Westpac Institutional Bank

Bearish tone continues for USD. The market continued with its recent bearishness towards the USD overnight as mixed US data was overshadowed by comments by Bernanke in his Semi-annual Monetary Policy Report to Congress. On the data front, US housing data continued to weaken while core CPI printed in line with market expectations of 0.2%, a solid gain for the month of June. The market seemed more focused on comments from Bernanke where the most notable themes were that inflation remains the Fed’s main concern but the downturn in the housing market is likely to continue and will slow economic growth in the short term. Of note, the GBP has continued its recent surge, touching on another 26 year high of 2.0548 while the yen made up some ground against the USD as it traded down to 121.58 overnight.

Economic data and events
Bank of Japan meeting minutes: June. One dissenter favoured a hike in July. However, most members expected flat prices for the next few months, and some an easing in annual inflation as last year’s increase in oil prices drops out. However, some members noted “rises in the prices of some everyday goods and services,” and it was stated that higher input costs would eventually be passed on. In sum, the division of opinion on the short-term inflation outlook implies a rate hike in Sep is a better bet than Aug. This has been our view all along.

Fed chair Bernanke’s testimony made it fairly clear that the Fed still sees growth accelerating once the drag from housing diminishes, even though that may yet be some way off. The central tendency forecast for core PCE inflation next year is unchanged at 1.75-2.0%, which would be consistent with the Fed on hold, but the risk around that forecast is still mildly to the upside.

The US housing data continues to weaken. Starts managed a rise but that was only thanks to a downward revision to May and a 12.5% bounce in multiples; single family starts were down for the third month running, as indeed were permits which fell 7.5% to a new cycle low. With single family permits running at 1019k annualised and starts at 1151k, expect further starts weakness in the months ahead.

US headline and core CPI up 0.2% in June. The headline was constrained by last month’s temporary 1.1% fall in gasoline prices but food rose a solid 0.5% and the core CPI posted a firm 0.23% gain. There was ongoing softness in apparel prices, auto prices were up just 0.1% and medical care and owners’ equivalent rent both held below trend at 0.2%. So the core was a little above 0.2% because of moderate upward pressure across a broad range of other less noticed price categories.

Canadian Jun headline CPI was unchanged at 2.2% yr, constrained by falling gasoline prices, but unfavourable base effects lifted the core CPI to 2.5% yr, as expected by the BoC.

UK earnings growth slowing. Despite falling unemployment on all measures, UK earnings growth is slowing on the key measures. This means that the labour market is not so tight that it is generating inflationary pressure, and also that household incomes growth is somewhat constrained, which should be a negative for consumption spending in coming quarters.

The minutes to the July BoE monetary policy committee meeting showed a 6:3 vote for the 25bp hike to 5.75%.