Morning Report
Today's economic developments and market movements.
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Key themes: There was a mild reversal in price action overnight as markets reflected on whether they could be a bit more enthusiastic about US rate cuts than Fed officials.
US equities pulled back, while stocks were flat to positive across Europe.
US treasury yields popped 5-7 basis points higher across the curve in a broad-flattening move. The size and direction of moves were similar in Europe and in the UK, but curves were slightly steeper in these markets.
The US dollar had a reasonable bounce and was flat to higher against every G-10 peer.
Gold pulled back in the face of higher yields, while crude oil found a floor after a 4-day slide.
Share markets: US equities pulled back overnight following a near 10% reversal rally since August 5. The S&P 500 was 0.9% lower, while the NASDAQ and the Dow Jones were down 1.7% and 0.4%, respectively.
Stocks were flat to higher in Europe. The Euro Stoxx 50 was unchaged, the German Dax advanced 0.2%, while London’s FTSE 100 edged 0.1% higher.
It was mostly green in Asian trade yesterday. The ASX 200 rose 0.2%, Japan’s Nikkei was up 0.7%, while shares in Hong Kong jumped 1.4%. Futures are pointing to a weak open across Asian markets this morning.
Interest rates: US treasury yields rose 5-7 basis points across the curve, led by the short-end, driving a mild flattening of the yield curve.
Comments from Fed officials at Jackson Hole gave the green light to September rate cuts but underscored the pace of easing will be gradual. This tested the almost 100 basis points of rate cuts which were already priced into US rates markets this year. All eyes will be on the comments of Jerome Powell tonight.
Yields were also modestly higher in Europe and the UK with moves led by longer tenors, contributing to a slight curve steepening.
Aussie bond yields were flat to lower in physical trade yesterday, while yields on futures popped higher by 5 basis points in both the 3-and-10-year contracts overnight. Cash rate futures still imply a near 100% chance of a rate cut from the RBA by December.
Foreign exchange: The US dollar had a decent bounce and was flat to higher against every G-10 peer. The DXY index rose from a low of 101.09 to a high of 101.63 before settling around 101.51.
The Aussie dollar was softer, testing support around 67 cents. The AUD/USD found buyers at a low of 0.6697 and was trading slightly higher at 0.6704 at the time of writing. The euro similarly pulled back to test support at 1.1100, bouncing off a low of 1.1098 to trade around 1.1112 at the time of writing.
The British Pound was little changed against the US dollar at 1.3091, while the Japanese Yen underperformed. The USD/JPY rose from a low of 144.85 to a high of 146.53 before pulling back slightly to trade around 146.26.
Commodities: Crude markets finally started to show signs of reacting to the bullish Energy Information Administration (EIA) inventory report earlier in the week and developments in the Red Sea. Oil futures bounced after falling for four straight sessions. The West Texas Intermediate (WTI) future rose 1.5% to US$73.01 per barrel.
Gold had a decent reversal in the face of higher yields, pulling back 1.1% to US$2484.62 per ounce. Copper futures dropped 1.4% to US$9,050, but the modest uptrend since early August remains in tact.
Iron ore finished 1.4% lower at US$96.55 after briefly making a run at US$100 in the previous session.
Australia: There were no major economic data releases yesterday.
Eurozone: The services purchasing managers’ index (PMI) reported an Olympic-related gain in August, rising to 53.3 from 51.9 and beating expectations for a reading of 51.7. However, the manufacturing PMI was essentially unchanged at 45.6 versus 45.8 in July and has largely drifted sideways at low levels over the course of 2024. German and French manufacturing activity remains weak, dragging on overall activity.
Euro Area consumer confidence dipped slightly in August to -13.4, but more broadly is well off its lows and trending higher.
United Kingdom: PMIs in the UK were firm in August. Manufacturing beat expectations to rise from 52.1 to 52.5 - the strongest reading since June 2022. The services PMI lifted to 53.3 from 52.5 in July, also topping expectations for a 52.8 reading.
United States: Ahead of Chair Powell’s address to the Jackson Hole Symposium tonight, FOMC member Harker said: “In September we need to start a process of moving rates down. We need to start bringing them down methodically. Right now, I’m not in the camp of 25 or 50 — I need to see a couple more weeks of data.”
Collins also said: “Data will tell us what kind of pace makes sense. There is no pre-set path”. Schmid noted: “It makes sense for me to really look at some of the data that comes in the next few weeks. Before we act — at least before I act, or recommend acting — I think we need to see a little bit more.”
The manufacturing PMI fell to 48.0 in August, its lowest reading this year. This followed a reading of 49.6 in July and underwhelmed consensus estimates which centred on 49.5.
The services PMI surprised to the upside, increasing to 55.2 from 55.0, against expectations for a fall to 54.0. The services PMI has plateaued at an elevated level over recent months.
The Kansas Fed Manufacturing survey beat consensus in August rising to -3 from -13 in July, but remains volatile and weak versus history. The Chicago Fed National Activity Index fell to -0.34 in July from a revised reading of -0.09 in June. This was the weakest reading since January.
Weekly initial jobless claims remained at historically low levels last week at 232k, meeting expectations.
Existing home sales rose 1.3% in July, as expected. This followed a 5.1% fall in June. Overall the number of existing home sales remains extremely low.
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