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RBA on hold, Chinese sluggish recovery

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By Craig Erlam  

The Australian dollar fell further Tuesday morning despite the RBA holding interest rates steady and warning that further tightening may be necessary.

The central bank warned that while inflation is declining, a strong labour market and economy remain a risk. What’s more, persistent services price inflation which is being seen in other countries could be another potential upside risk in Australia in the future.

Markets aren’t buying the hawkish warning though and continue to price in a 70% chance of no further increases from the RBA, with cuts then likely to start late next year. This will almost certainly change repeatedly over the months ahead, but as things stand, clear progress is being made on inflation and the central bank has no desire to needlessly crash the economy.

Chinese services PMI slips

Australia’s biggest trading partner, China, continues its sluggish recovery with the latest Caixin services PMI slipping back to 51.8 from 54.1 and well below forecasts. As we saw in the official survey data last week, it highlights the economy is struggling from both weak internal and external demand.

Measures to support the economy have been limited and targeted so far and there’s little to suggest that approach is going to change in the foreseeable future.

The PMI data may be contributing to the weaker performance in China and Hong Kong overnight and the uninspiring start in Europe.

UK retail sales promising, headwinds remain

UK retail sales bounced back in August after a disappointing performance in July, likely hampered by the weather.

The rebound is encouraging but there are a number of things to consider from inflation to one-off events, like the success of the Lionesses in the World Cup in boosting activity.

On the plus side, inflation is falling and wage growth will likely surpass it for the rest of the year, but there’s no guarantee that will lead to an increase in spending.

Higher interest rates will mean higher mortgage costs, and perhaps paying down debt and more cautious spending activity in the run-up to Christmas. Household spending has remained resilient though and that’s encouraging.

Chinese halt to oil rally

Oil prices are steady for a second day after another strong performance last week.

Brent continues to trade close to $90 and despite the slow start this week, momentum remains with the rally.

The Chinese data Tuesday morning may have stood in the way of further gains so far, but it will be interesting to see whether it can add to recent gains after rising to 2023 highs in recent weeks.

Gold continues to consolidate

Gold has slipped back from $1,950 in recent days, still struggling in the aftermath of the US jobs report which could have been a bullish catalyst for it. Instead, it’s consolidated just below these levels and it’s hard to say whether that is bullish or bearish.

A consolidation of this kind could be argued to be technically bullish but the failure to progress after that jobs report is a little odd and perhaps even a bearish signal.

 

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.