Morning Report
Today's economic developments and market movements.
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Key themes: After a tumultuous start to the week, a measured uptick in sentiment saw a more positive end to the week.
US equities ticked higher on Friday and remarkably the S&P500 clawed back the losses recorded at the start of the week.
US bond yields were mixed. Yields ticked up at the shorter end and were lower at the longer end of the curve. Comments made by Fed officials were consistent with the need for policy to be less restrictive, but they pushed back on the need for aggressive cuts.
The US dollar was lower, with the Aussie also down against the greenback.
Share markets: Global equity markets ticked higher while the spike in volatility indices we saw at the start of last week continued to retreat. Constructive comments from US Fed and Bank of Japan officials, and better than expected US jobless claims helped lift sentiment among investors.
US equities ticked higher for a second consecutive session. The S&P 500 and the Nasdaq both closed 0.5% higher. The Dow Jones closed 0.1% higher. Remarkably, the S&P500 clawed back the sharp losses recorded last Monday to finish the week virtually flat. The Nasdaq finished the week 0.2% lower, while the Dow Jones was 0.6% lower.
European markets also ticked higher with the FTSE100 up 0.3%, the DAX up 0.2%, and the Euro Stoxx 50 up 0.1%.
In Asia, the Nikkei closed 0.6% higher, to be 2.5% lower over the week, retracing most of the 12.4% fall recorded last Monday. The Shanghai declined 0.3%, following some disappointing data on inflation and producer prices, and finished the week 1.5% lower.
The ASX200 index closed 1.3% higher, following the strong gains made in the US amid improved jobless claims. All sectors were higher, led by materials. Over the week, the ASX200 was 2.1% lower. Futures are pointing to a positive open this morning, ahead of reporting this week from some of the largest companies on the ASX, including JB Hi-Fi, AGL Energy and Origin Energy.
Interest rates: US bond yields were mixed. The US 2-year bond yield increased 2 basis points to 4.05%. The 10-year treasury yield declined 5 basis points to remain under 4.0% at 3.94%. Longer end yields were also lower across Europe.
Interest-rate markets are pricing in around 100 basis points of cuts by the US Fed over the remainder of 2024 – down from 125 basis last Monday. There a further 110 basis points of cuts priced in for 2025.
Australian yields were also mixed. The 3-year government bond yield (futures) increased 1 basis point to 3.66%, while the 10-year government bond yield (futures) declined 1 basis point to 4.06%.
Markets are pricing just under a full rate cut by the end of 2024. The first full rate cut is expected by February, with around 90 basis points of cuts expected over 2025.
Foreign exchange: The US dollar index ended the session slightly lower (down 0.1%) after trading within a narrow range – 103.03 to 103.30. The inflation report for July to be released later this week will help determine whether the Fed has the scope to respond to the risks around the labour market and real economy. A stronger than consensus read may reduce sentiment and provide support for the US dollar.
The Aussie declined 0.2% against the greenback. The pair reach a high of just above 0.6600 before falling to a low of 0.6567 and ending the session at around 0.6572. Key labour market data this week, including the wage price index and jobs report, will help determine whether the pair can sustainably break the 0.6600 mark – stronger than consensus reads will support the Aussie and be consistent with the RBA’s hawkish tone.
The USD/JPY pair declined 0.4% to 146.62, but remains above the lows of around 142.00 recorded last week.
Commodities: The prices of key commodities, including gold, copper and oil, were higher.
The price of oil increased 0.9% in line with the bounce in sentiment. This WTI futures is currently trading at around US$76.84 per barrel. Iron ore markets softened though remained a touch above US$100 a tonne.
China: Consumer prices increased 0.5% over the year to July. This was stronger than the increase of 0.3% expected by the market and the 0.2% gain recorded in June. Food prices increased over the month to be flat in annual terms (compared with a fall of 2.1% in June) amid adverse weather events.
Core CPI, which strips out food and energy prices, rose by 0.4% over the year to July, the slowest rate since January, pointing to ongoing weakness in underlying demand.
Producer (or wholesale) prices declined 0.8% over the year to July. This was marginally firmer than the fall of 0.9% expected by the market and in line with June’s outcome. Processing costs, along with the costs associated with producing consumer and durable goods remained weak. In monthly terms, producer prices were down 0.2%, the same as in the month of June.
Preliminary estimates put the current account surplus at US$54.9bn in the June quarter, a touch softer than the surplus recorded in the corresponding period a year ago (US$53.9bn). The goods surplus widened to US$167.1bn (from US$160.3bn a year ago) due to an increase in export growth and slowdown in import growth. This was more than offset by an increase in the services account deficit to US$61.7bn from US$49.2bn over the corresponding quarter a year ago.
Eurozone: Consumer prices in Germany increased 2.3% over the year to July, up from the 2.2% recorded in June. Growth in food prices accelerated to 1.3% in annual terms (from 1.1%), growth in services prices remained unchanged at 3.9%, while the decline in energy prices moderated in July. On a monthly basis, consumer prices rose 0.3%, the largest increase in three months.
United States: Boston Fed President, Susan Collins said if the “data continue the way that I expect, I do believe that it will be appropriate soon to begin adjusting policy and easing how restrictive the policy is”.
Jeff Schmid, Kansas City Fed President, said the Fed is “close, but we are still not quite there… The path of policy will be determined by the data and the strength of the economy… Overall, the labour market still appears healthy”.
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