Australia’s economy shows resilience to high-interest rates. OPEC+ production cuts support oil rally

Economic news from the US on Tuesday provided support for the dollar after factory orders fell by 2.1% m/m in July, the biggest decline in 8 months, but stronger than expectations of a 2.5% m/m decline. FOMC representative Waller’s comments on Tuesday were dovish for Fed policy and bearish for the dollar as he signaled his support for a pause in Fed rate hikes. But weaker-than-expected economic news from China and the eurozone on Tuesday boosted relative optimism about the US economy and the dollar.

The Bank of Canada will hold its monetary policy meeting today. The latest inflation data for June showed a marked slowdown in both base and core inflation, but July’s figures show some resilience, with overall inflation rising to 3.3% y/y from 2.8% and core inflation holding steady at 3.2%. While there is only a 20% chance of any action being taken today, the probability of another 25 bps rate hike before the end of the year is around 50%.

Oil prices rose on Tuesday after Saudi Arabia said it would maintain a unilateral 1.0 million BPD oil production cut through December. The move will keep Saudi oil production at around 9 million BPD, the lowest level in three years.

The World Gold Council (WGC) said in its latest report that Australian investors have switched to fixed-income assets amid economic uncertainty. The outlook for fixed-income assets is now threatened by inflationary pressures. The report recommends considering gold as a long-term strategic asset alongside bonds.

Asian markets were mostly down yesterday. Japan’s Nikkei 225 (JP225) rose by 0.30%, China’s FTSE China A50 (CHA50) fell by 0.77%, Hong Kong’s Hang Seng (HK50) ended the day down by 2.06%, and Australia’s S&P/ASX 200 (AU200) ended Tuesday negative by 0.06%.

According to Japan’s Central Bank official Hajime Takata, Japan is seeing the first signs of a change in the established view that wages and inflation will not rise much, indicating that conditions are forming for a gradual withdrawal of large-scale stimulus. Takata emphasized the need to maintain ultra-soft monetary policy for the time being, as the slowdown in global economic growth is adding to uncertainty about whether Japan can sustainably meet the Bank of Japan’s (BoJ) 2% inflation target. However, he also noted that there are signs of a change in corporate pricing and wage-setting behavior, which is driving up prices not only for goods but also for services, indicating that inflationary pressures are intensifying. Japan’s core inflation reached 3.1% in July, surpassing the Bank of Japan’s 2% target for the 16th consecutive month.

Australian GDP grew by 0.4% in quarterly terms, in line with the previous quarter’s pace and economists’ estimates. This result is likely to boost the Reserve Bank of Australia’s (RBA) confidence that it can provide a soft landing for the economy. However, Goldman Sachs forecasts that growth in the Australian economy will weaken as households come under pressure from rising interest rates and prices.