Inflation Signs Muted

A jobs report was the headline story of the day but inflation is what matters right now and more signs pointed to subdued price pressures Wednesday. On the day the Aussie was the top performer in a rebound after breaking 0.70 while the Swiss franc lagged. Australian trade balance and retail sales are highlights along with a BOJ speech.

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ADP employment was essentially in line with estimates at 190K compared to 200K expected. A similar story played out in factor orders where the headline missed by 0.5 percentage points at 0.9% but the prior was revised 0.4 pp higher.

The more intriguing reports was Q2 nonfarm productivity. It showed unit labor costs down 1.4% and real compensation falling at a 1.1% annualized pace. That's nowhere near the wage inflation the Fed expects to see materializing.

The Fed's Beige Book was similarly downbeat on inflation. It said that across all districts input and selling prices were stable or up only slightly with wages flat in most districts. These two reports strengthen our conviction that the Fed won't hike in September. Fed funds pricing of a hike has fallen to 32%.

The US dollar inched higher throughout North American trading Wednesday as risk appetite returned. But despite a nearly 2% rally in the S&P 500, EUR/USD suffered only marginal losses while USD/JPY couldn't break the Asian highs.

Looking to the hours ahead, the focus is on Australia. Trade balance and retail sales data will be released at 0130 GMT. The market is tepid on the prospect of a rate cut this year but signs of deteriorating exports and consumers could quickly change that. A trade deficit of 3.16B is expected with retail sales up 0.4% m/m.

Also at the same time, the BOJ's Kiuchi speaks and four hours later he will hold a press conference. He's the least dovish BOJ member so the chances of an endorsement for more QE are nil but his comments on the global economy could be interesting.

Finally, note that China is on holiday for the remainder of the week.