Morning Report
Today's economic developments and market movements.
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Key themes: US equities generally finished higher as the core personal consumption expenditures inflation gauge came in a touch softer than expected.
Treasuries extended gains on renewed optimism for a rate cut this year, with US bond yields falling across the curve.
The US dollar was softer on the back of the lower yields. The Aussie was trading slightly higher.
OPEC+ agreed to extend its voluntary cuts through the third quarter of the 2024, with cuts then gradually phased out over the following 12 months.
Share markets: US equities generally finished higher following a late rally supported by economic data which was constructive for the Fed. It generally wasn’t enough to offset losses recorded earlier in the week, on the back of some hawisk remarks from Fed speakers.
The S&P 500 Index staged a late-day surge to close 0.8% higher but was 0.5% lower over the week. The Dow Jones closed 1.5% higher but was 1.0% lower over the week. The tech-heavy Nasdaq 100 ended flat and finished 6.9% higher over the week.
The ASX200 finished 1.0% higher on Friday, snapping its three-day losing streak. Ten of eleven sectors closed in the green, led by financials stocks. Futures are pointing to a positive open this morning.
Interest rates: Treasuries rallied on renewed optimism for a rate cut this year. The 2-year bond yield declined 5 basis points to 4.87%. The 10-year treasury yield also declined 5 basis points to 4.50%.
Interest-rate markets continue to price a full rate cut by December. For 2024, the market is pricing in around 37 basis points of cuts.
Australian yields were mixed. The 3-year government bond yield (futures) was unchanged at 4.05%. The 10-year government bond yield (futures) was down by 2 basis point to 4.41%.
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 was softer on the back of the fall in US bond yields. The DXY index fell from a high of 104.90 to a low of 104.36, before settling at around 104.63.
The lower US dollar was reflected in a higher AUD/USD pair. The AUD/USD pair was trading sideways early in the session before reaching a high of 0.6673 following the release of US economic data. The pair is currently sitting around 0.6653.
Commodities: Commodities were generally lower, with gold, copper, oil, and iron ore all lower. Coal was higher.
On oil, OPEC+ agreed to extend its voluntary cuts of roughly 2 million barrels a day through the third quarter or 2024, before gradually phasing them out over the following 12 months. The group also agreed to cap output at about 39 million barrels a day through 2025.
This WTI futures ticked lower and is currently trading at around US$76.80 per barrel.
Australia: Dwelling prices rose 0.8% in May to be 8.2% higher in annual terms. It was the 16th consecutive month of growth and the largest monthly gain since October 2023. Perth (+2.0%), Adelaide (+1.8%), and Brisbane (+1.4%) continue to lead the way. The remaining capital cities recorded mixed results ranging from a 0.6% increase in Sydney to a 0.5% decline in Hobart.
Private sector credit grew by 0.5% in April to be up 5.2%yr, both basically unchanged on March and the tight range growth has been holding in over the last nine months.
Housing credit annual growth lifted from 4.3% to 4.5%, a ten-month high but still subdued by historic standards. Business credit growth dropped back to 6.8%, reversing a brief blip higher to 7.3% in March. Personal credit ticked up 0.2%mth and continues to track a 3.2%yr annual pace.
Credit continues to expand at a modest pace, restrained by elevated interest rates and a sluggish economy on the one hand but supported by a need to add to capacity with business still operating close to capacity, unemployment at historic lows and a population-driven demand pressures on housing supply.
China: The NBS non-manufacturing PMI ticked lower to 51.1 points in May, down from 51.2 in April. This was sifter than the 51.5 points the market was expecting. It marked the 17th consecutive month of expansion in services activity, but the softest pace since January.
The NBS manufacturing PMI declined to 49.5 points in May, down from 50.4 in April. This was softer than the 50.5 points the market was expecting. It signalled the first contraction in factory activity since February this year, as both new orders and foreign sales fell in the month.
Eurozone: The preliminary inflation outcome showed an increase of 0.2% in May and 2.6%yr. The outcome for May was as expected in the month but a touch higher than forecast over the year. Annual core inflation surprised more meaningfully, up 2.9%yr versus the consensus estimate of 2.7%yr. Service inflation remains the point of uncertainty, printing at 0.6% in May and 4.1%yr. Persistence in services inflation is expected to result in a measured rate cutting cycle by the European Central Bank, beginning this week at the June meeting.
Canada: Annualised March quarter GDP disappointed, gaining 1.7% against a 2.2% expectation. The December quarter’s result was also marked down from 1.0% to just 0.1%. Consumption growth was reasonable in both quarters, but business investment has struggled. The uncertainty over the outlook has clearly limited businesses willingness to invest.
Japan: Preliminary data showed industrial production fell 0.1% in April, well below the 0.9% gain the market was expecting. In annual terms, industrial output declined 1.0% in April, the sixth straight month of contraction.
United States: US April personal spending and consumption data was constructive for the Fed, signalling a continued deceleration in income, spending and inflation.
Personal income rose 0.3% in April, slowing from a 0.5% increase in March. Compensation of employees rose by 0.2% over the month, easing from the 0.6% gain recorded in March. This result points to a marked deceleration in wage growth in early 2024, back to a rate consistent with 2% inflation.
Personal spending was soft at 0.2%, implying consumers are now not only thinking twice about discretionary spending on goods but also services. The volume of sales fell 0.1% in the month. As income growth slows further and with the savings rate at a low level, consumers are likely to continue showing restraint.
The personal consumption expenditure (PCE) price index went up 0.3% in April, the same as in each of the previous two months and was in line with market forecasts. Prices for goods were up 0.2% and prices for services increased 0.3%.
The core PCE index, which excludes food and energy, rose 0.2%, below the 0.3% recorded in March and February and market expectations of 0.3%.
The PCE report points to a further moderation in inflation in coming months, from 2.7%yr and 2.8%yr on a headline and core PCE basis towards 2.0%yr. The Fed’s 2.4%yr headline PCE forecast for end-2024 is readily achievable.
The Chicago PMI dropped to 35.4 points in May, from 37.9 points in April. This was well below the 42 points the market was expecting. It marked the sharpest contraction in Chicago’s economic activity since the pandemic.
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