Morning Report
Today's economic developments and market movements.
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Key themes: Markets are largerly treading water ahead of a swathe of key economic data this week.
US equities were mixed, as were stocks in Europe. Asian equities were broadly firmer yesterday.
US Treasury yields were modestly lower across the the curve with the 2-year yield holding just above the 4% level.
The US dollar was little changed against a basket of G-10 currencies. The Japanese Yen was the laggard, continuing to grind lower. The USD/JPY briefly pierced 148.
The big move was in oil, where the West Texas Intermediate (WTI)futures contract spiked 4.2% as traders remain focussed on the risks of an escalation of conflict between Israel and Hezbollah.
Share markets: Equities were fairly muted overnight. The S&P500 was flat with offsetting moves across sectors. Gains in IT, energy and utilities stocks offset falls elsewhere. The Dow Jones fell 0.4% and the NASDAQ was gained 0.2%.
European markets were also mixed with the Euro Stoxx 50 down 0.1%, the German DAX was unchanged, while in London, the FTSE 100 was up 0.5% in a broad-based move.
Asian markets closed higher yesterday, Japan’s Nikkei was up 0.6% and Hong Kong’s Hang Seng edged 0.1% higher. The ASX 200 rose 0.5% with gains in all sectors apart from materials and energy.
Interest rates: The US yield curve shifted lower across the curve. The 2-and-10-year bond yields fell 4 basis points to 4.02% and 3.90%, respectively. A September rate cut remains fully priced in for the Fed and there’s just under four cuts priced in for 2024.
European bond yields were mixed. The UK yield curve flattened slightly - the 10-year bond yield was down 3 basis points while the 2-year was down 1 basis point.
Australian yields were broadly unchanged with an ever-so-slight flattening of the curve in physical trade yesterday. Overnight, the 3-year futures yield fell 2 basis points to 3.62%, while the 10-year futures yield fell 4 basis points to 4.02%. Markets are pricing in the first RBA rate cut for December and another by May.
Foreign exchange: The US dollar was little-changed overnight, trading a narrow range between 103.09 and 103.31. The biggest move versus the USD was against the Japanese Yen. The USD/JPY rose from 146.73 to 147.23 and reached a high of 148.22 during the session.
The AUD/USD reached a high of 0.6604 before settling to 0.6587. The Aussie dollar has tested and failed resistance around 66 cents twice in the last two sessions. Momentum for the Aussie seems to have lost steam but it remains on firm footing above 65 cents for the time being as interest rate differentials hold in its favour.
Commodities: West Texas Intermediate oil futures gained 4.2% overnight to US$80.06 per barrel on continued fears of further conflict between Israel and Hezbollah. The London Metals Exchange Index rose 1.3% partially a result of stronger copper prices. Copper futures were up 1.8% to US$8921.34 as risks increase of broadening of strikes in Chilean copper mines.
Iron ore fell below US$100 ending the session at US$99.25. However, prices have popped higher again this morning and were back above US$100 at the time of writing.
Australia: The RBA’s Deputy Governor, Andrew Hauser, echoed the recent rhetoric from officials yesterday, but this time from the perspective of forecast uncertainty. Much of the remarks were dedicated to showcasing the inherent difficulty in making precise economic forecasts and providing a cautionary word on holding too much conviction in a single forecast estimate. Hauser also elaborated on how the RBA attempts to deal with uncertain forecasts including through publishing forecast error bands and undertaking scenario analysis.
The deliberate effort to describe the uncertainy of economic models and forecasts stands out as the RBA is currently hanging its hat on the assessment that the economy has less spare capacity than previously thought - a position which is itself derived from these uncertain economic models.
United States: The New York Fed’s 1-year inflation expectations gauge was unchanged at 3.0% in July, slightly above the 5-year pre-pandemic average of 2.7%. The 5-year expectations measure was also steady in July at 2.8%, while the 3-year expectations series fell 0.6ppts to 2.3%, a series low back to 2013. Overall, the survey results continue to suggest that consumer inflation expectations remain well anchored.
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