Morning Report
Today's economic developments and market movements.
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Key themes: The US Beige Book and remarks from US Federal Reserve officials suggested that the Fed is getting closer to cutting rates, despite stronger data on industrial production. This data and these remarks supported bond prices, leading to a fall in US bond yields fell.
US share markets were under intense pressure, as tech shares encountered heavy selling.
The US dollar sold off heavily after the US Beige Book was published. A big mover in FX markets was the British pound. GBP/USD shot up to a one-year high after UK inflation data suggested some risk the Bank of England may need to wait longer to cut rates.
Today’s labour market data in Australia is being eyed closely by markets for clues as to the Reserve Bank’s next move and the timing around it.
Share markets: The Nasdaq 100 dropped 2.8% and had its worst day since 2022, with concern about tighter US curbs on chip sales to China spurring a sell off in tech shares. The S&P 500 fell 1.4% whilst the Dow rose 0.6%. Yesterday, the ASX 200 rose 0.7%.
Interest rates: The US 2-year treasury bond yield rose 2 basis points to 4.44% but had been higher in trade at 4.48%. The US 10-year yield finished unchanged at 4.16%. Interest-rate markets expect the Fed to leave the fed funds rate unchanged in July and are attaching a 95% probability to a cut in September.
The Australian 3-year government futures bond yields ranged sideways between 3.91% and 3.94%, while the 10-year yield fell from 4.26% to 4.23%. Interest-rate markets currently expecting a 15% chance of a rate hike in August and are attaching a 40% probability to a rate cut in February.
Across the Tasman and markets now have a 45% chance of a rate cut from the Reserve Bank of New Zealand at their next meeting on August 14.
Foreign exchange: The US dollar index was treading water ahead of the Beige Book. It fell notably from near 104.30 to 103.65 in a short space of time after the Beige Book’s report on growth and inflation suggested the Fed may be closer to cutting rates. The AUD/USD moved up from 0.6755 to 0.6721, but has remained under pressure since hitting key resistance of 0.6799 on July 11. The Australian labour market report will be critical to the AUD’s direction in the short term. A stronger-than-expected report would likely spur the AUD/USD to test resistance around the 0.6800 handle whilst a weaker-than-expected report could spur selling to 0.6690. A possible break under support of 0.6690 is possible if the report is weak because it could see interest-rate markets remove any probability of a rate hike this year.
In other currencies, the EUR/USD pair rose from 1.0905 to 1.00948 and the USD/JPY pair fell from 158.20 to 156.07. The GBP/USD shot to a one-year high of 1.3044, from an overnight low of 1.2966, after inflation data led markets to lengthen their odds of a near-term rate cut in the UK.
Commodities: US crude inventories fell by 4.87 million barrels last week, more than expected by consensus. Crude oil prices inched higher in overnight trade. Meanwhile, gold prices pulled back.
Australia: There was no major economic data published in Australia yesterday.
New Zealand: Headline consumer price inflation was 0.4% in the June quarter, below the Reserve Bank of New Zealand (RBNZ) forecast of 0.6%. The annual pace eased to 3.3% in June, from 4.0% in May. The Westpac NZ team now expect the RBNZ to cut its official cash rate in November and for consumer price inflation to fall into the RBNZ’s 1-3% target band in the third quarter of this year.
United Kingdom: The consumer price index rose 0.1% in June, which left the annual growth rate unchanged at 2.0%. Consensus forecasts expected the annual pace to fall to 1.9%. The report led interest-rate markets to reduce their bets that the Bank of England (BoE) will lower interest rates from their current 16-year high next month. The Monetary Policy Committee has signalled it is getting closer to lowering rates from their current 5.25%. However, such a move would hinge on policymakers being confident that underlying price pressures are fully under control. A key concern has been stubborn services price growth, which is seen as an important gauge of underlying inflation. The latest figures showed services inflation also holding steady at 5.7% in June, ahead of consensus expectations for a decline to 5.6%.
United States: Industrial production posted a solid advance for a second straight month in June, helped by gains in factory output that suggests manufacturing activity could be improving. Industrial production rose 0.6% in June, after an upwardly revised rise of 0.9% in May, marking the biggest two-month advance since last 2021. The consensus forecast was for just a 0.3% rise. Capacity utilisation was firm at 78.8%.
Single-family housing starts, which account for the bulk of homebuilding, fell 2.2% to an annual rate of 980,000 in June, the lowest level since last October last year. Data for May was revised higher to show starts for this housing segment dropping to a rate of 1.002 million units instead of the previously reported 982,000 units. The report also showed permits for future construction of single-family houses dropped to a one-year low last month.
The Fed’s Beige Book of regional economic conditions reported that the economy “maintained a slight to modest pace of growth in the majority of Districts.” But there was a mix, with seven Districts reporting some increase while five reported flat to declining activity - three more than in the prior report.
In a sign of further cooling in the labour market, several districts saw some improvement in labour supply conditions as labour turnover declined, the report showed, reducing demand to find new workers. Contacts in several Districts expect to be more selective on who they hire and not backfill all open positions.
The labour market has come into increased focus in recent weeks after Federal Reserve chairman Jerome Powell signal a slightly shift in the central bank’s focus to easing in the labour market rather than solely on inflation.
Meanwhile, the pace of inflation was modest with most Districts noting that “input costs were beginning to stabilise.
Federal Reserve member Williams downplayed the possibility of a July rate cut, saying the Fed will learn a lot between July and September. He added that the past few months of data are getting the Fed closer to a disinflationary trend that they’re looking for. He suggested he would like to see more data to gain further confidence inflation is moving sustainably to the Fed’s 2% goal.
Another Fed member, Waller, said the current data is consistent with achieving a soft landing and he will be looking for data over the next couple months to buttress this view.
Fed member Daly also spoke overnight. She said inflation is coming down and it’s doing so in a way that confidence is growing that we’re getting nearer a sustainable pace of getting inflation back down to 2%.
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