Morning Report
Today's economic developments and market movements.
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Key themes: The European Central Bank (ECB) left rates on hold overnight, as widely expected. President Lagarde continued to underscore that future decisions would be made on a meeting-by-meeting basis.
Across the Atlantic, there was little by way of major data. Chicago Fed President Austan Goolsbee added more weight to the downside labour market risks in the US but didn’t weigh in on the timing of rate cuts.
US Equties sold off for a second straight session, halting a 3-month upswing.
Treasury yields were modestly higher across the curve, with pricing for rate cuts little changed.
The US dollar was firmer, unwinding a slide in the prior session and gaining against every G-10 major.
Share markets: US equities slipped for a second straight session, halting a 3-month upswing. The S&P 500 slipped 0.8%, while the NASDAQ eased 0.7%. The selling pressure spread from tech-mega caps to encompass a broader segment of the market, undermining the rotation trade hypothesis that investors are shifting funds away from mega-caps towards the broader market on enthusiasm that rate cuts will support the whole market.
The ASX 200 fell 0.3% yesterday and futures are down another 1.1% overnight.
Interest rates: US treasury yields rose across the curve, but remained at the bottom of their recent ranges. The 2-year yield gained 3 basis points to 4.47%, while the 10-year yield was 4 basis poitns higher at 4.20%.
There remain two Fed rate cuts priced into markets by the end of 2024, with a 93% chance the cutting cycle commences in September.
Aussie bond futures followed the US market, selling off modestly. The 3-year and 10-year futures yields each gained 4 basis points to 3.99% and 4.28%, respectively.
The implied odds of an RBA rate hike edged up yesterday. There’s just shy of a 40% chance of a hike priced in this year and a cut is not fully priced until July next year.
Foreign exchange: The US dollar bounced higher off a low of 104.17, reversing the prior sessions fall. The DXY index reached a high of 104.23 before settling around 104.17.
The Aussie dollar slipped for a fourth straight session as a broad US dollar bid offset hotter-than-expected domestic labour market data and a bounce in physical yields yesterday. The AUD/USD eased from 0.6744 to a low of 0.6698, respecting support around the 67c level.
The British Pound, the euro and the Yen all slipped agains the greenback. The USD/JPY still remains marginally below where it finished after last week’s suspected intervention.
Commodities: Crude markets were lower in choppy trade. The August WTI contract is down 0.57% at $82.38 while the September Brent contract is down 0.40% at $84.77.
Our measure of global crude inventory has dropped sharply in recent weeks, to the lowest level since early April pointing to a sharp rise in physical demand.
Metals were hammered with further signs that a slump in Chinese demand has forced onshore traders to dump unwrought copper and copper products into foreign markets. Copper is down 2.7% to $9,371, bringing losses for the last week to 4.25% while aluminium is down another 0.7% at $2,385, down 3.67% over the last week. Zinc has fallen 5% over the last week while tin has fallen 8.8%.
Iron ore markets eased with signs of increased supply and rising inventory weighing on sentiment. The August SGX contract is down 65c at $104.65 though the 62% Mysteel index rose 50c to $105.50.
Australia: Employment surprised to the upside in June, increasing by a solid +50.2k and trumping consensus expectations for a 20k gain. Employment growth over the June quarter broadly matched the first quarter of 2024, while the cumulative gain in employment over the first half of the year outstripped the observed growth over the same period last year.
However, this does not necessarily mean that the labour market is performing on a par with (or perhaps even stronger) than last year. Businesses’ appetite for labour has clearly cooled, from being well in excess of supply to now tracking broadly in line with population growth.
The participation rate rose to 66.9% in June - the second highest read in this cycle. The lift in participation meant that growth in the size of the labour force outsripped employemnt, seeing the unemployment rate move up from 4.0% to 4.1%.
The update is unlikely to materially alter the RBA’s sentiment. To the extent that employment growth is holding up better than the RBA expected, it is being matched by stronger than expected growth in population (i.e. labour supply). The labour market is clearly tracking a soft landing and no longer poses a singificant upside risk to inflation.
China: The first communication was released following the conclusion of China’s third Plenum. The communiqué highlighted authorities continued focus on “high-quality development”, that is, the expansion of capacity and improvement in industrial value add.
The property market received very little attention. While authorities cited an intent to “actively expanding domestic demand”, there was no indication that the consumer will receive immediate or significant support.
Instead, it is more likely that the central Government will focus on public and private investment, anticipating that this activity will support employment and confidence and consequently stronger consumer demand. Further detail will be provided on policy in coming weeks, with a Politburo meeting scheduled for the end of the month.
Eurozone: The European Central Bank (ECB) kept its key rates unchanged at their July meeting as widely expected. This followed a rate cut at the June meeting.
President Lagarde made clear in the press conference that policy would be decided on a meeting-by-meeting basis with September “wide open”. Also clear in the President’s remarks is that one data point won’t dictate September’s decision or any subsequent policy action, but rather the totality of the data. There is an 85% chance of a September rate cut priced in by the markets.
United Kingdom: Labour market and wages data came in as expected in May. The ILO unemployment rate was unchanged at 4.4%, while average annual growth in weekly earnings edged down from 5.9% in April to 5.7% in May. While the direction of earnings growth remains positive, the high level of growth will remain on the Bank of England’s watchlist, especially given gradually cooling labour market conditions.
United States: Chicago Fed President, Austan Goolsbee, took Jerome Powell’s assessment of the balance of risks a little further, warning that the Fed could risk the so called ‘golden path’ where inflation comes down without a significant rise in unemployment.
Goolsbee noted that the real fed funds rate is the “highest it’s been for decades” and that this level of restrictiveness is only necessary “if you’re afraid of an overheating economy”. Goolsbee added that “the economy is not overheating”. While Goolsbee shyed away from guidance around when the Fed should start cutting rates, the comments add to recent rhetoric laying the foundation for rate cuts, conditional on supportive economic data.
Initial jobless claims edged higher last week from 223k to 243k, but remain very low versus history.
The Philadelphia Fed index surprised materially to the upside, rising from 1.3 in June to 13.9 in July. The index has ranged between -10.6 and 15.5 since January. The Fed’s regional surveys continue to exhibit heightened volatility, but overall remain consistent with soft growth across the economy.
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