Morning Report
Today's economic developments and market movements.
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Key themes: Growing expectations of a soft landing in the US triggered a broad-based rally across key global equity markets. Data showed that the US labour market is only gradually cooling, and consumers continue to spend.
Bond yields ticked higher, particularly at the shorter end of the curve. Markets have also pared the expected size of Fed rate cuts for 2024.
The US dollar advanced on the back of yield support. The Aussie was also higher given the boost to risk sentiment and yesterday’s jobs report which showed the market is gradually cooling.
Iron ore continued to slide amid data coming out China which continues to point to patchy conditions.
Share markets: Global equity markets ticked higher as investors priced a soft-landing scenario for the US economy.
A broad-based rally in the US saw the S&P 500 close 1.6% higher, the Dow Jones end 1.4% higher, while the tech-focused Nasdaq surged by 2.3%.
European markets were also higher, supported by the US led turn in sentiment as well as benign data coming out of the UK. The FTSE100 finished 0.8% higher, the DAX and the Euro Stoxx 50 closed 1.7% in the green.
The ASX200 index closed 0.2% higher, led by banks and consumer discretionary stocks. The index trimmed earlier gains of as much as 0.6% after yesterday’s strong jobs report could suggest the RBA may be able to stay on hold for longer. Six of eleven sectors were higher. Futures are pointing to a strong open this morning
Interest rates: Bond yields were higher in key markets. In the US, bond yields were higher across the curve. The US 2-year bond yield increased a massive 14 basis points to 4.09%. The 10-year treasury yield increased 8 basis points but remained under 4.0% at 3.91%.
Interest-rate markets are pricing in around 90 basis points of cuts by the US Fed over the remainder of 2024 – down from 100 basis on Monday. There a further 100 basis points of cuts priced in for 2025.
Australian yields were also lower. The 3-year government bond yield (futures) declined 3 basis point to 3.50%, while the 10-year government bond yield (futures) declined 5 basis point to 3.87%.
Markets are pricing a full rate cut by the end of 2024, and around 75 basis points of cuts over 2025.
Foreign exchange: The US dollar advanced 0.5% on the back of yield support. The US dollar index bounced above the 103.200 mark following the release of key data. It is current sitting at 103.06.
The Aussie was also higher given the boost to risk sentiment and yesterday’s jobs report which suggests the market remains resilient. The AUD/USD finished 0.2% higher after testing the 0.6630 mark. It is currently trading at 0.6611.
The Yen was lower against G10 currencies. The USD/JPY jumped 1.9% to 149.28, a two-week low.
Commodities: The prices of key commodities, including gold, copper and oil, were higher.
The price of oil increased 1.5% in line with the bounce in risk sentiment and limited progress on Middle East peace talks. This WTI futures is currently trading at around US$78.16 per barrel.
Iron ore markets continued to slide back to the lows recorded in November 2022. The carnage in Chinese steel markets continue to slam sentiment. Iron ore now sitting at US$94.45 a tonne.
Australia: Employment increased by 58.2k (0.4%) in July, with most of the gains made in full time employment. The outcome was a continuation of an impressive run of employment gains over the last few months that has seen annual growth in the three-month average rising back to 2.9%yr in July from 2.6%yr in May.
The participation rate – which measures the proportion of individuals that are either in work or actively looking for work – reached a new cycle high of 67.1% in July, the highest since WWI.
The combination of continued strong growth in the working age population and rising participation saw labour supply outpaced demand. As a result, the unemployment rate moved up from 4.1% in June to 4.2% in July.
Growth in the total number of hours worked printed 0.4% in July, following a 0.3% increase in June.
The data suggests that total hours worked increased by 1.5% in the June quarter and was flat in year-ended terms – down from the initial estimate of a 0.4% gain in year-ended terms published as part of the June LFS. All else being equal, this suggests that Australia’s productivity performance may not be a dire as some had feared.
Overall, the labour report suggests that the market remains tight, with conditions only very gradually softening.
Consumer inflation expectations rose 0.2 percentage points to 4.5% in August, from 4.3% in July. This was the highest read since April this year.
New Zealand: Retail sales were down 0.1% in July. It was the sixth consecutive monthly decline. Consumers reduced their spendings on durables, hospitality and apparel. On the other hand, consumers spent more on fuel, motor vehicle, and consumables. On an annual basis, retail sales declined 4.9% for the second consecutive month.
China: Patchy economic conditions extended into the first month of the September quarter. Investment in fixed assets was slower than expected while retail trade was stronger, largely driven by seasonal factors. Industrial production softened and came in below expectations.
Retail sales growth rose 2.7% over the year to July, a step up from the 2.0% recorded in June. The outcome was slightly above the 2.6% the market was expecting. The pickup was driven by beverages, sports & recreation articles, communication equipment, and petroleum & petroleum products. On a monthly basis, sales grew 0.35% in July, up from a fall of 0.1% in June.
Industrial output increased 5.1% over the year to July, a step down from the 5.3% recorded in June and a touch softer than the 5.2% the market was expecting. This was the third straight month of moderating growth, with the slowdown driven by manufacturing activity and utilities. In monthly terms, industrial activity grew 0.35%, after a 0.4% gain in June.
Fixed-asset investment rose 3.6% in year-to-date terms compared to a year ago. This was softer than the 3.9% recorded in June and expected by the market. On the positive side, high-tech manufacturing investment resumed double-digit growth at 10.0% in July, up from 8.8% in June.
Investment in real estate contracted by 10.2% in year-to-date terms compared to a year ago. This was worse than the drop of 10.1% recorded in June. This drop occurred notwithstanding several government support measures to bolster market sentiment.
Japan: Economic activity expanded at an annualized pace of 3.1% in the June quarter. This was higher than the 2.3% the market was expecting and well above the contraction of 2.3% recorded in the March quarter. The strong outcome was driven by private consumption and investment. Large pay increases and temporary income-tax cuts helped private consumption, which broke a four-quarter string of falls. Industrial production was weak, however, declining 4.2% in July according to the final read, and 7.9% over the year.
United Kingdom: Economic activity expanded 0.6% in the June quarter, following a 0.7% gain in the March quarter. This was in line with market expectations. Government spending made the largest contribution, increasing 1.4%. Looking at the production side, services grew 0.8% in the quarter, with construction and other production lower. The preliminary estimate showed that the economy continues to make a recovery from last year’s recession.
United States: Retail sales soared 1% in July 2024, following a 0.2% fall in June. This was higher than the gain of 0.3% the market was expecting. It was the biggest increase since January 2023, with sales at motor vehicle and part dealers rising the most. Excluding sales of motor vehicles, retail turnover was up 0.4%. In 2024 nominal have been modest overall, but there is enough momentum to keep volume growth comfortably positive, promoting GDP.
Initial jobless claims fell for a second consecutive week to 227k from 233k in the previous week. This was the lowest level since July and was better than the 235k expected by the market. Continuing claims also declined and beat market expectations.
The Philadelphia Fed Manufacturing Index plummeted to -7 points in August, from 13.9 points in July. This was well below the 7.0 points the market was expecting and was the first contraction since January. The report indicated an overall decline in manufacturing activity, with slower growth in shipments, new orders, while employment turned negative. The NY Fed (Empire) manufacturing activity index rose to by 1.9 points to -4.7 - still below the zero reading that indicates contraction.
The NAHB/Wells Fargo Housing Index fell to 39.0 points in August, the lowest level so far this year. The gauge for present sales and traffic of prospective buyers both declined.
US Fed official, Raphael Bostic, said he is “open” to an interest rate cut in September, saying they cannot “afford to be late” in easing amid signs of cooling in the labour market.
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