Morning Report
Today's economic developments and market movements.
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Key themes: A pessimistic mood persisted in markets overnight as they await tonight’s nonfarm payroll figure. A weak number from the employment report will likely see markets price in a larger chance of a 50 basis point rate cut by the Fed.
Some revival in tech stocks saw the NASDAQ up but most key equities indices finished lower.
US treasury yields fell with the 2-10-year portion of the curve remaining inverted. Yields were also lower in Europe. Softer yields saw the US dollar drifting lower, temporarily dipping below 101.
RBA Governor Bullock spoke yesterday and gave a clear signal that rates will remain elevated for some time.
Share markets: Global equities eased further as the risk off sentiment persisted in the lead up to the key nonfarm payrolls release.
In the US, the S&P 500 fell 0.3%, closing lower for a third day in a row. The Dow Jones fell 0.5% while the NASDAQ closed 0.3% higher after a reversal in some tech stocks including Nvidia.
European stocks also dipped overnight, with the Euro Stoxx 50, the UK’s FTSE 100 and Germany’s DAX falling 0.7%, 0.3% and 0.1% respectively.
In Asia, the Nikkei fell 1.1% in Japan as a stronger yen eroded the appeal of Japanese equities.
In contrast, the ASX 200 closed 0.4% higher after a sharp decline on Wednesday.
Interest rates: The 2-year treasury yield fell 1 basis point to 3.74% while the 10-year treasury yield fell 3 basis points to 3.73%. Interest-rate markets have fully priced in four rate cuts with a fifth priced in 21% of the way. Three additional cuts are priced in for 2025. This is up from the 97 basis points of cuts over 2024 expected at the start of the week.
Yields in Germany and the UK also moved lower overnight, the 2-year Bund and Gilt both down 3 basis points, while the 10-year Bund and Gilt were both down 2 basis points.
Australian futures yields were flat to higher. The 3-year futures yield rose 1 basis point to 3.54%, while the 10-year futures yield stayed pat at 3.94%. Market pricing shows the first rate cut is pencilled in for February 2025 with almost four rate cuts priced in for 2025.
Foreign exchange: The US dollar softened overnight. The DXY index briefly dipped below 101 before regathering a little ground to finish at 101.07. The US dollar was weaker against every G-10 peer save the Norwegian Krone.
The euro finished stronger despite a weak retail sales print which proved a slight hurdle intra-day.
The Aussie was higher against the Greenback reaching a high of 0.6742 after earlier touching a low of 0.6714.
Commodities: The price of oil declined 0.1%, remaining below US$70 per barrel at US$69.15 after swinging wildly throughout the session. OPEC+ announced they will delay planned increases in output.
Iron ore decline further by 1.6% to US$92.35 but has bounced back in early trade this morning.
Australia: RBA Governor Michele Bullock spoke yesterday, reiterating the high costs of inflation and reinforcing that these costs as disproportionately borne by those on lower and fixed incomes. Bullock doubled down on guidance that the Board does not expect to cut rates this year, noting that market services and housing continue to be the largest drivers of inflation.
Eurozone: Euro Area retail sales grew just 0.1% in July after a downwardly revised 0.4% decline in June. Over the year, sales are 0.1% lower. With the labour market remaining strong, as rate cuts are experienced and inflation remains benign, growth in discretionary spending should lift.
United States: The US ISM services PMI was effectively unchanged at 51.5 in August compared to 51.4 in July. The details were mixed, new orders improved from 52.4 to 53.0 as employment softened from 51.1 to 50.2. Prices paid lifted from 57.0 to 57.3, but this reading is only a touch above the average of the 5 years before the pandemic, when consumer inflation was below target at 1.6%.
US ADP employment gained only 99k in August, its lowest read since Jan 2021; the prior outcome was also revised down to 111k from 122k. However, US initial jobless claims continue to suggest this softening in employment is not the result of widespread job shedding. Initial claims edging lower last week to 227k from 232k the week prior. Wage pressures continue to dissipate across the economy, the final estimate for Q2 unit labour costs marked down to 0.4% from an initial 0.9% gain.
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