Morning Report
Today's economic developments and market movements.
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Key themes: The ISM manufacturing survey surprised to the downside, underpinned by weakness in new orders. The soft reading providing another sign that US economic resilience is gradually fading.
US equities finished higher after clawing back an early slide. Shares were higher in Europe but lower in the UK.
US treasuries rallied at the long-end (i.e. yields fell) with 10-year and 30-year tenors outperforming. But there were no signs that the softer US data changed the equation for the Fed.
Most major currencies gained against the US dollar, with the British Pound and the Euro reaching high’s since March.
Share markets: The S&P 500 unwound an initial slide to close 0.1% higher. The NASDAQ outperformed, rising 0.6%.
Across the pond, the Euro Stoxx 50 (0.4%) and the German Dax (0.6%) were higher while the FTSE 100 slipped 0.2% in London.
The ASX 200 rose 0.8% yesertday, taking Friday’s offshore price action in its stride. Futures edged lower overnight, pointing to a tepid open this morning.
Interest rates: US treasury yields dropped, led by the long-end of the curve. The 2-year yield was 6 basis points lower at 4.81%, while the 10-year yield was down 11 basis points to 4.39%.
The sharper move at the long-end is a sign that weaker manufacturing data is unlikely to shift the dial on Fed rate cuts near term, but is perhaps a signal of the markets view of neutral interest rates as US economic exceptionalism fades.
Market pricing for Fed rate cuts was little changed. There’s around 40 basis points of rate cuts priced into the swaps curve by the end of 2024.
Aussie bond futures rallied overnight (i.e yields fell) after physical yields were flat to lower in yesterday’s trade. The 3-year futures yield slipped 5 basis points to 3.96%, while the 10-year was down 8 basis points to 4.30%.
Foreign exchange: The US dollar was softer on lower bond yields. The DXY slipped to the lower end of its recent range, trading from a high of 104.77 to a low of 104.05.
The Aussie dollar strenghtened but ran out of puff around 0.6695. The AUD/USD was trading only slightly lower at the time of writing.
The British Pound jumped to its highest level against the US dollar in almost 3-months, increasing from a low of 1.2694 to a high of 1.2808. The euro touched its highest level since late March, bouncing off a low of 1.0828 to a high of 1.0905. Both the Euro and the Pound have continued to drift higher during early Asian trade this morning.
The Japanese Yen had another solid showing, extending last week’s shaky uptrend. The USD/JPY fell from 157.47 to 155.95.
Commodities: The West Texas Intermediate (WTI) price of oil tumbled 3.6% to US$74.22 - its lowest since early February. Iron ore futures also traded sharply lower, falling 4.8% to US$111.50 per metric tonne. Gold and copper were both 1.0% higher.
Australia: Annual growth in the Melbourne Insitute monthly inflation gauge slowed to 3.1% in May, its slowest reading since January 2022. The inflation measure has tracked above the offical ABS monthly and quarterly inflation results since the middle of last year. Taken alone this could be a sign we may see some better inflation progress in May. However, it’s too early to draw too much from the move.
China: The Caixin purchasing managers’ index (PMI) edged up to 51.7 in May from 51.4 in April. This was the seventh consecutive reading above the threshold of 50 which separates expansion from contraction. The reading points to a modest expansion in the manufacturing sector as economic confidence improves and global demand remains solid.
Eurozone: German and euro-area manufacturing PMIs were finalised little-changed at 54.4 and 47.3, respectively. Manufacturing activity remains weak, despite a gradual improvement over the start of 2024.
United Kingdom: The May manufacturing PMI was finalised at 51.2 - the strongest reading since July 2022.
United States: The ISM manufacturing index edged lower from 49.2 to a below average 48.7 in May. Expectations were for a mild improvement in manufaccturing activity. New orders were particularly weak dropping from 49.1 to a contractionary 45.4. This was despite a lift in new export orders, implying a deterioration in domestic demand. On the positive side, prices paid eased to a near-average 57.0. The employment index rose to 51.1, in line with the decade average.
Contrasting the slide in the ISM manufacturing PMI, the May S&P manufacturing PMI was finsliased higher at final figures. The PMI was finalised at 51.3 compared to a flash reading of 50.9.
Construction spending edged lower again in April, down 0.1% after March’s 0.2% fall. Both residential and non-residential construction are approximately 0.3% lower over the two months, but are respectively 8.1% and 11.5% higher over the year.
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