Morning Report
Today's economic developments and market movements.
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Key themes: The sea of red across major equity markets turned into a red tsunami as the global equity selloff intensified after the disappointing US jobs report.
The unexpected increase in the US unemployment rate triggered a fresh bout of recession warnings. Markets have now priced a non-negligible chance of a 50-basis point cut when the US Fed meets next in September.
Treasuries rallied which saw the two-year US bond yield fall by more than 25 basis point to its lowest level in a year.
The US dollar declined in line with the lower yields. This saw the Aussie increase to finish the week above 0.6500.
The price of oil declined to an eight-month low amid concerns over the global economy, while safe haven flows saw gold remain elevated.
Share markets: For a second consecutive session, there was a sea of red across major equity markets amid disappointing economic data, with participants describing the rout as a “bloodbath”.
The softer than expected US jobs report saw the equity selloff which kicked off during the previous day intensify, triggering a massive surge in volatility. The VIX, or volatility index, was about 30% higher during the session, reaching levels last recorded in 2023 during the collapse of Silicon Valley Bank. Weaker than expected earnings reports from some of the tech megacaps also contributed to the rout.
The S&P 500 closed 1.8% lower to be 2.1% lower over the week. The Dow Jones fell 1.5% to also finish the week 2.1% lower. The tech heavy Nasdaq dropped 2.4% to finish the week 3.4% lower.
In Europe, the Euro Stoxx 50 was 2.7% lower, the DAX was down 2.3%, and the FTSE 100 was 1.3% lower.
In Asia, markets followed the lead from the previous session in the US/Europe. The Nikkei was down 5.8% - the sharpest one day drop since the pandemic in March 2020. The Hang Seng was 2.1% lower. Futures are pointing to sharp falls when markets reopen this week.
The ASX200 index fell 2.1% to 7,943.20. This was the sharpest one day fall since March 2023. All sectors finished in the red. Futures are pointing to sharp falls this morning.
Interest rates: Bond yields fell sharply, particularly at the shorter policy sensitive end of the curve.
The US 2-year bond yield declined by 27 basis points to 3.88% - lowest level since March 2023. The US 10-year treasury yield declined by 19 basis points to 3.79% - lowest level since July 2023. Yields were also lower in Europe and Asia.
Interest-rate markets are pricing in 44 basis points of cuts when the US Fed next meets in September, with more than 100 basis points of cuts priced in over 2024.
Australian yields were also lower. The 3-year government bond yield (futures) declined 6 basis points to 3.68, while the 10-year government bond yield (futures) declined 4 basis points to 4.05%.
Markets have priced in around an 80% chance of a cut this year. The first full RBA rate cut is priced in for February 2025.
Foreign exchange: The US dollar declined the most in one day since May this year, in line with the lower yields and increasing bets of larger US rate cuts. The US dollar index fell to a session low of 103.13 (lowest since March this year), before settling at around 103.22.
The Japanese Yen outperformed on the back of yield support, with the USD/JPY pair falling by around 1.89% to 146.53. This was the lowest level since the start of the year.
The Aussie appreciated by around 0.2%, with the AUD/USD pair reaching a high of 0.6547, before settling at around 0.6511.
Commodities: The price of oil fell by 3.7% to an eight-month low amid concerns over the global economy. This WTI futures is currently trading at around US$73.52 per barrel.
Australia: The total value of housing finance approvals posted a slightly better than expected 1.3% gain in June.
Most recent gains have been coming through larger average loan size with the number of loans approved declining about 4% over May and June. Investor lending is becoming a more prominent driver.
Annual loan growth remains much stronger in WA, and to a lesser extent Qld and SA, with Vic still seeing markedly slower rise. Most of the difference relates to differences in average loan size growth.
Producer (or wholesale) price increased 1.0% in the June quarter to be 4.8% in annual terms. The main contributor to the quarterly increase was residential and non-residential construction, where prices have increased due to rising labour costs, shortages of skilled tradespeople and increasing demand from government led projects such as schools, defence, health, and other building infrastructure.
Discretionary parts of the economy continue to show weakness with accommodation services down 8.8% in the June quarter, following higher demand due to school holidays and major events last quarter.
United States: Nonfarm payroll increased 114k in July, well below the downwardly revised 179k jobs (from the initial estimate of 206k) added in June. It was also lower than the 175k jobs expected by the market. The labour market has clearly softened with this latest read suggesting that jobs are being created at around half the average monthly pace recorded over the past 12 months. Over the month of July, jobs were added in health care, construction, transportation and warehousing, and social assistance. Job losses occurred in IT, while payrolls were little changed in mining, manufacturing, and wholesale/retail trade.
Average hourly earnings increased 0.2% in July, following a 0.3% increase in June. This was a touch below the 0.3% the market was expecting. Over the year to July, average hourly earnings have increased by 3.6%, the slowest pace since May 2021.
In part reflecting the step down in growth in payrolls, the unemployment rate unexpectedly ticked up to 4.3% in July, from 4.1% in June. The July read was the highest in almost 3 years. The increase in the unemployment rate over the past year has triggered recession warnings. As a result, markets are now pricing in the possibility of a 50-basis point cut in September.
This latest read suggests that the labour market is softening quite quickly, perhaps challenging US Fed Chair Powell’s characterisation of a “gradual” softening in conditions.
Factory orders fell by 3.3% in June, a touch softer than the initial estimate of a 3.2% decline. New orders for durable goods slumped 6.7% in June 2024, a touch softer than the initial estimate of a 6.6% fall. The steep decline comes after four consecutive monthly increases. Transportation equipment drove the decrease. Orders for non-defence capital goods excluding aircraft, a proxy for business spending plans, fared better, increasing by 1% in June, after a 0.9% fall in July.
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