Need To Know News

Markets have stabilized this morning, but jitters remain. Moves by the Fed last week to cut the discount rate, at which almost no one borrows, helped sentiment, as did the shift in the tone of the accompanying comment to a dovish stance, suggesting the Fed is concerned about damage to the real economy and could cut rates if this continues, which is not symbolic.

There are still signs that liquidity is tight. The RBA and BoJ again injected liquidity into the market. Still, the main story is a reversal of the trades which were a hit last week.

Equities are up this morning, notably so in Asia which lagged the rally in the US and Europe last week. The MSCI Asia Pacific index rose 3.9% overnight, after falling 8.0% last week. Many Asian markets were up 5% or so last night, including the Hang Seng, Kospi, and Taiwanese Taiex, along with major markets in China. European markets were more subdued this morning, with the CAC40 leading the gains with a rise of 1.28%; the DAX was up 0.41%.

Bond markets were just marginally weaker, with yields up about 1bp across the curve in Japan and 1-2bp in Europe.

The dollar is slightly weaker this morning against most currencies but the action was in the yen carry trade. The yen is down against the major currencies, notably so against the high yielders such as the AUD and Sterling. Euro yen was off ¥1.17 to 155.32 at around 7:00am.

Oil prices eased as it appears that Hurricane Dean would not head for the US gulf Coast, but it will threaten Mexico’s oil fields in the Bay of Campeche. There are wells in the threatened area but no refineries of note. The US light crude contract was trading down 61 cents, at $71.37/bbl with Brent off 27 cents, at $70.17/bbl.

There was little in the way of data overnight. UK BBA Mortgage lending was surprisingly strong, rising to £5.7 billion; expectations were for a gain of £5.2 billion. Credit card borrowing was soft. There are signs that past rate hikes are taking their toll, but so far they are rather sporadic. Public finances were as expected, with public sector net borrowing showing a July surplus of £6.5 billion and cumulative borrowing this year at £10 billion; the projection for the fiscal year is £16 billion. M4 money supply growth remained high, up 13% Y/Y in July.

The Fed has cut the discount rate to 5.75% from its current 6.25%. It has NOT cut the Fed Funds rate, keeping it at 5.25%. The discount rate had for many years been set below the FF rate, but in January 2003 it was set above the FF rate, thus acting as a penalty rate. At that time the FF target rate was 1.25% and there were two discount rates set, a primary rate set at +100 bp to FF and another set at +150 bp to FF. That means the current discount rates are 6.25% and 6.75%. Thus the Fed has today reduced the primary discount rate by 50 bp to 5.75%.

This action and its timing has been salutary for the markets. The Fed has been providing substantial liquidity all week, enough that the effective Fed Funds rate has been at times well below the target rate of 5.25%. This makes perfect sense, since in a liquidity squeeze, the important point is to provide that liquidity and let the effective rate go where the market takes it. The action today simply reduces the penalty on discount window borrowings, and assures those banks in need of funds that the Fed stands ready not only to provide liquidity through open market operations, but will take seriously its role as lender of last resort, and will do so with less of a penalty than seen since 2003. It follows from this that should discount window borrowings increase substantially (and so far this week they have not, since the Fed has been quite generous with providing reserves), they would likely remove the penalty entirely, but it is unlikely that they would lower this discount rate to below the Fed Funds rate, as was seen before 2003. By keeping the discount rate higher than the target Fed Funds rate, the Fed encourages banks to turn to the inter-bank market first before heading to the discount window.

It is important to remember that for the most part, the action by the Fed today is largely symbolic. Not only will the separate actions to inject liquidity through daily open market operations be a much larger part of the solution, it is unlikely that discount windows borrowings will increase much through today’s action, as the rate remains a penalty rate. In addition, very few if any debt obligations are tied to the discount rate. Consumers with credit cards and home-equity loans, and even business loans, are tied primarily to the prime rate, which in turn is tied to the Fed Funds rate. By not lowering the Fed funds rate, there is very little direct economic effect to lowering the discount rate. But by lowering the discount rate and continuing to provide substantial liquidity (and not worrying where on a strictly temporary basis the effective Fed Funds rates goes by the end of the day), the Fed goes a long way to calm markets, putting markets on notice that the Fed will use whatever means is in its power to prevent panic and the kind of irrational and frenzied behavior that drove short-term rates to very low levels this week.

The Fed stated that it is prepared to “mitigate” any adverse effects on the economy, stating that market conditions may “restrain economic growth”. The Fed stated that “financial market conditions have deteriorated” and that downside risks to growth have increased “appreciably”. The Fed says that it will keep these changes until liquidity improves “appreciably”, and that they will “act as needed” to help the economy.

We should understand that “act as needed” statement to mean that additional actions might be required and the Fed will entertain all possibilities, including cutting the Fed Funds target rate. How likely is that? The market has currently priced in 100 bp in easing moves by next June. We all know that this is an imperfect measure of potential monetary policy, and should things stabilize soon, those easing moves will be priced out.

However, it is entirely possible that the Fed will ease soon, perhaps even sooner than the next FOMC meeting on September 18. Everything will depend on the Fed’s judgment of economic conditions. Should the current situation turn into more than a liquidity squeeze, the Fed should be taken at its word to “act as needed”, and cut the Fed Funds rate. It is important to note that in the statement accompanying the discount rate cut, there was no mention of the inflation bias statement present in the August 7 meeting statement. In addition, current inflation numbers, out this past week, have been benign and clear the way for the Fed to cut rates if they feel such a move is necessary. It should also be kept in mind that by cutting only the discount rate, the Fed is currently signaling both that a Fed Funds rate cut is not necessary and that they would prefer not to cut that rate now or in the immediate future. The Fed would surely love to solve this liquidity issue now, and not cut the Fed Funds rate. They stand ready to do so whenever they judge it necessary, but right now, regardless of what the Fed Funds futures market is saying, a rate cut is not a done deal.

The University of Michigan consumer sentiment index was preliminarily reported to have fallen to 83.3 in August from 90.4 in July. The August result compared to a median forecast of 88.0. Earlier results for the overall index were 85.3 in June, 88.3 in May.

The economic outlook sub-index was preliminarily reported to have fallen to 74.1 in August from 81.5 in July, and these followed results of 74.7 in June, 77.6 in May.

The current conditions sub-index was preliminarily reported to have fallen to 97.7 in August from 104.5 in July, with earlier outcomes of 101.9 in June, 105.1 in May.

The survey’s one-year headline inflation expectation was a preliminary 3.2% in August, which compares to recent readings of 3.4% in July, 3.4% in June, 3.3% in May, 3.3% in April, and 3.0% in each of the prior three months. The June/July readings were the highest since last August (which was at the end of a string of sharp energy price increases). This result obviously reflects bad news at the gas pump and probably in the grocery store as well. The pinch on discretionary spending from higher energy and food prices remain an issue for consumers.

The Fed has cut the discount rate to 5.75% from its current 6.25%. It has NOT cut the Fed Funds rate, keeping it at 5.25%. The Fed stated that it is prepared to “mitigate” adverse effects on the economy, stating that market conditions may “restrain economic growth”. It stated that “financial market conditions have deteriorated” and that downside risks to growth have increased “appreciably”. The Fed says that it will keep these changes until liquidity improves “appreciably”, and that they will “act as needed” to help the economy.

The discount rate had for many years been set below the FF rate, but in January 2003 it was set above the FF rate, thus acting as a penalty rate. At that time the FF target rate was 1.25% and there were two discount rates set, a primary rate set at +100 bp to FF and another set at +150 bp to FF. That means the current discount rates are 6.25% and 6.75%. Thus the Fed has today reduced the primary discount rate by 50 bp to 5.75%.

Total borrowing at the discount window was $265 mln in the latest week compared to $255 mln in the previous week, not much so far, showing the effect of current Fed liquidity injections. Free reserves (excess reserves minus borrowed reserves) totaled $9 bln in the latest week compared to a recent range near $1.5 bln, an indication of how accommodative the Fed has been.

This is still a risky environment, despite pockets of stability. Outstanding asset back CP fell by $48.4 billion in the week to Wednesday, about 4% of the total outstanding. Canadian financial institutions agreed to roll their asset backed CP for 60 days, with no margin calls during that period. The largest previous decline was $19.5 billion the week of 9/11. Investors are moving into T-bills, which is a smaller market, while banks are being called on to fund back-up CP lines. Markets in Europe are a bit more stable this morning, but there is no real support from technicals. Asian markets tumbled overnight, ignoring the steadier markets in the US late yesterday. The MSCI Asia Pacific fell 3.4%, for a loss on the week of 7.9%. The NIKKEI fell 5.4%, the biggest one-day drop in almost six years, while 10-year yields were off 8bp, to 1.565% and 2’s down 5bp to 0.808%. Ten-year yields were last this low in February last year. The yen continued to strengthen, rising to ¥111.62/$ at the high today, but was well off that low at 7:00 this morning, falling to ¥113.32/$; there was even a tiny return of the carry trade, although volatility and chances in currency valuations are not a good backdrop for a return of that trade yet. At the low euro yen fell below 150, to 149.28, but by 7:00 was trading at 152.40. Short positions in yen are feeling the pain. The euro finally made some headway against the dollar this morning, edging up to a high of 1.3465 before slipping slightly to 1.3448, still up on the day. European markets are far steadier than those in Asia. Stocks were down just fractionally and were off their morning lows by 7:00 est. Ten-year bonds were mostly flat in the Eurozone, as were 2’s. The only moves of note among the majors in Europe were in the UK, where bond yields were down 5bp, to 5.02%, with 2’s off 3bp to 5.292%. The European iTraxx crossover index was at 375 bp early this morning, down 17.5bp from the close. The Reserve Bank of Australia remained hawkish in the statement yesterday, although the RBA did intervene in the FX market overnight, and there have been some notable sub-prime related losses in Australia.

Oil prices are up this morning as what will be a very strong, but not very large, hurricane is headed for the Gulf of Mexico, with the danger range extending from the Mexican oil fields up to the Texas coast. The US light crude contract was trading up 64 cents, to $71.64/bbl this morning, with Bent up 65 cents at $70.42/bbl.

On the data front, the German PPI fell 0.1% in July, to be up 1.1% Y/Y. Weakness in energy prices held down the index. Non-farm payrolls in France were unchanged in Q2 after a 0.8% Q1 increase. Wages rose 0.6% Q/Q, down from a 0.9% Q1 increase. These are weaker than expected. The employment component in the PMI’s suggest that hiring will pick up in coming months, although the financial instability in France suggests firms will be cautious through the remainder of Q3 at least.

Bottom Line: The 1.381 mln SAAR is consistent with forecasts of trend weakness, now more consistent with the overall level in the Homebuilders survey, at a 22 low for August, falling 2 points each month for the past three months. Homebuilder optimism is collapsing as FOMC easing remains a distant hope, but the future index remains well higher than the present index, perhaps reflecting hope that rate declines are yet coming, yet the Survey level suggests little in the way of higher starts soon. We think an intermediate-term trend decline remains in place, but starts are likely now to find some stabilization near current levels

Headlines and Immediate Analysis:

July housing starts fell 6.1% to a 1.381 mln seasonally adjusted annual rate (SAAR), following +2.1% in June to a 1.470 mln SAAR. With the decline this month, total starts are -20.9% year over year.

The January level had been the low for the current correction in housing until this month. However, levels even near a 1.5 mln SAAR, seen for several month since the Jan low, were not consistent with the level of the Homebuilder Survey, which recently fell to new lows at 22 for August, just 2 points above the all-time low at 20 in Jan 1991. Thus, it comes as no surprise that homebuilders continue to cut back on building. It had appeared that the relationship between the survey and starts seemed to have weakened, but with the decline to new lows for the current correction with July starts, that correlation is reappearing.

Single-family starts rose to both a new record and cycle high in Jan 2006 at a 1.814 mln SAAR, but are now a much weaker 1.070 mln SAAR in July, -7.3% this month, showing -25.4% yoy, and at current cycle lows. The very high Jan 2006 total starts level at a 2.292 mln SAAR was also in part boosted by very high 5+ unit starts, which reached up to a 424,000 SAAR, which was the highest since 446,000 in April 1988. They also fell to a 230,000 SAAR low last July, but surged in Dec 2006 to a 339,000 SAAR on warm weather, then fell back to a 257,000 SAAR in Jan, a 269,000 reading in Feb, a 250,000 SAAR in March, 254,000 in April, 252,000 in May, 282,000 in June, and now 275,000 in July, still above cycle lows, but not by much, and now showing -2.5% this month, but a surprising +19.6% yoy, but only because of that weak 230,000 SAAR last July.

We had been saying for some time that a 2.000 mln SAAR building rate could not be sustained in the face of a correcting housing sector regardless of what rates do, and after a 2.132 mln SAAR in Feb 2006, down from that cycle high in Jan at a 2.292 mln SAAR, we have now seen 17 consecutive months of sub-2.000 mln SAARs, with the current July 2007 number the lowest.

July single-family starts came in at -7.3% to a 1.070 mln SAAR, after -0.1% to a 1.154 mln SAAR in June.

July total multi-family starts came in at -1.6% to a 311,000 SAAR, after +10.9% to a 316,000 mln SAAR in June.

The change in total housing starts from a 1.746 mln SAAR last July is now -20.9%, after -19.2% in June.

Single-family year over year now shows -25.4%, after -21.4% in June.

July building permits were weaker at -2.8% to a 1.373 mln SAAR, after -7.0% to a 1.413 mln SAAR in June.

The July permit rise included -1.6% in single-family permits to a 1.003 mln SAAR, below current starts levels, and -6.1% to a 370,000 SAAR in multi-family, higher than current multi-family starts. Thus the difference between starts and permits (permits being now very slightly lower) is due to multi-family permits being above starts, fully offset by single-family permits being below starts. This suggests another month of relatively flat starts activity next month, due to lower single-family starts and higher multi-family starts.

July completions were -0.1% to a 1.512 mln SAAR, with the recent high at a 2.089 mln SAAR in May 2005. Completions are -22.3% yoy. With completions higher than starts, there is no pipeline strength left in housing.

With the national level well lower this month, regionally the story shows weakness in all regions but the Midwest. The Northeast was at a recent strong 188,000 SAAR in Jan (boosted by warm weather), but is at a 156,000 SAAR this month, -1.3%, with still +6.1% yoy; NSA levels moved to 14,300 from 15,700. The Midwest saw +2.6% to a 241,000 SAAR, and are -17.5% yoy, with NSA levels at a high 23,400, down from 23,900. The South was -11.0% to a 649,000 SAAR, now -26.3% yoy; NSA levels here fell to 58,100 from 66,700, a sharp monthly move. The West saw -3.7% to a 335,000 SAAR, now -21.5% yoy; NSA levels were at 32,000, up from 31,200.

Within this regional data, the Northeast saw single-family at -12.0%, the Midwest was at -9.2% for single-family, the South was at -6.2% in single-family, while the West saw -6.4% in single-family, all weaker than total starts except for the South, indicating that multi-family starts are holding up building rates in most parts of the country.

The market sell-off in equities gathered steam overnight, led of course by issues of financial companies. Fed Governor Poole argued against an emergency rate cut in comments last night, noting that the Fed would not act without hard evidence of damage to the real economy. That dashed a lot of hopes. At this stage the loss in asset values from the sell-off far exceeds any possible loss from sub-prime mortgage defaults, and it is about time for investors to start sifting through all this to pick up assets which have been caught in the downdraft. Financial firms in Canada and Australia are having the most difficulty obtaining funding just now, with central banks adding liquidity. Thus far the ECB has stayed out of the market. The immediate concern in the US centers on Countrywide Mortgage. On that front, Countrywide drew on its backup lines of some $11.5 billion, which should help stabilize things. They have additional liquidity lines should they need them. The MSCI Asia Pacific index was off 3.3%, for the largest loss in a year; markets in Korea and the Philippines were both off in excess of 6%. Turkish markets are also being hammered, with equities down 8% and the lire off 7% at about 7:00am, New York time. European markets are down sharply as well, with the DAX off 2.4% and the FTSE down just over 3.1%. In general Eurozone equities are down by between 2.4% and 3.15% (the CAC40) this morning. The flight to quality has led to another significant rally in government securities in Europe and most of Asia. Ten year yields were down by 9bp in Germany to 4.242%, with 2-year Schatz off 20bp, to 3.926%. Credit spreads have widened but are well off their highs in Europe, with the iTraxx Crossover index up about 20bp this morning, to 380bp. This certainly does not match the sell-off in equities. Ten-year yields rose 2bp in Japan while 2’s fell 4bp, as the flight to quality has shifted to shorter duration instruments. The yen once again soared, as the carry trade unwind gets into full swing; the corollary to that is weakness in the high yielders. The yen was up ¥2.4 per dollar at ¥114.22, rising ¥3.6 against the euro, to 153.15. With the exception of the yen the dollar is stronger, as the flight to liquidity continues. To caution once again, this is a flight to liquidity and the US has the largest and most liquid markets in the world. This is not a vote of confidence in the dollar per se, and dollar strength will reverse when this is over.

Oil prices are again suffering, battered by concern about the impact of this financial glitch on global growth and by the need to get out of what ever is liquid to meet other funding requirements. The US light crude contract is trading off $2.03/bbl to $71.30 with Brent down $2.36/bbl, at $69.28.

On the data front Eurozone consumer prices fell 0.2% in July, as expected with the Y/Y headline index up 1.8% Y/Y and core up 1.9% Y/Y.

UK retail sales jumped 0.7% in July, with June revised up to show a 0.4% increase. Australian average weekly wages costs jumped 1.7% in Q2, to be up 4.6% Y/Y. The RBA is stuck, with a liquidity crunch having to take priority over inflation concerns.

Overall industrial production rose by a m/m 0.3% in July, which compared to a median forecast of +0.3%. Earlier results for overall output were +0.6% in June, -0.2% in May, +0.6% in April, -0.1% in March, +0.8% in February (boosted by a weather-related surge in utility output), and -0.5% in January.

Manufacturing output alone was reported as up by a m/m 0.6% in July after +0.6% in June, -0.1% in May, a 0.4% rise in April, a 0.7% increase in March, a 0.1% drop in February, and a 0.6% decline in January. Our reading of the situation in the manufacturing sector is that the inventory adjustment has run its course and that activity ought to be on a better-supported trend in the months ahead, driven by modest growth in domestic demand and strong export growth. With that said, the automotive industry still has troubles, as do housing-related sectors. We therefore expect gains to be on the moderate side.

Utility output fell by a m/m 2.1% in July after a 0.1% increase in June. These followed earlier gyrations, mostly weather-related, of -1.6% in May, +2.8% in April, -6.6% in March, +8.6% in February, and +2.5% in January. Mining output rose by a m/m 0.7% in July after earlier results of +0.4% in June, +0.1% in May, 0.0% in April, +0.1% in March, -0.1% in February, and -2.3% in January.

The overall capacity utilization rate rose to 81.9% in July from a revised 81.8% in June (originally reported as 81.7%). The median forecast was for a steady rate at 81.7%. The manufacturing capacity utilization rate rose to 80.7% in July from a revised 81.4% in June (originally reported as 80.3%). The manufacturing utilization rate is well up from a cycle low of 71.6% hit in November 2001, but is still considerably below the most recent high of 83.8% reached in November 1997.

The overall CPI rose by a m/m 0.1% in July (the median forecast was +0.1%) after a 0.2% rise in June, an energy-driven 0.7% jump in May, a 0.4% increase in April, a 0.6% rise in March, a 0.4% increase in February, and a 0.2% rise in January.

Of much more importance to markets was that the core portion of the index was reported to have increased by a m/m 0.2% in July, which compared to a median forecast of +0.2%. This followed a 0.2% rise in June, a 0.1% increase in May, a 0.2% rise in April, a 0.1% increase in March, a 0.2% gain in February, a 0.3% rise in January and 0.1% increases in the preceding three months. On an unrounded basis, the seasonally adjusted July core increase was 0.236%, which followed increases of 0.232% in June, 0.150% in May, 0.177% in April, 0.061% in March, 0.241% in February, 0.256% in January, 0.144% in December, 0.096% in November, and 0.145% in October.

The heavily-weighted homeowners’ equivalent rent component increased by a m/m 0.2% in July after increases of 0.2% in June, 0.1% in May, 0.2% in April and 0.3% in March and February. This critical component of the core CPI appears to have peaked, which will go a long way toward keeping a lid on overall core inflation at the consumer level (although it has less of a weight in the core personal consumption price index, and thus had less of an upward impact on that index earlier and will have less of a downward influence now).

Calculated on a y/y basis, the overall index was up 2.4% in July after +2.7% in June, +2.7% in May, +2.6% in April, +2.8% in March, +2.4% in February, +2.1% in January, +2.5% in December 2006, +2.0% in November, and +1.3% in October.

The core index was up by a y/y 2.2% in July after +2.2% in June, +2.2% in May, +2.3% in April, +2.5% in March, +2.7% in February, +2.7% in January, +2.6% in December 2006, +2.6% in November, and +2.7% in October. Measured on a three-month annualized basis, the core index was up at a 2.5% rate in July after +2.3% in June, +1.6% in May, +1.9% in April, +2.3% in March, +2.6% in February, +2.0% in January, +1.4% in December 2006, +1.6% in November, and +2.3% in October.

The energy component of the overall CPI fell by a m/m 1.0% in July (+1.0% y/y) after a 0.5% drop in June, a 5.4% rise in May, a 2.4% increase in April, a 5.9% jump in March, a 0.9% rise in February, a 1.5% drop in January, a 4.2% rise in December 2006, a 0.2% decline in November, and a 6.7% decline in October. Food prices rose by a m/m 0.3% in July (+4.2% y/y) after +0.5% in June, +0.3% in May, +0.4% in April, +0.3% in March, +0.8% in February, +0.7% in January, -0.1% in December 2006, -0.1% in November, and +0.3% in October. Higher food and/or energy price inflation, if sustained, would not be a positive factor for discretionary consumer spending.

Empire State Mfg Index 25.06 in August After 26.46 in July

The Empire State Manufacturing Diffusion Index (calculated by the Buffalo branch of the New York Federal Reserve Bank) fell to 25.06 in August from 26.46 in July. Earlier results were 25.75 in June, 8.03 in May, 3.80 in April, 1.85 in March, 24.35 in February, and 9.13 in January.

The August reading compared to a median forecast of 18.0.

The 6-months expectations index for general business conditions rose to 50.40 in August from 48.24 in July, and these followed results of 44.14 in June, 49.79 in May, 33.85 in April, 35.17 in March, 38.49 in February, and 32.54 in January.

The only reason the Empire index interests markets is that it is seen as a precursor to moves in the Philadelphia Fed index for the month, which in turn is viewed as a leading indicator of the ISM manufacturing index. Sometime this works; often it does not. Moreover, even when these indices manage to move in the same direction, the relative magnitude of the changes often varies greatly. We therefore do not think that the Empire index adds much of value to the economic knowledge base, and it tends to receive more market attention than warranted.

Another nasty day in the markets, with global equities down particularly sharply in Asia, and weaker elsewhere. Asian markets were off by over 2.0% at the close, with the NIKKEI down 2.19%, the Hang Seng off 2.87%, and the Aussie ASX 200 down almost 3.0%. Japanese banks admitted to small US sub-prime exposure while there was a report by an Aussie hedge firm, Basis Capital, that losses may exceed 80%. The MSCI Asia-Pacific index fell 2.3% to a 3-month low. Among the major Eurozone markets the CAC 40 has been the hardest hit, down just over 1.5% at about 7:00am, with the DAX off 0.83%. In general financial shares are leading the way down. Bond markets have strengthened again, with yields down about 6-7bp in 10’s in Japan and Australia, bringing Japanese yields to 1.625%, a rate not seen since early last May, where there was a bit of market instability as well. Two year yields fell 4bp, flattening the curve. Yields were off 3-4bp in the Eurozone in 10’s, and 8-9bp in 2’s, for a steeper curve there. The Bank of Japan again drained liquidity from the system while the ECB refrained from adding one-day funds, suggesting in their mind things are returning to normal, despite market jitters — the day is young. The liquidity squeeze seems to have eased a bit but markets are still very risk averse and jittery. The yen continued to strengthen this morning even against a rising dollar, as carry trades were unwound. Euro yen was up ¥1.82 at 157.28 at about 7:00am with the yen up ¥0.89 against the dollar, at 116.69. Sterling slipped on slowing wage growth and a 9-0 vote for no rate change and no clear signal that another would be needed in the August BoE meeting minutes; it was trading at $1.9898.

Oil prices rose this morning as the hurricane season starts in earnest. The tropical depression in the Gulf is not a threat to oil facilities and the path of tropical storm Dean is still uncertain, but that has not prevented a price jump. The US light crude contract was trading up 55 cents to $72.93/bbl with Brent up 58 cents to $71.09/bbl.

On the data front the UK labor market continued to firm, with the unemployment rate slipping to 2.6% in July from 2.7% in June on a drop in the claimant count of 8,500. The ILO rate through June was steady at 5.4%. Wage growth slowed; wage increases including bonuses rose 3.3% Y/Y in July, down from 3.4% in June while excluding bonuses growth slowed to 3.4% from 3.5%. Unit labor costs, measured 3 months/Y/Y, were up 0.4% in June.

Australian consumer confidence fell 8.1% in August, to 111.1, still well above the “neutral” level of 100. The RBA rate hike played a role, as there has been a pattern of slumping confidence after each move, followed by a recovery. The wage cost index rose 1.1% in Q2, up from a 1.0% Q1 rise, to be up 4.0% Y/Y.