Morning Report
Today's economic developments and market movements.
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Key themes: There was a broad-based improvement in risk sentiment overnight supported, in part, by benign producer price inflation data in the US.
The data likely giving a little more conviction to expectations for US rate cuts, while concerns of an imminent implosion of the US economy appear to have evaporated.
Equities gained in both the US and Europe, while Asian markets finished in the green yesterday.
US treasury yields fell across the curve, with the 2-10-year portion of the curve bull steepening.
The US dollar tracked backwards at pace on the back of softer yield support.
The Aussie, euro, British Pound and the Japanese Yen all gained. The Aussie was the pick of the lot, only lagging the New Zealand dollar and the Norwegian Krone among G10 peers.
Share markets: Equities were up across major markets overnight in a broad improvement in risk sentiment. A weaker-than-expected producer price inflation report supported expectations that the Fed is on track to cut rates in September. Most indices finished at or near the high for the day. The S&P500 was up 1.7% with gains across all sectors except energy. The Dow Jones and NASDAQ also closed higher at 1.0% and 2.4%, respectively.
Gains in European markets were more muted in comparison with the Euro Stoxx 50 up 0.5% and London’s FTSE 100 up 0.3%.
Japan’s Nikkei outperformed yesterday’s move higher closing up 3.5%. However, this is in the context of a much deeper slide in Japanese equities during last week’s sell-off.
The ASX 200 rose 0.2% yesterday with a 2.9% fall in healthcare offset by smaller gains across most other sectors. The 0.7% gain in futures overnight suggests a solid open this morning.
Interest rates: The US yield curve bull steepened overnight. The 2-year bond yield fell 9 basis points to 3.93%, while the 10-year bond yield fell 6 basis points to 3.84%. A September rate cut remains fully priced in for the Fed with around a 40% chance of a larger 50 basis point move. There are four cuts priced by the end of 2024.
Yields were also lower in Europe. The German yield curve steepened with yields around 3-5 basis points lower, while the 2-10-year portion of the UK curve shifted down 3 basis points.
Australian yields shifted lower across the curve in physical trade yesterday. Overnight, the 3-year futures yield fell 4 basis points to 3.56% while the 10-year futures yield fell 6 basis points to 3.96%. Markets are almost fully pricing in the first RBA rate cut for December with two cuts fully priced in by April next year.
Foreign exchange: Softer yields in the US and improving risk sentiement saw the US dollar retreat sharply. The DXY Index fell to 102.63 from an intra-day high of 103.27.
The EUR/USD rose to 1.0992, marking its strongest close since January. The USD/JPY first moved higher to 147.95 but ended the session lower to at 146.87.
The AUD/USD outperformed, gaining throughout the session to finish at 0.6631, after breaking through resistance at 66 cents. The rebound in risk sentiment helped the Aussie dollar, having been a factor weighing heavily on the currency last week.
Commodities: West Texas Intermediate oil futures fell 2.1% overnight to US$78.35, partly reversing a strong move higher over the past week. Focus shifted back to the potential for waning demand and rising supply to push the market back into surplus. An International Energy Agency (IEA) report noting that “Chinese oil demand contracted for a third consecutive month” catalysed the move.
Metals were broadly weaker. Copper dropped 0.7% to US$8,859.16 as London Metal Exchange (LME) copper inventories topped a fresh 5 year high. However, this was tempered by news a failed waged agreement triggered a strike at BHP’s Escondida copper mine in Chile. Iron ore futures fell further below US$100, ending the session at US$98.30.
Australia: The Wage Price Index (WPI) rose 0.8% in the June quarter to be 4.1% higher through the year.
It’s becoming increasingly clear that wage inflation peaked at 4.2% in the December quarter having since drifted lower through the first half of 2024. The six-month annualised pace dropped significantly from 4.7% in the December quarter to 3.4% in June quarter.
Public sector wages gained 0.9%, up from the 0.6% lift in the March quarter. However, the annual pace of public sector wages growth has moderated from 4.2% in December 2023 to 3.9% in the June quarter.
Private sector wages, which are more closely tied to labuor market dynamics, rose 0.7% in June 2024, representing an ongoing moderation in quarterly gains from September 2023 (1.4%), December 2023 (1.0%) and March 2024 (0.9%).
The wages data was consistent with the RBA’s most recent round of forecasts released last week. However, seasonal volatility would put risks to the upside for the end of 2024, all else equal.
Business conditions rose 1pt to +6 in July, broadly in line with the result from May and slightly below the long-run average. The improvement in conditions was a result of a spike in just one of the three sub-indices, employment, which rose a massive 7pts from a flat result in June.
Outside of employment, other aspects of the survey continue to speak to the downbeat mood. Businesses are reporting tough trading conditions, which fell 2pts to +9, and weak profitability, which was flat at +2pts.
Business confidence continued to oscillate around low levels, falling 2pts to +1, broadly around the neutral level (zero), but below the longer-run average of +5pts. This is consistent with lingering uncertainty around the outlook.
The survey reported a surge in labour costs, from a quarterly-equivalent pace of 1.5% in June to 2.5% in July. This likely reflects the implementation of the Award and Minimum Wage rises from the Fair Work Commission in July. We are likely to see an unwind in August. Purchase cost growth eased from 1.3% to 1.1%, seeing price pressures hold at a three-year low of 0.7%.
Capacity utilisation continued to ease but it remains elevated compared to history, supporting the RBA’s view that demand continues to outstrip supply.
Eurozone: The ZEW expectations index dropped sharply in August, falling from 43.7 to 17.9. The move lower extended on a fall in July, partly reversing what appeared to a be strong recovery in growth expectations over the back half of 2023. Weak expectations in Germany helped drag the overall index lower, highlighting the fragility of the economic recovery in Europe’s largest economy.
United Kingdom: Average weekly earnings grew 4.5% over the year to the June quarter. That is a significant step down from 5.8% a month earlier and is the lowest rate recorded since November 2021. The deceleration in the series excluding bonuses was more modest though, falling from from 5.8% to 5.4%.
The ILO unemployment rate surprised in June, falling from 4.4% to 4.2% against an expectation of a modest lift to 4.5%.
United States: The Producer Price Index (PPI) came in below expectations in July. The headline index for final demand rose 0.1% compared to expectations for a 0.2% gain and the core measure was unchanged from June versus consensus expectations for a 0.2% rise.
Annual headline PPI inflation slowed from 2.7% to 2.2%, while core inflation slowed from 3.0% to 2.4% on an annual basis. Components of the PPI that feed into the Personal Consumption Expenditure (PCE) inflation gauge were consistent with a benign reading for July.
NFIB small business optimism improved in July, the index rising modestly from 91.5 to 93.7. However, this is still a weak outcome versus history with 101.2 the 5-year pre-pandemic average. Respondents views on the economy and sales improved, but hiring plans were unchanged. Importantly for the inflation outlook, momentum in selling prices and compensation eased in the month.
Atlanta Fed President, Raphael Bostic, said he will likely be comfortable cutting “by the end of the year” after seeing “a little more data”. He remains constructive on the outlook, expecting “an economy that’s pretty much fully normalized” in the next few months. Bostic also noted that a “recession is not in my Outlook. I think there’s still enough momentum in the economy that we can see slowing and not see labor markets deteriorate to a level of considerable concern”.
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