Morning Report
Today's economic developments and market movements.
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Key themes: The broad-based rally in equities took a breather, as investors wait for minutes from the most recent US Fed meeting and Fed Chair Powell’s address at Jackson Hole later this week.
Bond yields were lower in the US and Europe on the back of global data showing that inflationary pressures are receding.
The US dollar index continued to slide, with the Japanese Yen outperforming. The Aussie edged out further gains against the greenback.
Oil was softer while iron ore continued to stabilise.
Share markets: The broad-based rally in US equities took a breather, with key indices closing marginally lower. With the release of limited top tier data overnight, markets are waiting for confirmation that the Fed is ready to start easing policy, when Powell speaks later this week.
The S&P 500 closed 0.2% lower. The Dow Jones closed 0.15% in the red. The tech heavy Nasdaq was 0.3% lower.
European markets were also lower, with the Euro Stoxx 50 down 0.3%, the DAX 0.4% in the red and the FTSE 100 down 1.0%.
The ASX200 index rose for an eight consecutive day, to close 0.2% higher. Six of eleven industries finished in the green, led by materials stocks. Futures are pointing to a negative open this morning.
Interest rates: US bond yields were lower across the curve. The US 2-year bond yield declined 8 basis points to fall under 4.0% at 3.98%. The 10-year treasury yield declined 6 basis points to 3.81%.
Interest-rate markets are pricing in around 100 basis points of cuts by the US Fed over the remainder of 2024. There is a further 110 basis points of cuts priced in for 2025.
Australian yields were also lower. The 3-year government bond yield (futures) declined 4 basis point to 3.53%, while the 10-year government bond yield declined 6 basis point to 3.90%.
Markets are now pricing less than a full rate cut by the end of 2024 (or around 21 basis points), and around 75 basis points of cuts over 2025.
Foreign exchange: The US dollar continued its slide, with the US dollar index down 0.5%, reaching a low of 101.361 - the lowest level since January this year. The US dollar index is vulnerable to further falls, particularly if US Fed Chair Powell signals the start of an easing cycle at Jackson Hole later this week.
The Japanese Yen outperformed, appreciating 0.9% against the greenback. The USD/JYP fell to 145.22 – its lowest level in more than a week. This comes on the back of the Bank of Japan releasing research papers which highlighted the persistence of inflationary pressures, suggesting that there could be further increases to the policy rate.
The Aussie was also higher. The AUD/USD was 0.2% higher at 0.6749 – its highest level in more than one month. The minutes for the RBA Board’s August meeting had a hawkish tone, providing yield support.
Commodities: The prices of key commodities were mixed.
The price of oil declined 0.4% to hit a fresh two week low after the API reported an increase in crude inventory. This WTI futures is currently trading at around US$74.04 per barrel.
Iron ore markets ore on rumours of further fiscal stimulus coming out of China. Iron ore is now sitting at US$95.95 a tonne.
Australia: The minutes for the RBA Board’s August 2024 meeting revealed that the Board considered hiking rates in August. The minutes had a hawkish tone, noting that the Board continues to judge there is excess demand in the economy and remains “vigilant to upside risks to inflation”.
It was also noted that underlying economic conditions and estimates of the output gap were more uncertain than usual. As such, the minutes noted that the RBA Board would be placing “somewhat” greater-than-usual weight on the flow of data, relative to the forecasts. This could suggest rates are on hold for longer than expected by the market. The minutes retained the line that returning inflation to target remains the Board’s highest priority “and it will do what is necessary to achieve that outcome”.
New Zealand: The trade deficit narrowed to NZ$0.963bn in July, from a deficit of NZ$1.174bn a year ago. It was the lowest read since January as exports rose at a faster pace than imports. Exports increased 14% in annual terms, driven by higher exports of milk powder, butter, and cheese; fruit; preparations of milk, cereals, flour, and starch; and crude oil. Meanwhile, imports rose by 8.5% driven by petroleum and products; electrical machinery and equipment; pharmaceutical products; and plastic and plastic articles.
Eurozone: Consumer price inflation was confirmed at 2.6% over the year to July in the final release. Core inflation was also confirmed at 2.9% in annual terms. These numbers point to continued disinflation in the area.
Canada: Inflation eased to 2.5% over the year to Jule, from 2.7% in June. This was the softest increase in consumer prices since March 2021. Inflation decelerated for shelter and food. The core inflation measures came in below market expectations – the median and trimmed-mean core rates were 2.4%yr and 2.7%yr, respectively,
United States: The Philadelphia Fed’s non-manufacturing reading fell to -25.1 in August from -19.1 in July, with the employment reading declining further into negative territory to indicate contraction. The six-month outlook fell below the breakeven point with 40.5% of respondents expecting contraction in the sector. More broadly, regional indexes across manufacturing and services are pointing to weak conditions across the nation.
Fed Governor Bowman showed a willingness to begin cutting interest rates gradually if inflation continues to show evidence of returning to target. Upside risks for inflation were cited, while her view on the labour market remained constructive, with “better balance” seen versus downside risks.
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