Overnight News Recap: RBA Goes Dovish; Downside UK Ind'l Production, EU Retail Sales

News Recap | Written by CEP News | Aug 05 08 10:38 GMT |
(CEP News) - An unexpectedly dovish statement from the Reserve Bank of Australia was the only major macroeconomic news of Asia's overnight with UK markets being hit by an unexpectedly sharper contraction in industrial production tempered by a rebound in the services PMI and euro zone retail sales coming in on the downside.

As expected, the Reserve Bank of Australia's board decided to leave the cash rate unchanged at 7.25%, however the statement accompanying the decision was dovish, with promises of rate cuts to come.

"Given the opposing forces at work, considerable uncertainty has surrounded the outlook for demand and inflation. On balance, however, it is looking more likely that demand will remain subdued, and economic growth will be fairly slow, over the period ahead," read the statement from the RBA. "Inflation is likely to remain relatively high in the short term, with the CPI affected by high global oil prices. Looking further ahead, inflation in both CPI and underlying terms is likely to decline over time, given the outlook for demand, provided wages growth remains moderate."

The statement went on to read, "with demand slowing, the Board's view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing."

Markets had begun pricing in the possibility of a dovish RBA statement ahead of the decision, with an implied market forecast suggesting a 30% chance of a cut at this meeting compared to a 6% chance last week.

On Tuesday, Markit Economics reported that the UK purchasing managers' index for services rebounded slightly and rose to 47.7 in July. Economists had expected a further decline in the index to 46.6 after the PMI slipped to 47.1 in the previous month. However, despite the unexpected increase, the research firm stressed that the index was still below 50, indicating continued contraction of activity in the UK.

According to the Office for National Statistics (ONS), the UK industrial production level fell 1.6% year-over-year in June, deepening the 1.7% decline seen in the previous month. Economists had expected a fall of 1.2% while May's reading was revised down from the -1.6% reported earlier.

Month-over-month, industrial output in the UK fell 0.2% following the 0.9% decline seen in May, revised down from -0.8%. Economists had been more optimistic and had called for a 0.1% increase in production for the month.

Manufacturing output was the only sub-index to see a decline in production on a monthly basis, falling 0.5% compared to the previous month. Conversely, electricity, gas and water supply production led the way in monthly gains, rising 2.2% month-over-month.

According to the HM Treasury in London, the UK government's current level of foreign reserves fell by US$60 million to US$26.28 billion in July. In the month, the government's gross reserves and liabilities had both decreased to $56.2 billion and $29.9 billion respectively.

In an interview with BBC Radio 4 on Tuesday, UK Chancellor of the Exchequer Alistair Darling suggested that a windfall energy tax was not especially practical for the UK and said that he saw "problems" with such an idea. Darling added that he would be aiming to pressure energy companies to help struggling customers, rather than having those firms taxed.

Despite expectations of a 1.3% decline, euro zone retail sales contracted by a full 3.1% in June year-over-year, adding to the 0.1% fall seen in the previous month. May's figure was revised down from the +0.2% initially reported. On a monthly basis, retail sales in the monetary union slipped 0.6% as expected following May's 0.5% gain, revised down from an initial reading of +1.2%.

Following the releases of the individual country purchasing managers indexes, Markit Economics released its services PMI for the euro zone and announced that the index had fallen to 48.3, in line with expectations, from June's 49.1 level. July's reading marks the lowest services PMI level seen since June 2003. The research firm also reported that the euro zone composite PMI declined to 47.8 as expected from June's 49.3 level.

Breaking down the country data, Germany's services PMI had risen to 53.1 for the month. However, economists had expected a stronger gain to 53.3 after the PMI had slipped to 52.1 in June.

Both France and Italy had seen record falls in their respective PMIs. France's services PMI fell to a record low 47.5 in July from 50.1. Meanwhile, Italy's services index had dropped all the way to 45.6 - its lowest in 10 years, down from both the 47.3 reading expected and the 48.5 level seen in June.

Earlier in the day, Markit Economics reported that the Irish services PMI had fallen to 41.4 in July from June's 41.9 level, while the services PMI for Spain had tumbled unexpectedly to 37.1 in July. Economists had expected a further decline to 36.5 after the index slipped to 36.7 in June.

On Tuesday, the Statistical Office of the Slovak Republic reported that retail sales grew 3.1% year-over-year in June, down from both the 7.3% gain expected and the 6.7% increase observed in the previous month.

According to AiG, Australia's performance of services index declined to a reading of 42.8 in July compared to 45.4 in June.

In the aftermath of the day's events, the Canadian dollar was down three tenths of a cent, at 0.961 against the USD, after trading as low at 0.959. The euro fell to as low as 1.5487 USD, currently trading down three-quarters of a cent at 1.5502. WTI Crude oil was down $1.55 at $119.03 after trading as low as $117.98.

At around 6 a.m. EDT, China's Sichuan province was once again hit by a strong earthquake, this time of magnitude 6.0. Details have not yet been released.

AU RBA Cash Target 7.25% vs. Exp: 7.25% Prior: 7.25%

IT PMI Services July +45.6 vs. Exp: +47.3 Prior: +48.5

FR PMI Services July Final +47.5 vs. Exp: +47 Prior: +47

DE PMI Services July Final +53.1 vs. Exp: +53.3 Prior: +53.3

EU PMI Services July Final +48.3 vs. Exp: +48.3 Prior: +48.3

EU PMI Composite July Final +47.8 vs. Exp: +47.8 Prior: +47.8

GB Industrial Production (M/M) June -0.2% vs. Exp: +0.1% Revised: -0.9% Prior: -0.8%

GB Industrial Production (Y/Y) June -1.6% vs. Exp: -1.2% Revised: -1.7% Prior: -1.6%

GB Manufacturing Production (M/M) June -0.5% vs. Exp: +0.1% Prior: -0.5%

GB Manufacturing Production (Y/Y) June -1.3% vs. Exp: -0.6% Revised: -0.9% Prior: -0.8%

GB Official Reserves July -$60M vs. Prior: +$462M

GB PMI Services July +47.4 vs. Exp: +46.6 Prior: +47.1

EU Euro-Zone Retail Sales (M/M) July -0.6% vs. Exp: -0.6% Revised: +0.5%

Prior: +1.2%

EU Euro-Zone Retail Sales (Y/Y) June -3.1% vs. Exp: -1.3% Revised: -0.1% Prior: +0.2%

By Erik Kevin Franco, efranco@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it and Todd Wailoo, twailoo@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , edited by Stephen Huebl, shuebl@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it

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