Morning Report
Today's economic developments and market movements.
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Key themes: The tone was set by the softer than expected economic data coming out of the US, which supports the case for rate cuts in coming months. European central bank officials also signalled that two more cuts this year seemed “reasonable”.
On the back of this, there was a sea of green when it comes to equities. US and European markets finished firmly in the green, with the S&P 500 notching up a fresh record high. Asian equity futures are higher.
US bond yields were lower, while the US dollar also lost ground. The Aussie appreciated, climbing to its highest level since early January this year. The AUD/USD pair remains above the 0.6700 level.
The prices of key commodities were generally higher, with oil and gold both lower.
Share markets: US equities rallied following the softer than expected economic data coming out of the US, as well as the Fed FOMC minutes from the June meeting where officials viewed the economy as “cooling”.
The S&P 500 Index gained 0.5% to close at 5,537 points. The tech-rich Nasdaq rose 0.9% to 18,188 points. The Dow Jones was virtually flat (declining 0.06%).
European markets also finished in the green, with the Euro Stoxx 50 and the DAX up 1.2%, while the FTSE 100 made a 0.6% gain.
The ASX200 closed 0.3% higher, snapping a two-day losing streak. Seven of eleven sectors were higher, led by materials stocks. Futures are pointing to strong open this morning.
Interest rates: US bond yields were lower across the curve.
The 2-year bond yield declined 4 basis points to 4.71%. The 10-year treasury yield declined 7 basis points to 4.36%.
Interest-rate markets are pricing in just under two 25 basis points rate cuts this year (or 47 basis points of cuts), one in November and the other in December.
Australian yields were also lower. The 3-year government bond yield (futures) declined 2 basis points to 4.11%, while the 10-year government bond yield (futures) declined 5 basis points to 4.39%.
There is now around a 50% chance of an RBA rate hike priced in for 2024 with around a 23% chance of a hike at the August meeting. Markets have pushed out the first full rate cut to August next year.
Foreign exchange: The US dollar was lower on the back of the fall in yields, particularly at the long end of the curve. The US dollar index fell to a low of 105.05 before settling at 105.35.
The Aussie outperformed and appreciated against the US dollar (+0.6%). The AUD/USD pair increased to a high of 0.6734 (highest since early January this year), before settling at 0.6705.
Commodities: Commodities were generally higher, with gold, copper and oil all higher.
This WTI futures was higher overnight and is currently trading at around US$83.88 per barrel.
Australia: Retail sales rose 0.6% in May, coming in better than the consensus and Westpac forecast of a 0.3% lift. While that marks the best gain since the start of the year, the picture is still subdued with nominal sales tracking a 0.4% for the June quarter and the underlying trend looking about flat. Annual sales growth lifted to 1.7%yr, also the strongest pace for the year but again implying a marked 2.5-3% contraction in real, per capita terms.
By store-type, the May month saw a robust gain for basic food (+0.7%), and a lift in both clothing (+1.6%) and household goods (+1.1%). This was partially offset by a 0.9%mth fall for department stores. Cafes & restaurants continued to see flat sales.
By state, there were relatively strong gains for Vic (+1.2%mth after two weak month) and WA (+1.3%mth extending a more positive run), with Qld (+0.5%mth) more in line with the national result and a softer performance in NSW and SA (both dipping 0.1%mth).
Other monthly data released over the last few weeks also point a soft June quarter for the consumer. Motor vehicle sales fell away quite sharply into year-end. Auto fuel consumption also softened through March-April, tracking about flat for the quarter.
The total number of dwellings approved rose 5.5% in May, after an upwardly revised 1.9% rise (from an initial estimate of -0.3%) in April. This was stronger than the 1.6% increased expected by the market. The monthly increase was driven by medium and high-density private sector dwellings, which rose 16.3%. Private sector house approvals also rose by 2.1%.
Total dwelling approvals rose in all states, with WA leading the rise, up 19.6% in May. This was followed by Vic (+8.9%), Qld (+6.3%), SA (+4.1%), Tasmania (+3.8%) and NSW (+2.9%). The monthly increase reflects a stabilisation in approvals which looked to have troughed, rather than a turnaround, with total dwelling approvals still down almost 10% from a year ago.
Eurozone: Producer (or wholesale) prices declined 4.2%yr in May, following a 5.7%yr drop in April. This was broadly in line with the decline of 4.1%yr expected by the market. It was the 13th straight month of annual producer deflation. Excluding energy, prices went down 0.4%yr, less than a 0.9%yr fall recorded in April.
ECB official, Yannis Stournaras, said two more rate cuts this year seems “reasonable.”
China: The Caixin China Services PMI declined to 51.2 points in June from 54.0 points in May. This was the slowest pace of expansion in almost eight months. Growth in new and export orders eased. On prices, input prices increased due to higher material, labor, and transport costs. As a result, selling prices also rose, but the survey suggests that increases were marginal.
The Composite Output Index declined to 52.8 points in June, down from 54.1 points in May. This suggests that business activity expanded for an eighth successive month. The rate of growth was solid driven by an acceleration in manufacturing activity and output growth, partly offset by slowing in activity in the services sector.
United States: The ISM non-manufacturing index declined 5 points to 53.8 points in June, from 48.8 points in May. This was weaker than the 52.7 expected by the market. This is the second sub-50 reading in three months, but more importantly the June read is almost 7.5 points below the decade average. The employment index also fell back to April’s weak level (some 6 points below average) after rebounding in May. Business activity and new orders also dropped sharply in June. The level of these sub-components speak to the risk of outright contraction against our base expectation of modest growth and need to be watched closely.
Factory orders disappointed in May, declining 0.5% and April was revised lower, from 0.7% to 0.4% on a headline basis. The outcome for was well below the gain of 0.2% expected by the market, suggesting some softness in activity over the period ahead.
ADP private payrolls also modestly undershot expectations at 150k (market expectations was 165k). Initial jobless claims and the May trade balance were largely as expected and little changed from prior readings.
The minutes from the Fed’s FOMC June meeting were also released overnight. The tone was consistent with the Committee’s positive forecasts for the economy, with most officials viewing the economy as “gradually cooling”. Policy is seen as restrictive and will consequently bring about desired inflation outcomes in time. Economic activity was also characterised as robust during discussions.
That said, there were some notes of caution over momentum in the labour market, in particular “several” participants noted that nonfarm payrolls may be overstating job creation. Anecdotes on the labour market and consumer behaviour were also used to guide that both wage inflation and consumer inflation is continuing to decelerate. Despite the shift to only one cut this year in their published forecasts, the Committee looks to be ready to begin easing as incoming data give confidence in inflation’s downtrend and/or should downside risks assert. September remains the most likely timing for a first cut.
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