Morning Report
Today's economic developments and market movements.
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Key themes: Global equity markets were calmer overnight with US and European equities retracing some of the falls recorded over the previous three sessions.
US bond yields were higher across the curve after an auction for new three-year notes. The US dollar index advanced, while the price of oil stabilised.
The Aussie was higher following hawkish comments made by the RBA Governor, ruling out near term reductions in the cash rate. Market pricing for future cuts pulled back significantly, from around 45 basis points of cuts on Monday over 2024, to 20 basis points this morning.
Share markets: Global equity markets were calmer overnight with key volatility indices pulling back from the highs recorded in the previous session. Constructive comments from Fed officials helped to lift sentiment and investors looked for bargains following the sharp falls seen over the previous few sessions.
US equities rebounded more strongly than in Europe. The S&P 500 and the Nasdaq both closed 1.0% higher. The Dow Jones closed 0.8% higher. All three indices dipped in late trade, moderating the gain recorded at close.
In Europe, equities squeezed out some gains with the FTSE 100 up 0.2% and both the Euro Stoxx 50 and the DAX closing 0.1% higher.
In Asia, the Nikkei bounced 10.2% following the fall of 12.4% recorded in the previous session.
The ASX200 index closed 0.4% higher. Six of eleven sectors were higher, led by financials. Futures are pointing to a soft open this morning.
Interest rates: US Treasury yields advanced across the curve, also retracing some of the declines recorded over the previous sessions.
The US 2-year bond yield increased 5 basis points to 3.98%. The 10-year treasury yield increased 10 basis points to 3.89%. Yields were also higher in Europe and Asia.
Interest-rate markets are pricing in around 100 basis points of cuts by the US Fed over 2024.
Australian yields were lower. The 3-year government bond yield (futures) declined 4 basis points to 3.64%, while the 10-year government bond yield (futures) declined 3 basis points to 4.02%.
Following on from yesterday’s RBA Board meeting, markets are pricing 20 basis points of cuts this year, with the first full rate cut priced in by February 2025.
Foreign exchange: The US dollar index advanced, in line with the higher yields. The US dollar index fell from a session high of 103.23 to a low of 102.70, before settling at 102.90.
The Aussie appreciated by around 0.2% on the back of yield support, with the RBA Governor making it clear that ‘a near-term reduction in the cash rate doesn’t align with the Board’s current thinking.’
The AUD/USD pair reached a high of 0.6542, before settling at around 0.6521.
Commodities: Gold, copper and gold were lower. The price of oil stabilised (up 0.4%) with the bounce in equities lifting the mood. This WTI futures is currently trading at around US$73.20 per barrel. Iron ore markets softened though remained above US$100 a tonne.
Australia: The Reserve Bank Board left the cash rate unchanged at 4.35% in August, consistent with Westpac’s and the market’s expectation.
The Board’s policy statement and the Statement on Monetary Policy continued to highlight upside risks to inflation and were more hawkish than we expected, reflecting a surprisingly bullish view on domestic demand. In the media conference after the decision, the Governor went one step further, all but ruling out rate cuts this year by stating explicitly that: ‘A near-term reduction in the cash rate doesn’t align with the Board’s current thinking.’
Prominent in the Governor’s language in the media conference was the need to ‘stay the course’ to get inflation down. This and some other language reveal that the RBA Board is not yet thinking in a forward-looking manner, but it appears to want to see inflation almost back in the target range before cutting rates.
Central to the Board’s hawkishness is its assessment that the level of demand continues to outstrip the level of supply. This levels-based analytical approach is a relatively new emphasis at the RBA; it is substantially based on past inflation outcomes and assumes a lot about the structure of the supply side. In the media conference, the Governor said she would not ‘hang her hat’ on the staff’s numerical estimates of supply.
The RBA also upgraded its view of the resilience of domestic demand. Other than some revisions to the past for consumption, which drop out of the growth rates for next year, most of this upgrade is coming from public demand.
Eurozone: Retail trade declined 0.3% in June, following a 0.1% increase in May. The outcome was softer than the fall of 0.1% expected by the market. Sales of food items declined 0.7% in June, with non-food items down 0.1% in the month. In annual terms retail trade declined 0.3%, down from a 0.5% increase advance in May.
Factory orders in Germany increased 3.9% in June, following a decline of 1.7% in May. The outcome was well above the 0.5% gain expected by the market. It was the first monthly increase since December 2023, driven by increased orders for aircraft, ships, trains and motor vehicles. the automotive industry (9.3%). While the bounce was welcomed, orders over the June quarter were still down compared with the March quarter.
United States: The trade deficit narrowed to US$73.1bn in June, from US$75bn in May. The deficit was larger than the US$72.5bn expected by the market. Exports rose by 1.5% in June driven by civilian aircraft, automotive vehicles, and energy commodities. Imports rose by 0.6% over the month on the back of increases in pharmaceutical items and semiconductors.
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