Aussie Tumbles On Economic Data

Aussie tumbled sharply in Asia today in response to poor Australia and China economic data. Australia retail sales unexpectedly dropped -0.8% mom in July, comparing to expectation of 0.2% mom rise. That was indeed also the biggest fall since October 2010. In particular, sales in departments otters dropped a steep -10.2%, the biggest fall in seven years.

Another piece of data also showed that job advertisements dropped -2.3% in August, the fifth consecutive month of detail, which indicate continuation in softening in the job market. The TD Securities inflation expectation jumped 0.6% mom in August, much higher than prior month's 0.2% mom, but over the year, the gauge was at 2.2%, which is towards the lower end of the 2-3% target range.

RBA will announce rate decision and is widely expected to keep rates unchanged at 3.50% for the third straight month. However, the odds of additional rate cut is increasing and markets are fully pricing in a cut to 3.25% in November. Meanwhile, overnight indexed swaps suggest that there could be at least 2 more cuts in the next 12 months.

Meanwhile, economic data from China is also pressuring the aussie. The official PMI manufacturing released on the Saturday dropped to 49.2 in August, below 50 for the first time since November. The HSBC manufacturing PMI was finalized at 47.6, lowest since March 2009, and stayed in contraction for 10 straight months. The data showed further deterioration in the outlook for Q3 and there are talks that China could indeed miss this year's growth target of 7.5%.

A front-page article in People's Daily urged the Chinese authority to "decisively" adjust its policies and should reverse prior tightening quicker to stimulate the economies. Recent data did look worrying for the authorities and would likely trigger additional stimulus. But judging from the response in stocks, investors are not too convinced on any long-lasting effect yet.

Other data released today saw New Zealand terms of trade dropped more than expected by -2.6^ qoq in Q2. Japan capital spending rose less than expected by 7.7% in Q2. Swiss retail sales and SVME PMI, Eurozone PMI manufacturing final will be released in European session. But the major focus will be on UK PMI manufacturing which is expected to improve just slightly to 46.1 in August.

Elsewhere, equities markets are relatively firm though. The uplift in market sentiment indicated that investors very much welcomed Fed Chairman Ben Bernanke's speech at the Jackson Hole Symposium. While not signaling any particular action on any particular date, Bernanke's comments sent a strong signal that further quantitative easing is on the way.

During his speech, Bernanke defended the use of unconventional easing as "effective" with evidence that balance sheet expansion have supported the economic recovery. While evaluating costs and benefits of quantitative easing, the Chairman stated that costs remained manageable and the Fed would "not rule out the further use of such policies if economic conditions warrant." While the speech appeared to have pushed the timing of QE3 closer, we think the likely timing would be either September or December, instead of October as election approaches.

In Europe, markets are eagerly awaiting this ECB rate decision later this week and expecting Draghi to unveil the details of the new bond-buying program. According to sources, Draghi is finalizing the proposal and would send a list of options to Executive Board members tomorrow.

The options could include yield caps and limits on spreads over bunds, purchases of a range of assets in additional to sovereign bonds. And at this point, no single option has emerged as preeminent so far. Based on current situation, some economists are readjusting their expectations and thought Draghi couldn't reveal any details and could remain vague after this week's ECB meeting. But at least, all are expecting Draghi to be clear that works are in progress in what direction, and give a certain timeframe.