Morning Report
Today's economic developments and market movements.
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Key themes: Stronger than expected US wages data on the eve of the Fed policy announcement bolstered expectations for more hawkish commentary for the Fed and supported the prospect of higher for longer interest rates.
US equities stumbled on the data and revised rate expectations which pushed US treasury yields higher across the curve.
The US dollar pushed back above the 106 handle, gaining against every G-10 major. The Aussie dollar slipped back below 65 cents.
Bank of Japan (BoJ) end of month accounts suggested that authorities intervened to support the ailing Yen earlier in the week. However, the intervention only appears to have temporarily stemmed the sell-off. The Yen has since unwound around half of Monday’s sharp gain.
Share markets: Equities were lower in the US and Europe overnight. Hotter-than-expected wages data in the US left markets on edge on the eve of the May Fed decision.
The S&P 500 slipped 1.6%, unwinding a big chunk of last week’s gains. The tech heavy NASDAQ dropped 2.0%. Across the pond the Euro Stoxx 50 shed 1.2% and the German Dax fell 1.0% despite stronger than expected economic growth.
The ASX 200 finished 0.3% higher yesterday but futures dropped 1.2% overnight, pointing to a weak open this morning.
Interest rates: US treasury yields were up across the curve on the surprisingly strong US wages data. The 2-year yield rose 6 basis points to 5.04%, a fresh five month high. The 10-year yield rose 7 basis points to 4.68%.
A 25 basis point Fed rate cut remains fully priced by year-end but the odds of a second were trimmed to just shy of 10%, from closer to 30% earlier in the week.
The Aussie 3-year Aussie futures yield is currently trading at 4.07% after gyrating overnight and in early trade this morning. The 10-year futures yield is current trading around 4.49%.
Interest rate markets are still sceptical of an RBA rate cut this year, but the implied odds of an additional hike from the RBA were pared back following yesterdays weak retail spending data.
Foreign exchange: The US dollar jumped on the stronger US wages data, gaining a tailwind from higher for longer rate expectations. The DXY index rose from a low of 105.66 to a five-session high of 106.34.
The Aussie dollar struggled against the stronger greenback, falling back below the 0.6500 handle to a low of 0.6472. There was nowhere to hide in the G-10 basket with all the majors slipping against the US dollar.
BoJ end of month accounts suggested that authorities intervened in the Yen market on Monday. However, the intervention appears to have only slowed the bleeding, particularly if the lengthening of US rate cut expectations has further to run. The USD/JPY was trading back around 157.74 this morning with the Yen having lost around half of the gains induced by the suspected intervention.
Commodities: Commodity prices were broadly lower overnight. The West Texas Intermediate (WTI) price of oil slipped 0.8% to US$81.93 per barrel while gold and copper dropped 2.1% and 1.5%, respectively.
Australia: Private sector credit grew by 0.3% in March, a slight softening on the 0.5% gains in January and February and compared to the average of the past half year (0.4% per month). Growth in housing credit was unchanged at a monthly pace of 0.4%, where it has stood for the past seven months. Business credit growth ticked down from 0.6% in February to 0.5% in March, however, annual growth edged up to 7.0% - comfortably above the 10-year average of 4.8%.
Retail sales came in weaker than expected in March, contracting 0.4% in the month. Through the March quarter, nominal retail spending was up just 0.2%, suggesting real retail spending (i.e. adjusted for inflation) is likely to come in at a similar level to the December quarter (0.3%) if not slightly weaker. Retail spending represents around 30% of household consumption, suggesting the weak consumer spending likely continued through the start of 2024.
China: China’s factory activity expanded ever so slightly in April, bolstering hopes that an economic rebound can be sustained. The official manufacturing purchasing managers’ index (PMI) weakened slightly to 50.4 in April but held marginally above expectations and importantly, above the threshold of 50.0 which separates expansion from contraction. The expansion in manufacturing activity was echoed by the private PMI survey which rose from 51.1 to 51.4 – its highest level since February 2023. The non-manufacturing PMI surprised to the low side, but remained in expansionary territory at 51.2, down from 53.0 in March.
Euro zone: The Eurozone exited from a narrow recession in the March quarter as GDP surprised to the upside. GDP expanded 0.3% in the quarter, up from a 0.1% fall in the December quarter. Annual growth accelerated to a tepid 0.4%, well above expectations for a 0.2% gain. While it appears the Eurozone economy has turned a corner, it will likely take a healthy shot in the arm from rate cuts before a more sustainable expansion takes hold.
A welcome drop in services inflation in April after five months of no progress is likely to sway in favour of ECB rate cuts. The consumer price index (CPI) rose 0.6% in the month, down from 0.8% in March. This saw headline annual inflation hold steady at 2.4% while core inflation slowed to 2.7% from 2.9%. However, this was slightly stronger than consensus expectations which centred on a core reading of 2.6%. Services inflation, which has held stubbornly at 4.0% for the past five months, pulled back to 3.7%.
Japan: A 3.8% bounce in industrial production in March was not enough to offset falls in factory output in both January and February, leaving quarterly output growth at its weakest since the second quarter of 2020. The weak reading points to downside risk to economic growth in the first quarter and is going to do little to expedite any further removal of accommodative policy settings.
New Zealand: Business confidence slipped to a seven-month low in April as restrictive policy settings take their toll. The ANZ business confidence index fell to 14.9 in April from 22.9 in March unwinding what looked to be an encouraging improvement in business confidence late in 2023 and through the start of 2024.
United States: A surprise acceleration in wages growth in the March quarter will provide another setback for near-term Fed rate cuts and will likely support more hawkish commentary from Fed Chair Jerome Powell at tomorrow morning’s post-meeting press conference. The Fed’s preferred wage measure, the employment cost index (ECI), rose 1.2% in the quarter, topping even the most bullish estimates and reaching its fastest quarterly pace in 12 months. Annual growth in the ECI was unchanged at a stubbornly high 4.2% - a level likely inconsistent with achieving the 2% inflation target. The tandem acceleration in both core services inflation and wages growth is a troubling combination for the Fed and is likely to see the higher for longer rhetoric persist for a little longer yet.
The FHFA house price index rose a surprise 1.2% in February, the largest monthly gain since April 2022. The CoreLogic house price index was slightly less upbeat but nonetheless printed a 0.6% monthly gain, taking annual growth to 7.3%.
The MNI Chicago PMI tumbled to its lowest level since November 2022 in April, underwhelming expectations for a modest improvement.
The Conference Board consumer confidence index slipped to 97.0 in April as the assessment of current conditions and expectations of the outlook both soured. The April reading marked the first fall below 100 since October last year and the weakest print since July 2022.
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