Morning Report
Today's economic developments and market movements.
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Key themes: US equities were generally lower with the weaker than expected consumer sentiment read weighing on the market.
US bond yields were slightly lower, locking in the falls in yields we saw last week.
The US dollar continued to advance as risk sentiment took a hit amid the political uncertainty in Europe, while the Aussie fell.
Share markets: US equities were generally lower with weaker than expected economic data weighing on valuations.
The S&P 500 Index was flat to be 1.6% higher over the week. The Dow Jones closed 0.2% lower to be 0.5% lower over the week. While the Nasdaq closed 0.1% higher to be 3.2% higher over the week – the largest weekly gain since late April.
Given the political instability in Europe, markets in the area closed in the red with the Euro Stoxx 50 down 2.0% on Friday.
The ASX200 closed 0.3% lower, to finish the week 1.7% lower. Nine of eleven sectors closed in the red, led by materials stocks. Futures are pointing to a soft open this morning.
Interest rates: US bond yields were slightly lower, consolidating the falls in yields we saw over this past week amid softer than expected inflation data.
The 2-year bond yield was virtually unchanged at 4.70% but was 18 basis points lower over the week. The 10-year treasury yield declined 2 basis points to 4.22%, to close 21 basis points lower over the week.
Interest-rate markets are pricing in two 25 basis points rate cuts this year, one in November and the other in December.
Australian yields were also lower. The 3-year government bond yield (futures) fell 1 basis points to 3.81%. The 10-year government bond yield (futures) fell 3 basis points to 4.11%.
The Aussie rates curve is flat across the remainder of 2024. A full rate cut has now been fully priced by February 2025.
Foreign exchange: The US dollar continued to advance with the DXY Index testing the 105.80 level before settling at around 105.52.
Economic resilience, and more recently the political uncertainty in Europe, has led to an increase in capital flows into the US, which is supporting the greenback. IMF data shows that the US has nabbed almost one-third of all global capital flows since the pandemic. The pre-pandemic average share was 18%.
The Aussie fell against the US dollar, sliding below 0.6600 before increasing and settling at around 0.6616. The uncertainty in the global economy and declines in key commodity prices are weighing on the Aussie. A more hawkish than expected RBA Board statement following the two-day meeting that kicks off today could provide the Aussie with some support.
Commodities: Commodities were generally lower, with copper, oil, coal, and iron ore all lower.
This WTI futures was slightly down overnight and is currently trading at around US$78.45 per barrel.
Australia: There were no major releases last Friday.
New Zealand: The BusinessNZ Performance of Manufacturing Index contracted further to 47.2 points in May, down from 48.9 points in April. This was the 14th consecutive month of contraction. New Orders continued to decline, and production reverted to its downward trend.
Japan: The Bank of Japan played a steady hand with policy, leaving their policy rates on hold at between 0 to 0.1%. The BOJ also announced it will reduce bond purchases but delayed details until July, saying it wanted to consult with market participants.
BOJ Governor Ueda said the reduction in bond purchases will be “considerable.” He also said a rate hike in July was a possibility, depending on economic data.
Eurozone: The Euro Area’s trade surplus widened in April from €17.2bn to €19.4bn, holding on to a material portion of gains over the past year.
European Central banks President Lagarde noted that progress on inflation in being made even though the road ahead is likely to be bumpy. She said “We do have plenty of challenges, but I really believe that we are now heading toward a disinflationary path that will have its little hiccups here and there — what we call bumps on the road, But it’s definitely on a declining path.”
United States: The preliminary University of Michigan consumer sentiment index fell for a third straight month to 65.6 points in June, from 69.1 in May. This was the lowest since November, and well below the 72 points the market was expecting.
Assessments of personal finances dipped, due to modestly rising concerns over high prices as well as weakening incomes. The current conditions gauge declined (from 69.6 to 62.5) and there was also a pullback in expectations (from 68.8 to 67.6). The 1 and 5-year inflation expectations were little changed in the month at 3.3% and 3.1% but only circa 0.5ppts above the average of 2010-2019, when CPI inflation was below target.
Import prices fell 0.4% in May, the first price decline of the calendar year. This was softer than the growth of 0.1% expected by the market. Prices for fuel imports fell by 2%, tracking the softness in global energy markets. Prices for non-fuel imports fell by 0.3% amid lower costs for foods, feeds, and beverages; industrial supplies and materials; and consumer goods. On an annual basis, import prices rose by 1.1%.
Export prices fully offset April’s 0.6% gain, declining 0.6% in May to be up just 0.6% in annual terms.
Loretta Mester, Cleveland Fed President, described the recent softer inflation data as “a great gift,” but said she still “thinks the risks to inflation are still on the upside. I think the risk to the labour market is dual-sided.”
Austan Goolsbee, Chicago Fed President, said the recent inflation read was “very good” and that “If we got a lot of months like this, we would be feeling so much better”.
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