Morning Report
Today's economic developments and market movements.
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Key themes: Minutes from the Fed’s August policy meeting and annual revisions to US non-farm payrolls reinforced expectations that the Fed is set to cut rates in September.
But with significant policy easing already priced in by the end of 2024, there was limited scope for markets to rally much further.
Equities were firmer in the US and in Europe, while the ASX 200 eked out a small gain yesterday.
US treasury yields were down across the curve, led by the short-end.
Softer yield support led to further US dollar selling. The DXY index briefly dipping below 101.
Oil futures slipped despite bullish inventory data and reports of a tanker ablaze in the Red Sea. Iron ore gained for a third session.
Share markets: Equities closed in the green in the US and across Europe. The S&P 500 rose 0.4%, while the NASDAQ was 0.6% higher. US equities are higher over August to date, having fully unwound their sharp falls from the start of the month.
In Europe, the Euro Stoxx 50 gained 0.6%, while the German Dax and London’s FTSE 100 were up 0.5% and 0.1%, respectively.
The ASX 200 finised 0.2% higher yesterday, gradually unwinding an early fall throughout the session. Futures were firmer overnight.
Interest rates: US rates markets rallied on a large downward revisions to non-farm payrolls and Fed meeting minutes which firmed expectations for rate cuts.
The 2-year treasury yield fell 5 basis points to 3.93%, while the 10-year yield eased 1 basis point to 3.80%; the 2-10-year curve bull steepening by 4 basis points but still managing to remain inverted (-13bps).
A Fed rate cut remains fully priced in for September, with around a 25% chance of a larger 50 basis point move factored in. By year-end there are almost four 25 basis point cuts priced into the OIS curve.
Aussie bond futures joined in on the rally offshore. The 3-year futures yield fell 3 basis poitns to 3.48%, while th 10-year futures yield was down 2 basis points to 3.88%.
Market pricing for rate cuts remains at odds with the RBA’s guidance that there will be no rate cuts this year. There is currently around a 95% chance of a December rate cut priced into cash rate futures.
Foreign exchange: The USD dollar continued to face selling pressure overnight. The DXY index briefly dipped below 101, reaching an intra-day low of 100.92 before retracing slightly to finish at 101.18.
The Aussie dollar underperformed, trading broadly flat after traversing a fairly narrow range of 0.6731 to 0.6761. The british Pound was the strongest performer, jumping from a low of 1.3011 to a more than 12-month high of 1.3119. The euro also gained to 1.1152, while the Japanese Yen was little changed at 145.16.
Commodities: Despite a bullish Energy Information Administration (EIA) inventory report and an oil tanker being reported ablaze and drifting in the Red Sea, crude markets were hit hard by algorithmic selling, sending them to 6-month closing lows.
West Texas Intermediate (WTI) futures are down 1.7% at US$71.93 per barrel, while Brent futures dropped 1.5% to US$76.06 per barrel.
The EIA inventory report saw draws across the board with crude stocks down 4.649m barrels, gasoline down 1.6m barrels and distillate down by 3.311m barrels. The drop in crude inventory took stocks to the lowest since January.
Metals were mixed with copper up 0.6% at US$9,182 while aluminium and nickel fell. Iron ore rose for the third day with the focus remaining on Chinese policy support for the residential property market. Futures in Singapore are up 3.2% to $98.20.
Australia: There were no major economic data releases yesterday.
United States: The level of non-farm payrolls at March 2024 was reduced by 818k in the initial annual revision. All of the revisions were in the private sector.
Before revision, the average monthly gain over the 12-months to March 2024 was 242k. This initial revision implies a monthly average pace around 174k, closer to the pace of population growth over the period (~133k).
In the July FOMC meeting minutes, members expressed growing comfort with the trajectory of inflation, with “some further progress” seen in recent months which critically was “broad based across the major subcomponents of core inflation”. Waning pricing power amongst businesses as consumers became more price sensitive points to a continuation of the disinflation trend. Supply and demand in the labour market was also seen as continuing to come into better balance.
The risks to the outlook continue to evolve, upside risks for inflation diminishing as downside risks for the labour market grow. On the latter, it was noted that the “the risk had increased that continued easing [in labour demand] could transition to a more serious deterioration”.
On the path to a first rate cut, “several observed that the recent progress on inflation and increases in the unemployment rate had provided a plausible case for reducing the target range 25 basis points at this meeting or that they could have supported such a decision”. “The vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting”.
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