Morning Report
Today's economic developments and market movements.
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Key themes: US equities were generally higher amid better-than-expected inflation data and robust earnings from tech companies. The S&P 500 and Nasdaq have now closed at fresh record highs for four consecutive days.
Treasuries rallied on the back of the benign inflation data, and the softer labour market indicators, which help bolster the case for the Fed to cut rates this year.
The US dollar advanced, while the Aussie fell. The prices of major commodities were also generally higher.
Share markets: US equities generally closed higher after a choppy session where stocks flipped between gains and losses. The better-than-expected inflation data was weighed up against concerns about a slowing economy. Investors gain confidence when US Treasury Secretary Yellen expressed optimism about continued progress in disinflation, while noting that the labour market remains resilient despite recent softening in conditions.
the S&P 500 Index closed 0.2% higher with gains largely driven by semiconductor stocks. The Nasdaq climbed 0.3%. While the Dow Jones was the outlier, closing 0.2% lower.
The ASX200 closed 0.4% higher, partly reversing the decline of 0.5% recorded during the previous session. Nine of eleven sectors closed in the green, led by health care stocks. Futures are pointing to a soft open this morning.
Interest rates: Treasuries rallied on the back of the benign inflation data, which help bolster the case for the Fed to cut rates this year.
The 2-year bond yield declined 5 basis points to 4.70%. The 10-year treasury yield declined 7 basis points to 4.24%.
Interest-rate markets are now pricing in two 25 basis points rate cuts this year, one in November and the other in December. At the start of the week, markets had priced in 35 basis point of cuts this year.
Australian yields were also lower. The 3-year government bond yield (futures) fell 4 basis points to 3.85%. The 10-year government bond yield (futures) also fell 4 basis points to 4.16%.
The Aussie rates curve is flat across the remainder of 2024 as traders trimmed the odds of a rate cut from the RBA this year.
Foreign exchange: The US dollar retraced the fall in the previous session, with the DXY Index now trading back at the 105.20 level. The DXY Index moved from a low of 104.64 to a high of 105.28, better settling at 105.21.
The US dollar is likely still being supported by the updated Fed “dot plots”, which showed Fed Governors now expect fewer cuts this year. Uncertainty in Europe is also likely providing a tailwind, with the EUR/USD pair falling back to recent lows below 1.0750 in overnight trade.
The Aussie fell against the US dollar despite the neutral labour market data, retracing some of the gains made during the previous session when the AUD/USD pair reached a high of above 0.6700. Overnight, the AUD/USD pair declined to a low of 0.6626 before settling at around 0.6635.
Commodities: Commodities were generally higher, with copper, oil, coal, and iron ore all higher.
This WTI futures ticked higher overnight and is currently trading at around US$78.62 per barrel.
Australia: In May, the level of employment rose by +39.7k (+0.3%). the participation rate printed 66.8%, holding flat from April (upwardly revised from 66.7% to 66.8%). That implied a solid +30.5k increase in the size of the labour force. At the same time, there was also a decline in the level of unemployment, down –9.2k, seeing the unemployment rate fall from 4.1% to 4.0%.
The total number of hours worked declined –0.5% in May, to be 0.6% higher in annual terms. In part, this soft outcome was driven by a larger than average share of employed persons working fewer hours due to illness (4.2% in May 2024 vs. 3.5% pre pandemic average).
Outside of these month-to-month dynamics, it remains clear that the labour market – in an aggregate sense – is becoming progressively less tight. Growth in employment eased from 2.9%yr in April to 2.6%yr in May (three-month average basis), marking a continued but gradual slowdown from earlier strength (6.4%yr in Oct-22), to still be above the 2.0%yr to 2.5%yr ‘norm’ observed in the years prior to the pandemic.
It is also worth highlighting that growth in employment has been keeping pace with growth in the working age population. At 64.1%, the employment-to-population ratio is not materially different from what was observed at various instances over last year. Having just come out of the tightest labour market in around fifty years – and with many key sectors still reporting skilled labour shortages – businesses remain eager to expand their workforce and their capacity. As this dynamic continues to unfold, average hours worked will remain a key lever of input adjustment in response changes in demand conditions (as discussed in more detail below).
New Zealand: Retail spending has remained weak, falling 1.1% in May. That was the fourth straight month of declines, and points to further belt-tightening by consumers after a year of already-flat spending over 2023.
Household spending is expected to remain soft over the coming months. Household budgets remain under pressure from continued high interest rates and still-high inflation. At the same time, the labour market is softening. On the more positive side, income tax cuts may give spending a temporary boost through the back half of the year.
Eurozone: The market’s primary concern regarding Europe is political uncertainty. The April industrial production outcome also highlights that downside economic risks remain, surprising with a 0.1% decline. Intermediate goods output declined further, while the production of capital goods advanced at a slower pace over the month. Primarily the result of a base effect, the annual rate also fell from -1.2%yr to -3.0%yr. The start of the ECB’s cutting cycle is timely, helping to manage downside risks and sure up the anticipated economic recovery.
United States: The producer price index (PPI) fell 0.2% in May, while the core PPI (which excludes volatile items such as food and fuel) was flat. Both outcomes were well below expectations and recent readings. Annual headline and core PPI inflation is now respectively 2.2%yr and 2.3%yr, a fraction of the 11.7%yr and 9.7%yr peaks of early-2022. While not a strong lead for CPI or PCE inflation overall, coming a day after the better-than-expected May CPI print, this result adds weight to the notion that US consumer inflation is on its way back to 2.0%yr.
Initial jobless claims remain historically low, but last week’s increase to 242k was material. The highest outcome in over a year, the current reading for claims suggests the labour market has turned and, albeit at the margin, supply is now outpacing demand. Continuing claims are volatile but are also edging higher.
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