Morning Report
Today's economic developments and market movements.
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Key themes: A slightly hotter-than-expected monthly reading on US core inflation saw traders converge on a 25 basis point rate cut for the Fed’s September meeting.
US equities erased an early fall to finish in the green, buoyed by the usual mega-cap tech names.
US treasuries sold off modestly across the curve with the 2-10-year yield curve flattening slightly and barely remaining positive at just 1 basis point.
The US dollar traded a little firmer but remained comfortably within recent ranges. The Aussie dollar had a decent showing popping higher and ending a three session string of lower lows and lower closes.
Share markets: A rally in tech stocks saw US equities erase an early slide on the back of hotter-than-expected inflation data. The S&P 500 finished up 1.1% and the NASDAQ gained 2.2%.
Trade was mixed in Europe, the Euro Stoxx 50 rose 0.3%, the German Dax gained 0.4%, while shares were down 0.2% in London.
Equities struggled in Asian trade yesterday. The ASX 200 closed down 0.3%, Japan’s Nikkei shed 1.5% and major bourses closed in the red in both Hong Kong and Shanghai. Futures were broadly firmer overnight.
Interest rates: Traders pared near-term expectations for Fed rate cuts following the slightly firmer than expected inflation report, cementing the view that the Fed will kick off the cycle with a 25 basis point cut. However, there remains a touch over 100 basis points of cuts priced in for 2024, implying the Fed will go by 50 basis points at one of the remaining meetings this year.
2-year treasury yields were 5 basis points firmer at 3.64%, while the 10-year yield edged up 1 basis point to 3.65%; the 2-10-year curve flattened but just remained positive at 1 basis point.
Aussie bond futures shadowed in the move in US treasuries. The 3-year futures yield closed up 4 basis points at 3.51% while the 10-year futures yield was 2 basis points higher at 3.88%.
Cash rate futures are still pricing in around an 80% chance of RBA rate cuts this year, defying Michelle Bullock’s recent guidance.
Foreign exchange: The US dollar edged higher but continued to buy time in the 101-102 range. The DXY index rose from an intra-day low of 101.27 to close at 101.73, only slight below the day’s high of 101.82.
The Aussie dollar popped higher, ending a three session string of lower lows and lower closes. The AUD/USD fell to a near 4-week low of 0.6622 before staging a late rally to close up around 0.6673 - the first constructive session for the Aussie in a little while.
The Japanese Yen also firmed against the Greenback, the USD/JPY touched a year-to-date low of 140.71 before retracing most of the lunge lower to trade back around 142.28 at the close. The euro and the British Pound were both softer, finishing at 1.1014 and 1.3044, respectively.
Commodities: Crude finally reacted to the upgraded Hurricane Francine smashing through the Gulf Coast forcing the closure of as much as 25% of Gulf production.
West Texas Intermediate futures are up 2.4% at $US67.31 per barrel.
Energy Information Administration (EIA) data for the previous week did not help the bull case. The EIA reported that crude inventory rose by 833k barrels against expectations for a sizeable fall in inventory.
Metals saw a modest bounce, helped by improved sentiment in global markets, with copper up 0.7% at $8,974 and aluminium up 1.8% at $2,379.
Iron ore markets bounced despite Vale announcing that it is set to produce more iron ore in 2024 than previously forecast. Iron ore futures are up 2.3% at $US92.95.
Australia: The RBA’s Chief Economist, Sarah Hunter, spoke on the Bank’s assessment of the labour market yesterday. Overall, it was noted that the labour market is easing but remains tighter than what’s considered consistent with achieving the inflation target.
While labour market conditions had evolved largerly as expected, Hunter shared that the RBA had been surprised by the strength of participation and resilience in hours worked given the underlying slowdown in the economy, which has kept underemployment low.
Taken at face value, the RBA remains confident in an orderlying normalising in labour market conditions which allows the flexibility to focus their attention on returning inflation to target. This compared to most other central banks who have now pivoted their attention to preventing undue deterioration in the labour market.
New Zealand: Net migration rose to 3.0k in July from an upwardly revised 2.8k in June. The monthly migration pulse is now back at, if not slightly below, pre-pandemic levels.
United Kingdom: GDP disappointed in July, unchanged against an expectation for a 0.2% gain. Over the past 3 months though, activity is up a solid 0.5%.
Industrial production also missed, declining 0.8% in the month compared to expectations for a 0.3% gain. Manufacturing production was 1.0% lower, construction activity dropped 0.4% and services activity was just 0.1% higher.
United States: Headline inflation was as expected in August, rising 0.2% in the month and 2.5% over the year. Core inflation was a touch stronger than expected, accelerating to 0.3% in the month. But the annual rate was in line with expectations at 3.2%.
The marginal upside surprise for core prices was the result of another robust month for the shelter component, a 0.5% gain following July’s 0.4% rise. Transportation service inflation also accelerated in the month, from 0.4% to 0.9%, while car price inflation was less of a drag.
The consumer price index (CPI) excluding shelter rose just 1.2% over the year to August, having oscillated around the 2.0% target since May 2023.
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