue declining but at slower pace. The argument for stimulus need will emerge again with the release of consumer prices on Tuesday. Annualized CPI is expected to slow to 1.8% in July from 1.9% a month earlier and producer prices expected to remain in negative territory for the 53rdconsecutive month. Friday is also a big day for China with retails sales, fixed-assets investments, and industrial production all expected to slow.

Another central bank to ease monetary policy

Reserve Bank of New Zealand is set to follow steps taken by Bank of England and Reserve Bank of Australia to be the third major central bank to cut rates. The announcement of new restrictions to lending limits on residential properties last month raised the prospects for a 0.25% rate cut when the bank meets on Thursday. However, a rate cut alone is not enough to send the Kiwi lower for two reasons. First, the news is already priced in the currency and second, a 2% interest rate will remain the highest within the universe of major central banks. So unless the central bank indicates further easing measures in the foreseeable future, expect the NZD to remain firm. 

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