Morning Report
Today's economic developments and market movements.
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Key themes: Financial markets experienced some swings after the stronger-than-expected US retail sales report overnight. The US dollar index shot up before fully unwinding its gains whilst the Australian dollar slid further against the greenback.
Expectations of rate cuts at the US Federal Reserve’s meeting in September remained intact after a Federal Reserve member provided optimism that inflation is returning to the Fed’s 2% target.
These rate-cut expectations contributed to the S&P 500 share market index hitting another record high and could help spur the Australian share market higher in trade later today.Share markets:
Share markets: Expectations that the US Federal Reserve may start cutting the fed funds rate soon spurred share markets higher. The S&P 500 hit a new record high. Small caps outperformed; the Russell 2000 has outperformed the Nasdaq over four sessions, which is the most since 2011.
Bloomberg news has flagged that the S&P 500 has gone 351 sessions without a 2% decline. If this share market benchmark reaches 352 by Wednesday’s close, it will be the longest stretch since the onset of the global financial crisis.
Interest rates: US Treasury yields fell across the curve with the 2-year yield down 4 basis points at the close and the 10-year yield 7 basis points lower. Interest-rate markets are not expecting the Fed to move rates at their next meeting in July but are fully priced for the Fed to start cutting rates at their September meeting.
The Australian 3-year government (futures) bond yield fell from 3.95% to 3.89%, while the 10-year yield fell from 4.26% to 4.20%. Interest-rate markets are currently attaching a 15% probability of a rate hike at the Reserve Bank’s August 6 meeting and comes ahead of key labour market data this week. The market also has a probability of 35% attached to a rate cut in February 2025.
Foreign exchange: The US dollar index shot up from around 104.20 to an overnight high of 104.52 after a strong retail sales report. However, these gains were fully unwound during the overnight session and the US dollar index is now currently trading around the 104.50 handle.
The AUD/USD slid further overnight, from around 0.6750 towards 0.6715, after it flirted with the resistance level at around 0.6800 in trade yesterday.
Commodities: US crude inventories fell by 4.4 million barrels last week, while fuel supplies rose, according to API data. This information contributed to a decline in the price of crude oil overnight.
Australia: There was no major economic data published in Australia yesterday.
Eurozone: IThe ZEW expectations index deteriorated to 43.7 on July for the eurozone economy, from 51.7 in June. In other data, the eurozone trade surplus reduced to €12.3 billion in May, from €18.5 billion in April.
United States: Retail sales were unchanged in June as a drop in receipts at auto dealerships was offset by broad strength elsewhere. The previous month was revised higher from 0.1% to 0.3%. The core control group for retail sales jumped 0.9% and beat consensus expectations of an increase of 0.2%. This better-than-expected report from the Commerce Department shows consumers are displaying some resilience in the US economy.
Car repossessions surged 23% year-on-year in the first half of 2024 to be 14% above the 2019 level, a sign of perhaps rising consumer distress.
The Atlanta Fed’s GDP prediction model for Q2 was increased to 2.45% from 2.02% (on 10 July), following the positive surprise from retail sales data. Real personal consumption expenditure was increased to 2.1% from 1.6%.
The NAHB homebuilder confidence index slipped to 42 in July, from 43 in June. The result was in line with consensus expectations.
Federal Reserve Governor Adriana Kugler expressed cautious optimism that inflation is returning to the US central bank’s 2% target, with goods, services and now housing contributing to easing price pressures. Kugler’s comment were among the strongest yet from a member of the Fed’s Board of Governors suggesting confidence that inflation was on a steady path back to 2% - the precondition the Fed has set for reducing borrowing costs.
World: The International Monetary Fund (IMF) warned inflation has cooled more slowly than expected in many economies, posing a risk to global growth from interest rates staying higher “for even longer.” The fund raised its 2024 GDP outlooks for China, India and the UK.
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