Morning Report
Today's economic developments and market movements.
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Key themes: US and European equities started the week higher, partly retracing some of the falls from Friday’s sell-off.
US Treasuries were little changed amid the low top tier data flow. Investors are looking to this week’s US inflation numbers for guidance around the size of the Fed’s rate cut in September - markets have priced a 30% chance of a 50-basis point cut in September.
The US dollar index was higher, while the Aussie remains under pressure amid soft commodity prices and weaker than expected inflation data coming out of China.
Share markets: US equities strengthened overnight, clawing back some of the losses from the sell-off late last week. The S&P 500, Dow Jones and NASDAQ each rose 1.2% overnight.
European markets also finished in the green. The Euro Stoxx 50 finished 0.9% higher, while the FTSE 100 rose a solid 1.1% higher in London – the strongest one-day performance since early August. The German DAX closed 0.8% higer.
The Asian session was mostly playing catch-up to last week’s pull-back. Stocks finished –0.5%, –1.4% and –1.2% lower across Tokyo, Hong Kong and Shanghai respectively.
The ASX 200 managed to regain some momentum over the day after falling –0.8% at market open – following on from the sell-off in US equities late last week – but ultimately finished –0.3% at market close. Futures markets are pointing to a solid opening this morning, following the lead from the US.
Interest rates: Treasuries saw relatively milder moves overnight, finishing with a slight flattening of the US yield curve. The 2-year treasury yield rose 2 basis points to 3.67% while the 10-year treasury yield fell 1 basis point to 3.70%.
Near-term market pricing is broadly unchanged, with futures markets indicating a 30% chance of a 50bp rate cut priced in for September. There has been some paring back of rate cut bets in the outer end of the curve, with 240bps of cuts now priced in by the end of next year.
Australian yields moved lower overnight. The 3-years futures yield fell 2 basis points to 3.52%, while the 10-year futures yield declined 5 basis points to 3.92%. Given the RBA’s clear guidance, markets understandably do not have a full appetite for a rate cut this year but continue to price in roughly 100 basis points of cuts through to the end of next year, with the first rate cut fully priced in for February.
Foreign exchange: The US dollar continues to make gains after last Friday’s sell-off, staging a recovery against most major currencies. Overnight, the US dollar index reached a high of almost 101.70, before settling at 101.63 to finish the day 0.5% higher.
The Aussie was 0.1% lower against the Greenback. After falling to an intraday low of 0.6648 amid falling commodity prices and weaker than expected inflation data coming out of China, the AUD/USD stabilised to close at 0.6662. Soft commodity prices and global risk mood are likely to remain headwinds for the Aussie in the near term.
The Yen was weaker against the US dollar, with the USD/JPY up 0.6% to 143.16.
Commodities: Commodities were generally higher.
The price of oil was higher as Tropical Storm Francine was forecast to generate a life-threatening storm surge for portions of the Upper Texas and Louisiana coastlines, impacting supplies. The October WTI contract was 1.5% higher to US$68.71 per barrel.
Iron ore markets stabilised at US$92.75 per tonne after a brief test below the US$90 level.
Metals benefitted from the improved risk tone with copper trading back above US$9,000 before sliding to finish just under the $9,000 mark.
Australia: There was no top tier economic data released yesterday.
Japan: The economy expanded 0.7% in the June quarter, compared with flash data and market estimates of a 0.8% expansion. Growth in private consumption and business investment was slightly lower than initially estimated in the flash data. Despite the downward revision, the June quarter outcome was the It was the strongest quarterly growth since the June quarter of 2023.
The current account surplus increased to JPY3.2b in July from JPY2.8b a year earlier. This was better than the JPY26b expected by the market. The increase was mainly driven by a widening in the primary income surplus, with the services trade balance also contributing.
China: Consumer prices were 0.6%yr higher in August, up from 0.5%yr in July and slightly below the 0.7%yr expected by the market. Food prices rose for the first time since June 2023, as fresh vegetables rebounded sharply. Non-food prices increased 0.2%yr, much slower than the 0.7%yr increase in July, on softer rises in cost of clothing, housing, health, and education. Core consumer prices, excluding food and energy costs, increased 0.3%yr, the slowest pace since March 2021.
Producer (or wholesale) prices declined 1.8% over the year to August, which was softer than the 0.8%yr fall recorded in July. The August print marked almost two straight years of produced price deflation amid weak demand and expanding capacity. Declining costs of production and prices of consumer goods led the decline.
Eurozone: The Eurozone Sentix Investor Confidence Index declined from to -15.4 in September from -13.9 in August. This was weaker than the -12.2 expected by the market. The current conditions sub index declined to -22.5 points in September, from -19.0 in August. The expectations index recovered from August’s -8.8 read to -8.0 in September.
United States: The NY Fed’s 1-year consumer inflation gauge was unchanged at 3.0% in August, the top of the range seen in the five years before the pandemic, when inflation was well below target. The 5-year view was also unchanged from July at 2.8%.
Consumer credit meanwhile surprised to the upside, increasing $25.5bn in July, more than twice the market estimate.
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