Morning Report
Today's economic developments and market movements.
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Key themes: US equities finished firmly in the green amid growing optimism the Fed will be in a position to start cutting rates this year. This follows softer than expected labour market data released overnight.
Hopes for a global loosening cycle were bolstered overnight with the Bank of Canada becoming the first G7 central bank to cut rates. The European Central Bank is expected to follow and deliver a rate cut tonight.
US treasuries extended gains on this renewed optimism for a rate cut this year, with US bond yields falling across the curve.
The US dollar was slightly higher while the Aussie was broadly unchanged. Oil and gold recorded gains.
Share markets: US equities finished firmly in the green with the Nasdaq and S&P 500 climbing to fresh record highs. Expectations for rate cuts in the US have been bolstered by the softer than expected labour market data released overnight.
Tech stocks led the rally in the megacaps with Nvidia climbing to claim the title of second most valuable company in the world.
The Nasdaq closed 2% higher as it crossed back above the 17,000 level. The S&P 500 climbed 1.2% for its fourth-straight gain. The Dow Jones was up 0.3%.
The ASX200 finished 0.4% higher. Eight 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 4.72%. The 10-year treasury yield also declined 5 basis points to 4.28%.
Interest-rate markets have now fully priced in a rate cut by November. For 2024, the market is pricing in around 49 basis points of cuts – almost two full rate cuts.
Australian yields were also lower. The 3-year government bond yield (futures) declined 2 basis points to 3.91%. The 10-year government bond yield (futures) was down 3 basis point to 4.22%.
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 finished higher in what was a bumpy session. The DXY traded between a low of 104.13 and a high of 104.46 but some late selling pressure saw the index finish around the midpoint of the daily range near 104.27.
The Aussie dollar was little changed after gyrating through gains and losses. The AUD/USD initially rose on a better than feared domestic GDP read to an intra-day high of 0.6651. Beyond that, the AUD went along for the USD ride, mirroring swings in the US dollar.
The other majors were mixed, the British Pound firmed, while the euro edged down - both remaining comfortably within recent ranges. The Canadian dollar experienced a bout of volatility but finished only slight softer after the Bank of Canada became the first major central bank to cut interest rates.
The Japanese Yen had another outsized move, this time to the downside. The Yen fully retraced yesterday’s strong gains, the USD/JPY jumping back to around 156.00.
Commodities: The West Texas Intermediate (WTI) price of oil rose 0.8% to US$74.07 per barrel but remains in a distinctly lower range after a sharp sell-off through the start of the week.
The slide in iron ore futures took a breather overnight, with prices steadying around US$107.20 per metric tonne. This is down around 8% on Friday’s close.
Australia: The economy continued to limp along in the March quarter, with GDP rising just 0.1%qtr and 1.1%yr. The quarterly result and the mix were both broadly in line with expectations, albeit with some modest surprises and significant revisions around the consumer.
The annual pace of growth is well below trend and the slowest outside of recessions and the major shocks of the pandemic and the GFC. It is particularly weak given the current strong pace of population growth, running at 2.4%yr. Australia has now recorded four consecutive quarters of declining per capita GDP.
Domestic demand edged 0.2% higher over the quarter with solid growth in public demand but near-flat private demand.
The main surprise was a larger than expected contribution from household consumption, up 0.4%qtr although this was offset by a larger than expected drag from private new non-dwelling construction. Some of this reflects a temporary boost from one-off events – the Taylor Swift concerts and Formula 1 look to have added about 0.1ppt to consumption in the quarter.
Significant upward revisions to historical estimates of spending suggest consumers may be more cautious over the year ahead. These revisions relate to estimates of Australian tourism spending abroad. The total mark-up adds just over $22bn to the last five quarters of spending estimates and lifts the annual growth profile of total consumer spending by about 1ppt. However, it also implies a much larger run-down in reserves carried over from the pandemic. Nearly half of this aggregate buffer now looks to be gone. That suggests households may be less inclined to spend and more inclined to rebuild savings buffers as their incomes recover.
Meanwhile the recovery in incomes remains slow, real household disposable income flat in the quarter and up just 0.4%yr. The various headwinds to income – from the rising cost-of-living, higher interest rates and higher tax payments – are moderating but with only a muted recovery in incomes so far.
Elsewhere: dwelling investment and business investment were both soft in the quarter, speaking to wider issues facing the construction sector; net exports were a large drag, again reflecting the surge in tourism-related imports; and inventories provided some offset, reversing a run-down last quarter.
The update shows productivity and unit labour costs continuing to improve, but only very gradually. Hours worked tracked GDP in the quarter with labour productivity flat on a year ago (albeit still an improvement on declines). Growth in unit labour costs slowed from 6.6%yr to 5.8%yr.
Looking ahead, the economy is expected to see some improvement as consumer headwinds continue to subside and policy provides more support as tax cuts and fiscal support measures impact from July and an eventual easing in interest rates comes through from November. The March quarter update will be a mixed result for the RBA, subdued growth indicating restrictive policy is aiding disinflation.
China: The Services PMI advanced to 54.0 points in May, from 52.5 points in April, beating market expectations of 52.6 points. It was the seventeenth straight month of expansion in services activity, marking the fastest pace since July 2023. Business sentiment remained positive but declined amid rising concerns over the global economic outlook.
Eurozone: Ahead of the ECB’s June meeting tonight, the Euro Area PPI came in below expectations in April, prices declining 1.0% in the month (consensus -0.7%) and 5.7%yr. The ECB is on track to sustainably achieve their 2.0%yr inflation target while the labour market remains strong and growth accelerates. Final estimates for the May S&P Global services PMIs were essentially unchanged from the flash estimates, providing evidence of robust growth in the Euro Area and UK in Q2 2024.
United States: The US ISM services PMI strengthened in May to 53.8 from 49.4. Business activity jumped 10pts to 61.2, while new orders and employment posted modest gains to 54.1 and 47.1 respectively. Headline, new orders and employment are all still below the 10-year average, however. Overall, these results therefore point to growth around trend, though by itself the employment indicator is pointing to outright job loss. Prices paid edged 0.9pts lower to 58.1, but again this is a below-average level, consistent with inflation at target. Also out overnight ADP private payrolls surprised to the downside in May at 152k (consensus 175k and April 188k).
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