China Data Pushes Asia into the Red with the BoE and Retail Sales to Drive the GBP and Inflation to Drive the USD

Earlier in the Day:

Asian equities were pushed into the red in the Asian session this morning, with macroeconomic data weighing on market risk appetite, which was already being tested in the wake of the relief rally at the start of the week.

August data out of China this morning included fixed asset investment, industrial production and retail sales figures, with all three falling short of forecasts and July levels, raising concerns over the economic growth prospects for China through the 2^nd half of the year.

Industrial production grew by just 6% year-on-year, down from July’s 6.4%, the softer output growth coming off the back of weaker numbers in July, with the stat considered to be a proxy for China’s economic growth.

The stats were released shortly after the release of Australia’s August employment figures, which had been positive providing support for the AUD, the gains reversed and the AUD continuing to struggle to recover to $0.80 levels through the Asian session.

The AUD was up 0.16% at $0.7999 at the time of the report, with the markets torn between the positive stats out of Australia and the possible negative impact of an economic slowdown in China on the Australian economy through the remainder of the year.

The Day Ahead:

For the European session, the Pound will be basking in the limelight for yet another session, with August retail sales figures scheduled for release ahead of the September BoE monetary policy decision this afternoon.

Following this week’s inflation figures out of the UK, there are expectations of the BoE taking a more hawkish stance on monetary policy, with the projected timing of the first rate hike expected to be brought forward from September of next year. Positive data out of the UK in the lead up to Tuesday’s inflation figures also suggested that there may be additional votes in favour of a rate hike, though weak wage growth figures released on Wednesday were a disappointment.

The BoE had flagged concerns over labour market conditions as a key consideration in the Bank’s neutral monetary policy position and the weak figure may take the pressure off, but things may become all the more uncertain ahead of the BoE decision should August retail sales figures impress.

At the time of the report, the Pound was down 0.07% at $1.32021 with the markets having held back on any moves ahead of today’s stats and monetary policy decision, though the surge in the annual rate of inflation will likely be of particular concern to the BoE and likely to provide some support to the Pound ahead of the retail sales figures.

With macroeconomic data out of the Eurozone limited to finalized inflation figure out of France and Italy, focus will shift from the BoE to U.S inflation figures due out this afternoon, which will be pivotal in the Dollar’s recovery, with the Dollar having managed to recover some of its recent losses on Wednesday.

The FED is in its blackout period, so there will be no FOMC member commentary to decipher the inflation figures for the markets, which will leave the Dollar exposed to the data, any pickup in inflation towards the FED’s 2% objective being Dollar positive. Sentiment towards the Dollar could be mixed should the weekly initial jobless claims figure breach the 300k level, with the weekly jobless claims figures due out at the same time as the inflation numbers, though we will expect inflation to be the key driver for the Dollar ahead of tomorrow’s retail sales figures.

Adding to the allure of the Dollar has been the build-up of talks on tax reforms, with the U.S administration now focused on delivering at least one of its growth policies before the end of the year. The U.S President’s dinner with Democratic senators earlier in the week was said to have been fruitful, the three senators reportedly open to the idea of tax reforms, though we will expect the markets to be somewhat wary on the talk of the U.S administration and its ability to deliver, the administration having failed to deliver on policies to date.

At the time of the report, the Dollar Spot Index was down 0.04% at 92.482, with direction for the Dollar hinged on this afternoon’s inflation figures, though the markets will also be looking out for any noise from Capitol Hill on tax reforms, which would certainly reinvigorate the Dollar and deliver yet another catalyst for U.S equities to march forward.