Morning Report
Today's economic developments and market movements.
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Key themes: Data showed the US economy is holding up solidly and pricing for a 50 basis point rate cut at one of the Feds remaining 2024 meetings is likely overdoing it.
US equities were largerly firmer outside of tech with the Dow Jones hitting a fresh record.
Tech stocks struggled for momentum following Nvidia earnings.
US treasury yields were modestly higher across the curve on solid US data and unimpressive demand for a 7-year treasury auction.
The US dollar was firmer, regathering ground above 101 and undermining the chances for a broad-based capitulation in the US dollar.
The Aussie dollar was slightly firmer but again failed to hold onto a run above 68 cents.
Share markets: US equities struggled for momentum despite most individual stocks finishing in the green. The tech sector weighed on the S&P 500 and the NASDAQ in the wake of Nvidia earnings which were solid, but weren’t enough to top lofty expectations.
The S&P 500 finished flat, the NASDAQ pulled back 0.2%, while the Dow Jones rose 0.6% to a fresh record high - a sign of a further rotation from mega-cap tech stocks.
This didn’t do much to stall a risk on mood in Europe. The Euro Stoxx 50 jumping 1.1% and the German Dax gaining 0.7%. In London, the FTSE 100 was up 0.4%.
The Asian session was mixed yesterday. The ASX 200 pulled back 0.3%, Japan’s Nikkei was flat while the major bourses in Hong Kong and India finished in the green.
Interest rates: US treasury yields were modestly higher across the curve. Slightly firmer data is providing another test for rate cut pricing which still implies a rate cut at each of the Fed’s remaining three meetings this year and fairly chunky odds for a larger 50 basis point move at one of the meetings. Modest demand for a US$44bn 7-year bond auction did little to improve the mood.
The 2-and-10-year yields both finished 3 basis points firmer at 3.89% and 3.86%, respectively.
There was a broad steepening impulse across the atlantic with the 2-10-year curve 2 basis points steeper in the UK and 4 basis points steeper in Germany.
Aussie bond futures mimicked the move US treasuries. The 3-and-10-year futures yields both up 3 basis points to 3.57% and 3.99%, respectively.
RBA rate cut pricing remains optimistic, with an 82% chance of a rate cut by year-end. This has pulled back after the monthly inflation indicator earlier in the week.
Foreign exchange: The US dollar popped higher gaining against most majors, the exception being the Aussie, the Kiwi and the and the Norwegian Krone.
The DXY index gained ground back above 101, rising from a low of 100.86 to a high of 101.58 before finishing slightly lower around 101.38.
The Aussie dollar had another go popping its head above 68 cents, this time hitting a fresh 7-month high of 0.6824. But the Aussie again failed to sustain the move, pulling back to finish the session back below 0.6800.
The New Zealand dollar also jumped to a 7-month high against the US dollar, reaching a peak of of 0.6299 before unding most of the move to close modestly higher. The NZD/USD was trading around 0.6260 at the time of writing.
The euro, the British Pound and the Japanese Yen all lost ground against the Greenback. The Yen remains well within its range of the last few weeks while the Pound and euro are pulling back after appreciating solidly through August.
Commodities: Crude futures rose as Libya suspended oil exports from five eastern ports, and the country’s output dipped further amid an escalating stalemate over who controls the central bank.
West Texas Intermediate (WTI) futures gained 1.9% to US$75.91 per barrel, while Brent was 1.6% higher at US$79.94 per barrel.
Metals were dragged lower by weakness in aluminium which continued a sharp reversal from the recent 2-month highs above US$2,550. Aluminium fell 1.2% to US$2,466 and is down circa 4% over the week. The focus in aluminium is on rising supply and weak demand in China. Copper prices edged lower after a sharp fall in the previous session. Copper futures were down 0.1% to US$9,152.
Iron ore markets continued marking time just above $100 despite warnings from the China Metallurgical News that prices were “irrational” and the current rise in iron ore lacks fundamental support” given plentiful supply, weak demand, high inventories and low mining costs. Futures gained 0.8% to US$101.40.
Japan’s Nippon Steel called for trade tariffs on Chinese steel exports, amid concerns that Chinese exports into Japan will increase further.
Australia: Private business capex declined 2.2% in the June quarter. The March quarter gain of 1.0% was revised significantly higher to 1.9%.
Private business capex grew by 6.0% over the 2023-24 financial year (year average terms). This suggests that capex levels remain elevated, despite the quarter-on-quarter volatility. Capex expectations point to a similar sized increase in the 2024-25 financial year.
While private business capex remains elevated, there is a growing divide between industries that are experiencing higher demand on the back of increased public spending and the population rebound, and those at the coal face of the consumer led slowdown.
Industries like construction, information media and telecommunications, and electricity, gas, water and waste, that cater for the larger population continue to build their capital stocks.
On the other hand, sectors that are bearing the brunt of the consumer led slowdown are responding to sluggish demand and are running down their capital stocks.
Eurozone: The August consumer confidence reading was finalised little changed at -13.5; a marginal weakening in confidence compared to July (-13). The current level is a touch above both the 5 and 20-year averages and remains around the highest levels seen since 2021.
More broadly, economic confidence edged higher in the month from 96 to 96.6, thanks to an improvement in services and industrial confidence. These results speak to nascent optimism over the growth outlook.
Germany’s Consumer Price Index (CPI) fell 0.1% in the August preliminary reading taking annual growth to 1.9%. The reading was marginally softer than expected in both monthly and annuala terms and marked an improvement on the prior month’s reading.
Joachim Nagel, the Bundesbank President and ECB Governing Council member, remained cautious on the path back to the inflation target, cautioning it will remain above target well into 2025 and consequently that the ECB must not lower rates too quickly. Nagel noted “we are not there yet. While our 2% target is in sight, we have not reached it.”
United States: The second estimate for June quarter GDP growth came in slightly firmer than expected as consumer spending continues to propel the US economy.
Annualised growth edged up to 3.0% from 2.8% owing to stronger consumption, now 2.9% annualised, versus 2.3% previously.
Despite stronger consumer demand in the June quarter, annualised core PCE inflation was revised down a touch from 2.9% to 2.8%.
Initial jobless claims were steady last week at 231k from 233k the week prior.
Pending home sales plunged 5.5% in July, extending a recent bout of significant month-to-month volatility. The slide erased a solid 4.8% rise in pending sales in June but in a broader context, pending home sales are down 4.6% over the year to July.
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