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Today's economic developments and market movements.


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Key themes: Jerome Powell’s congressional testimony was the sole focus of markets overnight. 

Powell did little to sway market expectations for rate cuts this year, unveiling a more balance assessment of inflation and growth risks, while conciously avoiding any near-term guidance.

US equities continued to grind higher, extending fresh records, while the tone was less upbeat in European equities.

Treasury yields traded fairly narrow ranges, with the 2-10-year portion of the curve bear steepending slightly as the short-end held steady and longer maturity yields edged higher.

The US dollar firmed slightly against a basket of major currencies, gaining against the British Pound, the euro and the Japanese Yen.

The Aussie dollar outperformed, advancing slightly against the greenback.

Share markets: US equities finished slightly higher, bouyed by remarks from Jerome Powell which did little to sway rate cut bets. The S&P 500 and the NASDAQ rose for a sixth straight session, each gaining 0.1% to notch up fresh record highs.

The mood was less upbeat across the atlantic. Shares in Germany closed down 1.3%, matching the slide in the broader Euro Stoxx 50. In London, the FTSE 100 shed 0.7%.

The ASX 200 gained 0.9% yesterday, continuing to jump around within a familiar range. Futures traded lower overnight, pointing to a soft open this morning.

Interest rates: US treasuries traded fairly narrow ranges overnight, suggesting comments from Jerome Powell did little to shift the markets assessment of the economy and the rate outlook. The yield curve bear steepened slightly as the 2-year yeild finished unchanged at 4.63%, while the 10-year yield edged 2 basis points higher to 4.30%.

Overnight index swaps (OIS) imply around a 70% chance of a Fed rate cut at the September meeting, with a cut fully priced in by November.

Aussie bond futures sold off slightly overnight. The 3-year (futures) yield rose 1 basis point to 4.09%, while the 10-year yield gained 3 basis points to 4.38%.

Interest rate markets are still pricing in a roughly 50/50 chance the RBA hikes rates again by November this year. Cuts are not yet fully priced into the curve until later next year.

Foreign exchange: The US dollar edged higher, gaining against the British Pound, the euro and the Japanese Yen. The DXY traded from a low of 104.96 to a high of 105.21 before pulling back slightly to trade around 105.12 at the time of writing.

The Aussie dollar outperformed, rising from a low of 0.6724 to a high of 0.6748 - retesting resistence around 0.6750. The AUD/USD has since pulled back slightly to trade aroun 0.6741. The Japanese Yen came under renewd pressure, largerly unwinding recent gains. The USD/JPY closed back above 161, finishing around 161.28.

Commodities: The West Texas Intermediate (WTI) price of oil slipped for a third consecutive session falling 1.1% to US$81.41 per barrel. Copper also slipped (-0.5%), while gold (0.2%) and iron ore (0.9%) bucked the trend.

Australia: The Westpac-Melbourne Insitute consumer confidence index fell to 82.7 in July from 83.6 in June, confirming sentiment remains stuck in the doldrums. 

Interestingly, households are more alert to the risk of additional rate hikes with just shy of 60% of respondents expecting mortgage rates to increase over the next year - up sharply on previous months.

Stage 3 tax cuts and gradually easing inflation will continue to unwind the extreme pressure recently heaped on household incomes. This should help foster some optimism among consumers, although an easing in monetary policy will likely be needed to catalyse a sustained improvement in sentiment.

The NAB business survery recorded a sharp uptick in business confidence in June, rising 6 points to +4. However, in the context of recent results, business confidence remains broadly neutral, having oscilated between slightly pessimistic and narrowly optimistic over recent months. While businesses are clearly more upbeat than households, the mood is hardly cheerful.

Business conditions continued to grind lower, edging down to +4 in June from +6 in May - below long-run average levels. This is hardly surpsing given recent soft economic data economic data. Meanwhile a tepid forward orders reading suggested there has been more of the same in train for the June quarter.

On the cost side capacity utilisation remained elevated, a sign that demand, whilst moderateing, continues to outstrip supply. Encouragingly, measures of input costs unwound their spike in May, but remain elevated by historical standards. This echoes recent data which has shown inflation is still coming down, just at a slower rate than previously anticipated.

United States: Jerome Powell struck plenty of familiar chords during his congressional testimony overnight. Powell was careful not to opine on the potential timing of rate cuts but did underscore that hiking rates further was deemed unlikely, hardly breaking any new ground. Interestingly, however, Powell outlined a more balanced assessment of the economic risks, stressing that the Board is cognisant the risk of both slower inflation progress and weaker economic growth and labour market outcomes. 

In making this assessment Powell noted that the economy is no longer overheated and that the labour market appears to be back in balance - noting that this was only a recent observation promted by the latest labour market data. However, it was also reinforced that further data would be needed to build confidence that the inflation target can be sustainably achieved. The rhetoric reinforced expectations for rate cuts this year, but the lack of guidance and balanced tone prevented a broader bet on imminent rate cuts.

The NFIB small business optimism index rose to its highest level this year, lifting to 91.5 in June from 90.5 in May. However, by historical standards small business sentiment remains decidedly weak, having averaged 101.2 in the five years prior to the pandemic.

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