Morning Report
Today's economic developments and market movements.
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Key themes: US equities edged out further gains on Friday to chalk up one of the best weeks in almost a year.
Markets are increasingly pricing a “goldilocks” scenario for the US, with the prospect of a hard landing, which caused havoc a few weeks ago, looking like a distant memory.
Bond yields were lower, particularly at the shorter end of the curve. The US dollar was lower given the risk on tone. The Aussie outperformed amid hawkish comments made by the RBA Governor, and as suggested by recent reports, the ramp up in Yen carry trade which is providing a tailwind for higher yielding currencies.
Iron ore stabilised after a volatile week but remains vulnerable to further falls.
Share markets: US equities edged out further gains on Friday to chalk up one of the best weeks in almost a year – or since November 2023.
The “goldilocks” scenario is firmly back on the cards following last week’s flow of data which showed the labour market continues to gradually cool, inflation is moderating, and consumers are showing resilience, reinforced by Friday’s increase in US consumer sentiment.
The S&P 500 closed 0.2% higher to end the week 3.9% higher. The Dow Jones closed 0.2% higher on Friday, to end the week 2.9% in the green. The tech heavy Nasdaq outperformed, up 0.2% on Friday and 5.3% over the week.
European markets were also generally higher. The Euro Stoxx 50 closed 0.7% higher to finish the week up 3.5%. The DAX was 0.8% higher to finish the week 3.4% higher. The FTSE 100 closed 0.4% lower on Friday following some weaker than expected partial economic data but was 1.8% higher over the week.
Asian markets were also higher with the Nikkei ending the week 8.7% higher and the Hang Seng up 2.0% over the week.
A broad-based rally saw the ASX200 index close 1.3% higher, to be 2.5% higher over the week. The rally was led by financial stocks and all sectors finished in the green. Futures are pointing to a soft open this morning.
Interest rates: In the US, bond yields were lower across the curve. The US 2-year bond yield declined 4 basis points to 4.05%. The 10-year treasury yield declined 3 basis points to 3.88%.
Interest-rate markets are pricing in around 95 basis points of cuts by the US Fed over the remainder of 2024. There a further 100 basis points of cuts priced in for 2025.
Australian yields were higher, with futures broadly unchanged. The 3-year government bond yield increased 7 basis point to 3.57%, while the 10-year government bond yield increased 5 basis point to 3.93%.
Markets are now pricing less than a full rate cut by the end of 2024 (or around 22 basis points), and around 75 basis points of cuts over 2025.
Foreign exchange: The US dollar declined 0.5%, retracing the gain made in the previous session. The US dollar index lost ground throughout the session, closing at around the session low of 102.40. The US dollar index is vulnerable to decline further if US Fed Chair Powell signals the start of an easing cycle at Jackson Hole this week.
The Aussie outperformed to close 0.9% higher at 0.6669 – its highest level in almost one month. The AUD/USD rallied over the week to break through the 0.6650 level. On Friday, the pair was supported by hawkish comments made by the RBA Governor.
Reports also suggest that the Yen carry trade is picking up again which is providing higher yielding currencies, such as the Aussie, with a significant tailwind.
The AUD/JYP has shot up by more than 3.0% over the past 2 weeks to be at 98.466. The USD/JPY also finished the week 0.7% higher at 147.63.
Commodities: The prices of key commodities were mixed.
The price of oil declined 1.9% reversing the gain made in the previous session. This WTI futures is currently trading at around US$76.65 per barrel.
Iron ore markets ore stabilised after a volatile week but remain vulnerable given increasing supply and moderating demand. Iron ore is now sitting at US$94.45 a tonne.
Australia: The RBA Governor reiterated that talks of rate cuts are premature, and that the RBA is still concerned about upside risk to inflation, when she appeared before a parliamentary economics committee on Friday.
The RBA’s view that supply was weaker than previously thought was also reiterated, notwithstanding the most recent labour force release which showed that some of the RBA’s concerns over labour productivity were exaggerated.
The Governor noted that public spending is not the main game when it comes to inflation. Structural factors, particularity in the construction industry, which are delaying broader disinflation across the economy are of bigger concern, accordign to the Governor.
New Zealand: The BusinessNZ manufacturing PMI ticked higher to 44.0 index points in July from 41.1 points in June. Despite the increase, the PMI remains in contractionary territory, well below the long-term average of 52.6 points. Sub-indexes that showed an improvement include production and new orders.
Producer (or wholesale) prices jumped 1.1% in the June quarter, up from the 0.9% increase recorded in the March quarter. The acceleration was primarily driven by the cost of electricity and gas supply, dairy product manufacturing, and accommodation and food services.
Eurozone: The trade surplus widened to €17.5b in June from €12.4b in May. The outcome was better than the surplus of €13.5b expected by the market. The result was driven by a 2.4% drop in imports, which was only partly offset by a 0.2% fall in exports.
United States: Consumer sentiment increased to 67.8 points in August from 66.4 points in July. This was the first increase in five month and above the 66.9 points the market was expecting. Expectations strengthened for personal finances and the five-year economic outlook. The survey showed that sentiment among Democrat voters increased after Kamala Harris stepped in as the party’s nominee. The year-ahead and the five-year inflation expectations were unchanged at 2.9% and 3%, respectively.
Housing starts declined 6.8% to an annualised rate of 1.24m in July. This was the sharpest decline since March and the lowest level since 2020. The outcome was worse than the fall of 1.5% expected by the market.
Building permits declined 4.0% to an annual rate of 1.40m in July. This was also the lowest level recorded in four years and worse than the fall of 2.0% expected by the market. Approvals of units in buildings with five units or more slumped 12.4% in July.
Chicago Fed President, Austan Goolsbee, said that the labor market and several leading economic indicators are flashing warning signals. “If we move toward less restrictiveness, it will help” reduce the risk of overtightening, he said.
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