RBA slightly more dovish, Japanese wage growth surges

Summary:

• Reserve Bank of Australia keeps monetary policy settings unchanged delivering a slight dovish remark
• Japanese labour cash earnings for June come in well above expectations
• BoJ was to consider hiking rates twice this year, Reuters says
• Chinese stocks bounce back, USD steadies

In line with widespread expectations the Reserve Bank of Australia kept all interest rates untouched offering a slight dovish change though. The bank said that headline inflation will be a bit lower than previously seen. Nevertheless, it is unlikely to lead to any changes in monetary policy in the foreseeable future as odds for rate cuts equal exactly zero. Therefore, one may suspect that rates in this Antipodean economy will be kept unchanged at least through mid-2019. Beside this subtle alteration the monetary authorities delivered more or less the same remarks as previously. They admitted that wage growth remains low and is likely to continue for a while, household consumption remains a source of uncertainty, housing markets have slowed in Sydney and Melbourne or the AUD remains in the range of the past couple of years. Except this (almost) negligible modification with regard to headline CPI the communique did not basically change at all. The Australian dollar is gaining 0.1% as of 6:43 am BST but such a move might stem rather from the relative USD weakness seen this morning.

Technically, the EURAUD is on the edge of a breakout, and one may expect it to happen once the cross breaks through 1.5620. Given that the shared currency is underperforming against the US dollar such a downside move looks quite probable. Source: xStation5

While the RBA’s meeting drew attention this morning there was another big event overnight - Japanese labour cash earnings data. The release showed annual wage growth accelerating in June to 3.6% and 2.8% for nominal and inflation-adjusted terms respectively. Both numbers easily beat economists’ expectations pointing to 1.7% and 0.9% respectively and made big increases from 2.1% and 1.3% produced in May. What did such a surge come from? The prime reason were higher summer bonuses contributing to the quickest pace of wage growth in more than 21 years. The data might we welcome by the Bank of Japan which once again cut its inflation forecasts at the meeting last week, and if this increase turns out to be sustainable it could help the central bank eradicate deflationary mindset. Obviously the key is repeatability as one swallow doesn’t make a spring, hence if these summer bonuses were a stirring of rising wage pressure (the labour market is already really tight) rather than one-off event it could be reasonable to assume more hawkish remarks coming from the BoJ in the months to come. Let’s also add that the yen was boosted to some extent by a Reuters report suggesting the BoJ had considered raising interest rates twice this year.

Japanese wage growth reached in June its highest yearly pace since 1997. Source: Bloomberg, XTB Research

On the other side, household spending decreased 1.2% in June recovering from its local trough at -3.9% in the prior month. In a brief comment to the data the Japanese government said that spending may turn up in July as households spend their bonuses handed out at the end of June. Nonetheless, one needs to be aware that Japanese people have quite low marginal propensity to consume (in favour of save) therefore we cannot rule out that the lump sum offered to them last month might be saved rather than spent.

Meanwhile, the US dollar is beginning the day relatively flat on balance slightly on the back foot. In turn, Chinese indices have gained quite substantially thus far with the Shanghai Composite picking up 1.6% and the Hang Seng (CHNComp) adding 1%. The Japanese NIKKEI (JAP225) is also 0.65% higher whilst the Japanese 10Y yield keeps moving around 0.11%.

The USDJPY is still moving above its local trend line and until the pair stays there one can assume that an ultimate move to the upside could take place. Source: xStation5