PMIs Make News and the Dollar takes a Break

The US dollar is consolidating yesterday's losses.  The greenback's upticks have thus far been shallow and unimpressive, except perhaps against the New Zealand dollar, which is off 0.8% ahead of next week's RBNZ meeting.  Softer than expected labor cost increase reinforces the conviction that a 25 bp rate cut will be delivered next week. 

Durable Goods Prices are Falling

This Great Graphic is deceptively simple.  It is chart from the Bureau of Economic Analysis based on the price indices from components of personal consumption expenditure.

The rust line is service prices.  They are steadily increasing.  No deflation or disinflation here.  Think about rent, medical services, education, and entertainment.  

RCEP: So Far, a Tale of Missed Deadlines

Over the last few years, negotiations for the Trans-Pacific Partnership (TPP) have provoked waves of criticism and suspicion in the Asia Pacific. Today, the kinds of criticism that burdened the TPP — that the negotiations were slow and tedious, and that the agreement needs more transparency and accountability — are being applied to the Regional Comprehensive Economic Partnership (RCEP).

Shaping a New Normal in the South China Sea

Almost 30 years to the day that a young, Harvard-trained American lawyer won a famous judgment at the International Court of Justice (ICJ) against the United States, Paul S Reichler pulled off another momentous victory at The Hague. This time the judgment was against China for having breached its international treaty obligations in the South China Sea.

The Flashpoint that is the South China Sea

Clearing the haze of speculation, the Permanent Court of Arbitration (PCA) handed down its ruling on the maritime dispute between China and the Philippines on 12 July. The Philippines filed the case under Annex VII of the United Nations Convention on the Law of the Sea (UNCLOS) in 2013. The Tribunal found that China’s claimed ‘nine-dash line’ has no legal basis under UNCLOS and China could claim no ‘historic rights’ to resources in the South China Sea.

The Reserve Bank of Australia and other Happenings

August has begun off with clear price action.  The US dollar is stronger against nearly all the major currencies.  Bond yields are higher.  Equities and commodities are mostly lower. 

However, outside of the purchasing managers July manufacturing prints, these do not appear to be an overarching story today.  Investors are still trying to make sense of last week's developments, including the BOJ disappointment and the shockingly poor US GDP figures.  

Could More Underwhelming News be on the Way?

The US dollar is trading with a small upside bias in narrow trading ranges.  The main news has consisted of PMI reports, while investors continue to digest last week's developments.  In particular, the BOJ's underwhelming response to poor economic data and a missed opportunity to reinforce the fiscal stimulus, and the dismal US GDP. 

The Importance of Being August

Four events this week will command the attention of global investors. 

1. The Reserve of Bank of Australia is first.  It is a close call, though the median in the Bloomberg survey favors a cut, including most of the banks in Australia that participate in the poll.

The case for it is that price pressures are weakening, and credit growth is slowing.  The currency has begun appreciating again, and the Federal Reserve cannot be counted on to lift US rates until the end of the year, at the earliest.  

GDP News Puts the Brakes on Dollar Advance

The US dollar advance was stopped in its tracks by the disappointingly weak Q2 GDP figures.  The 1.2% annualized growth rate was roughly half of the pace expected.  The FOMC statement earlier in the week did not leave the impression that a September hike was likely, and with the poor growth numbers, the odds were downgraded further.