Markets: Equities weaker & Treasuries rally as US GDP report disappoints & US debt impasse drags on, Dollar weaker, mkts open more positively Monday morning as US debt deal said to be "very close".

USA: GDP rises just 1.3% saar in Q2 after Q1 growth slashed to 0.4%, '08 recession revised deeper.

USA: Employment cost index up 0.7% qoq in Q2.

USA: Chicago PMI falls 2.3pts to 58.8 in July, below mkt, employment falls 7.2pts to 51.5.

USA: U of Mich. Confidence revised down 0.1pts to 63.7 in July, down from 71.5 in June.

CAN: GDP down 0.3%mom in May, below mkt.

EMU: CPI estimate rises 2.5%yoy in July, below mkt.

UK: GfK consumer confidence down 5pts to -30 in July, below market.

DEU: Retail sales rise 6.3%mom in June, to be down 1%yoy, above market.

FRA: Cons. spending up 1.2%mom/1.8%yoy in Jun.

SWE: Prelim GDP rises 1%qoq in Q2, above mkt.

BEL: Prelim GDP rises 0.7%qoq in Q2, above mkt.

THE DAY AHEAD...

USA: ISM Manuf. (Jul), Construction Spending (Jun)

EMU: PMI Manuf. (Jul F), Unemployment Rate (Jun)

UK: PMI Manufacturing (Jul)

DEU: PMI Manufacturing (Jul F)

FRA: PMI Manufacturing (Jul F)

ITA: PMI Manuf. (Jul), Unemployment Rate (Jun P)

ESP: PMI Manufacturing (Jul)

DNK: PMI Survey (Jul), Retail Sales (Jun)

NOR: PMI (Jul)

SWE: PMI Survey (Jul)

BEL: Unemployment Rate (Jun)

JPN: Vehicle Sales (Jul)

CHN: PMI Manufacturing (Jul)

AUS: AiG/PWC PMI (Jul), TD/MI Securities Inflation (Jul), HIA New Home Sales (Jun)

NZL: ANZ Commodity Price Index (Jul)

US debt deal getting closer as economy sags? (Slow progress resolving the US debt ceiling impasse and some poor US data made for another difficult session for equities market investors on Friday, with both the S&P500 and Stoxx600 closing down 0.7%. Despite supposed worries about the US fiscal situation and a possible ratings downgrade, Treasuries rallied strongly, with the 10-year note now yielding 2.8% i.e. back to where it stood in late November. (As had seemed likely neither the Boehner nor Reid proposals to address the US debt ceiling impasse garnered support. However, congressional leaders have been working on another proposal over the weekend with Senate Minority leader McConnell saying that a deal is "very close" and Senate Majority Leader Reid saying that he has signed off a deal which he hopes to hold a vote on later Sunday night (judging by some other comments carried by the newswires, this could still prove a bit optimistic). According to Bloomberg, the deal would deliver a $2.8 trillion increase in the debt ceiling in return for an immediate $1 trillion cut in spending and the set-up of a special committee charged with identifying another $1.8 trillion of savings by year-end (recall that these savings occur over 10 years). The deal under discussion does not appear to include the revenue measures that Democrats have been holding out for.

(As if investors didn't have enough to worry about, Friday's dataflow cast the US economy in a weaker light. Not only did Q2 GDP growth undershoot expectations at 1.3% saar (with final sales even softer at 1.1% saar), but the estimate for Q1 was slashed to 0.4% saar from 1.9% saar previously with final sales now flat for the quarter (see our first chart). And this comes after a set of revisions that means that the annualized decline in real output over the course of the post GFC recession is now 3.5% vs. 2.8% as previously thought (see our second chart). With the economy growing at just 0.8% saar during the first half of this year it is no wonder that the improvement in the labour market has stalled. Given this lack of momentum, our US economics team has lowered its estimate of Q3 GDP by a full percentage point to 2.5% saar and they have reduced their forecast for Q4 from 4.3% saar to 3.0% saar. And they warn that these estimates will be subject to further revision pending a couple of near term developments, namely the resolution of the debt ceiling impasse and the outcome of the July employment report. For example, if financial conditions tighten significantly in response to a sovereign ratings downgrade or there is a Federal government shutdown, our colleagues note that they would make more drastic cuts to growth (they estimate that a 2-3 week government shutdown could subtract 1.5% from Q3 GDP growth). Over the medium-term, both the yield curve (our third chart) and the nominal GDP-fed funds gap (final chart) remain supportive of growth, so we still view this slowdown as likely temporary.

(Over the next 48 hours or so the focus will likely remain on the US debt ceiling negotiations. But with Friday's GDP report raising further questions about the state of the US economy, there will be plenty of interest in today's ISM report, which we think will be a touch weaker than last month. Attention will then turn to Wednesday's non-manufacturing ISM and ADP reports as analysts fine-tune their forecasts for Friday's jobs data, which our US team expects will show a meagre 50k gain in non-farm payrolls and a steady unemployment rate of 9.2%. Also of note this week are July auto sales and June personal income and spending (Tuesday) and the weekly jobless claims report (Thursday). (Looking elsewhere, in Euroland there will be some interest in the final PMI readings for July (and the peripheral country detail) following the large decline seen in the flash estimate. The German factory orders report is also of note (Thursday), together with the flash Italian Q2 GDP estimate (Friday). In addition the ECB will meet on Thursday. My European colleagues view the ECB as being on "indefinite hold", consistent with a "monitor very closely" stance. In light of the current macroeconomic and financial market trends, they think there is little risk of a rate hike warning until year-end at the earliest. They still see the next hike in December but acknowledge that the risk that the next hike is delayed into 2012 is rising. Meanwhile, the market will scrutinize Trichet's comments on the Securities Market Programme carefully. In the UK we expect neither policy action nor comment from the BoE at Thursday's MPC meeting, so the focus will be mainly on the PMIs. Locally, there will be plenty of interest in Tuesday's RBA meeting and Friday's RBA Monetary Policy Statement (we don't expect a rate hike but one cannot be ruled out) together with Wednesday's Australian retail sales report. In New Zealand, Thursday's Q2 household employment report will be the focus.

Markets

KEY RELEASES

Source: Bloomberg Finance LP

NORTH AMERICA

USA: GDP rises just 1.3% saar in Q2, Q1 growth slashed to 0.4% saar

(In Q2, real GDP rose 1.3% saar vs. 0.4% in the first quarter. Consumer spending rose 0.1% vs. 2.1% previously, as consumption of durables fell 4.4%. Household spending on services rose 0.8%, the same as in Q1. Consumer spending added just a tenth of a percentage point to the overall gain in GDP. Capex rose 5.7% vs. 8.7% previously, thereby adding 0.4 ppts to growth and non-residential structures rose 8.1% vs. -14.3%, adding 0.2 ppts. Residential investment rose 3.8% vs. -2.4% previously-worth another tenth on growth. The inventory build (+$49.6B vs. $49.1B previously) was less than we expected, but also added two-tenths to growth. Government spending fell by -1.1% vs. -5.9% previously. The shutdown in the motor vehicle sector subtracted only one-tenth of a percent from Q2 GDP. ( With respect to back revisions to the GDP data, the annualized decline in real output over the course of the recession was magnified to -3.5% vs. -2.8% as previously thought. In turn, the recovery also became more pronounced, as 2010 GDP was lifted from 2.8% Q4/Q4 to 3.1%.

To be sure, the output data were weaker than expected, although the weakness in Q2 was largely concentrated in consumer spending. As a result, the focus in the second half of the year becomes even more acutely focused on consumers and more specifically the drivers of household consumption.

USA: Employment cost index rises 0.7% in Q2, above mkt, up 2.2% yoy

( Wage and salaries rose just 0.4% qoq but benefits rose 1.3% qoq.

USA: Chicago PMI falls 2.3pts to 58.8 in July, below mkt

( In the main details of the survey; inventories increased (53.2 vs. 46.9) as did the order backlog (55.7 vs. 49.3). However, negatively impacting the survey were new orders (59.4 vs. 61.2), production (64.3 vs. 66.9), and employment (51.5 vs. 58.7).

The survey results run somewhat contrary to the details of the latest Fed Beige Book which had hinted at a recovery in vehicle production as well as high capacity utilization in the steel sector.

USA: U of Mich. Confidence revised down 0.1pts to 63.7 in July

(Recall that the June reading was 71.5. The economic conditions index was revised lower to 75.8.

CAN: GDP down 0.3%mom in May, to be up 2.2%yoy, below mkt

( According to Statistics Canada, the primary contributor to the decline in overall output in May was a 5.3% drop in the mining, oil and gas extraction sector caused by wildfires in Northern Alberta and also by the shutdown of petroleum production facilites for maintenance. This interruption in oil production also had a negative impact on refining output which, together with the impact of some persisting supply chain disruptions on motor vehicle output, contributed to a further pull back in manufacturing in the month..

CAN: Industrial product price falls 0.3%mom in June, below mkt

EUROPE

EMU: CPI estimate rises 2.5%yoy in July, below market

UK: GfK consumer confidence down 5pts to -30 in July, below market

UK: Nat'wide house prices rise 0.2%mom in July, to be down 0.4%yoy

UK: M4 money supply falls 0.5%mom/0.7%yoy in June

UK: Net consumer credit up GBP0.1bn to GBP0.4bn in June, above market

( Mortgage approvals rose 2Kto 48.4K in June, highest since May 2010.

DEU: Retail sales rise 6.3%mom in June, to be down 1%yoy, above market

FRA: Consumer spending up 1.2%mom/1.8%yoy in June

ESP: Unemployment rate down 0.4pt to 20.89% in Q2, slightly below mkt

NOR: Unemployment rate rises 0.3pt to 2.8% in July

SWE: Prelim GDP rises 1.0%qoq/5.3%yoy in Q2, above market

( Investment rose robustly (8.1%yoy), exports rose 7.8%yoy, while imports increased 5.8%yoy.

BEL: Prelim GDP rises 0.7%qoq in Q2, above mkt, up 2.5%yoy

JAPAN/CHINA

JPN: Manufacturing PMI rises 1.4pts to 52.1 in July

JPN: Employment rises 40k in June, jobless rate up 0.1pps to 4.6%, at mkt

( The jobs-to-applicant ratio rose 0.2pps to 0.63, back to where it stood in March.

JPN: National CPI rises 0.2%yoy in June, at mkt

( The Tokyo CPI rose 0.5%yoy in July and was up 0.3%yoy ex food and energy.

JPN: Real household spending falls 4.2%yoy, below mkt, but up 0.8%mom

JPN: IP rises 3.9%mom in June, down 1.6%yoy, slightly below mkt

JPN: Vehicle production falls 13.9%yoy in June

JPN: Housing starts rise 5.8%yoy in June, above market

JPN: Construction orders up 6.0%yoy in June

AUS COMMENTARY

The week ahead?

( A busy week ahead in Australia. Attention will first turn to the outcome of the RBA Board meeting on Tuesday. The Q2 CPI, which we discuss more fully elsewhere in the Weekly, has sharpened the market's focus on this meeting by indicating that underlying inflation is running above the pace the RBA had expected in its May Statement on Monetary Policy. Given that the May profile had inflation breaching the top of the target band by Dec-2013, the possibility of a pre-emptive policy tightening has come into focus. While we cannot entirely discount the prospect of a rate hike, our favoured view is that the RBA will leave the cash rate unchanged on Tuesday. There are two main reasons for this. First, the current uncertainty relating to the US debt ceiling and the possibility that a resolution may not be to hand by the time the RBA Board meets. Second, the minutes to the RBA's Board meeting clearly indicated a less 'hawkish' tone, with the RBA indicating that it had "more time to assess" inflationary pressures. Coupled with an evidently softer pace of consumer spending, this suggests the RBA is unlikely to completely disregard its recent tone by lifting the cash rate within days of the CPI release, especially given the global backdrop. The data highlight in the week ahead will be June retail sales, due Wednesday. We have pencilled in a 0.4%mom outturn with a rise in quarterly volumes of 0.6%qoq. We look for a slight rebound in June building approvals, due Tuesday (up 2.0%mom) and a further slight fall in house prices for the June quarter (down 1.5%qoq). The June trade balance should post a further AUD2.0bn surplus when released on Wednesday. Finally, the RBA Statement on Monetary Policy will be released Friday. We preview the Statement more fully elsewhere in the Weekly, but briefly, we suspect the overall tone of the Statement will remain distinctly more 'hawkish' than current market pricing would suggest.

NZ COMMENTARY

Credit growth remains weak in June

( The June credit aggregates remained very soft. Total credit extended to the household sector rose just 0.1%mom dropping annual growth to a new low of 1.1%. Housing credit rose 1.3%yoy and other consumer credit fell 1.0%yoy. Credit in the agriculture sector rose $127m, smaller than the usual seasonal rise, to be down 0.4%yoy. Business credit fell $331m but was still up 0.8%yoy. Overall private sector credit (ex repos) rose 1.4%yoy.

Within the monetary aggregates, we did note that M1 growth now stands at a very strong 11.1%yoy, consistent with stronger growth in nominal spending but also pointing towards a move to more liquid assets. Broad money (M3 ex repos) rose a less buoyant 6.3%yoy.

Building consents remain very weak in June

( According to Statistics NZ, the number of dwelling consents issued fell 1.4%mom in June to be down 26%yoy. Excluding consents issued for apartments, consents were down 4.5%mom and 28%yoy. Looking by region, during the three months to June, the number of consents issued in Auckland fell 20%yoy, a little less than the nationwide decline of 27%yoy. Consents in the quake-impacted Canterbury region were down 21%yoy, a relatively modest decline due to the consent of a number of temporary dwellings last month. Amongst the major centres the largest declines were in Wellington (46%yoy) and Otago (27%yoy). Large declines were also recorded across a number of smaller centres. Meanwhile, in recent months we have noted some pick-up in average consent values per square metre. This trend continued in June with the three month average up 5.0%yoy.

The week ahead?

( As far as the local diary is concerned, the focus this week will doubtless be on the Q2 labour market reports, especially the Household Labour Force Survey (HLFS) report which is released on Thursday. Employment rose a quite unexpected 1.4% qoq in Q1, dropping the unemployment rate back to 6.6%. Cognisant of the recent saw-tooth volatility in the survey (possibly due to changes in seasonal patterns), we have pencilled in no change in employment during the quarter even though we think the economy probably recorded reasonable growth. We expect the HLFS unemployment rate to have nudged down to 6.5% assuming that labour force participation eased a little following the very strong increase reported in Q1. The Quarterly Employment Survey (QES) measure of filled jobs, released on Tuesday, will provide some guide as to the outcome of the HLFS. We think that the wage and salary data released in the QES and the Labour Cost Index (also released Tuesday) is likely to continue to point to relatively subdued growth, albeit stronger growth than recorded during the depths of the recession. We expect the private sector ordinary time average hourly earnings series in the QES to have increased 1.0% qoq and 2.9% yoy. We expect private sector ordinary time wage rates in the LCI (which can be interpreted as a gauge of unit labour costs) to have increased 0.5% qoq, raising the annual rate of growth to 2.1% yoy. Outcomes such as we forecast above would leave the market anticipating a rate hike from the RBNZ of at least 25bps (more likely 50bps) on 11 September provided that the global economic and financial outlook does not deteriorate substantially between now and then.

DIARY

AUSTRALIA

Today

AIG/PWC PMI (Jul) [Previous 52.9]

TD/MI inflation gauge (Jul) [Previous 0.0%mom/2.9%yoy]

Tuesday

RBA cash rate announcement [DB/Market 4.75%; previous 4.75%]

Dwelling approvals (Jun) [DB: 2.0%mom/-10.7%yoy, Mkt 3.0%mom/-10.3%yoy; Previous -7.9%mom/-14.4%yoy]

ABS established house price index (Q2) [DB: -1.5%qoq, Mkt -1.0%qoq/-3.0%yoy; Previous -1.7%qoq/-0.2%yoy]

RBA commodity price index (Jul) [Previous 1.3%mom/28.2%yoy in SDR terms]

Wednesday

International trade in goods and services (Jun) [DB: AUD2.0bn, Mkt AUD2.2bn; Previous AUD2.3bn]

AIG/CBA PSI (Jul) [Previous 48.5]

Retail trade (Jun) [DB: 0.4%mom/2.3%yoy, Mkt 0.4%mom; Previous -0.6%mom/2.2%yoy] Volumes [DB: 0.6%qoq/0.7%yoy, Mkt 0.4%qoq; Previous 0.0%qoq/0.8%yoy]

Thursday

No data

Friday

RBA Statement on Monetary Policy

NEW ZEALAND

Today

ANZ Commodity price index (Jul) [World prices: previous 1.2%mom]

Tuesday

Quarterly employment survey (Q2)

[Private Sector Wages: DB 1.0%qoq/2.9%yoy, Mkt 0.8%qoq, Previous 0.3%qoq/2.5%yoy]

[Filled Jobs (nsa): DB 1.1%qoq/-0.5%yoy, Mkt 0.4%qoq, Previous -0.7%qoq/-0.2%yoy]

Labour cost index (Q2)

[Private Sector: DB 0.5%qoq/2.1%yoy, Mkt 0.5%qoq, Previous 0.4%qoq/2.0%yoy]

Wednesday

No data

Thursday

Household labour force survey (Q2)

[Employment: DB 0.0%qoq/2.0%yoy, Mkt 0.0%qoq/2.0%yoy; Previous 1.4%qoq/1.8%yoy

Unemployment rate: DB 6.5%, Mkt 6.5%, Previous 6.6%

Labour force participation rate: DB 68.4%, Mkt 68.4%, Previous 68.7%]

Friday

No data

DIARY