Morning Report
Today's economic developments and market movements.
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Key themes: Friday’s non-farm payrolls release and commentary from Fed officials did little to settle the debate on whether the Fed will cut by 25 or 50 basis points, leaving the door wide-open on both options.
US equities remained focussed on downside economic risks with the major bourses continuing to slide. The S&P 500 notched up its worst week since Silicon Valley Bank collapsed in March 2023.
US treasuries rallied at the short-end as traders priced in over 250 basis points of Fed rate cuts by the end of 2025. The 2-10-year yield curve closed un-inverted for the first time since mid-2022.
The US dollar finished a little firmer with the Japanese Yen and the Swiss Franc the only majors to post gains. The AUD underperformed.
Share markets: The S&P 500 slipped for a fourth straight session, dropping 1.7% to end the week 4.3% lower - the worst weekly performance since Silicon Valley Bank collapsed in March 2023. The NASDAQ dropped 2.6% on Friday to be 5.8% lower over the week.
European markets also finished in the red after a late slide. The Euro Stoxx 50 ended down 1.6%, the FTSE 100 dropped 0.7% in London, while the German Dax closed 1.5% lower.
The ASX 200 closed 0.4% higher on Friday ending the week down 1.0%. Futures have since traded sharply lower, pointing to a weak open this morning.
Interest rates: The US yield curve finished lower and steeper on Friday after swinging wildly in response to payrolls data and comments from Fed officials. The 2-year yield closed 10 basis points lower at 3.65%, its lowest close since September 2022. There are now 250 basis points of rate cuts priced in for the Fed by the end of 2025. Swaps pricing still implies a 50 basis point cut at some stage this year, but there is only around a 25% chance of a larger 50 basis point move being delivered at this month’s meeting.
The US 10-year yield was down just 2 basis points to 3.71%, its lowest closed since June 2023. The 2-10-year curve steepened sharply, disinverting convincingly and closing in positive ground for the first time since mid-2022.
Aussie bond futures were little changed and have limited scope to rally given guidance from RBA Governor Bullock for no cuts this year. There remains around a 90% chance of a rate cut priced in.
Foreign exchange: The US dollar was slightly firmer on Friday, gaining against most G-10 majors save the Japanese Yen and the Swiss Franc. The DXY tumbled to a low of 100.58 on the payrolls data before rallying to post an intra-day high of 101.40. The DXY pulled back slightly to finish at 101.18.
The Aussie dollar underperformed despite a significant improvement in yield support, again falling foul to its sensitivity to risk sentiment. The AUD/USD fell from a high of 0.6767 to a low of 0.6660 before closing only slightly higher around 0.6670 - where it was again trading early this morning. Near-term, the terms of trade and global risk mood are likely to remain headwinds for the Aussie, though firmer yield support does present the opportunity to re-explore territory above 67 cents should the global backdrop turn more supportive.
The Japanese Yen took another lunge towards its year-to-date highs, bucking the broader sell-off against the US dollar. The USD/JPY fell from a high of 144.01 to a low of 141.78 and was trading around 142.21 in early trade this morning.
The euro and the British Pound both finished lower after riding the back of US dollar swings post-payrolls. But both held around the top of their ranges of the last 3-months. In early trade this morning the euro and the Pound were trading around 1.1084 and 1.3132, respectively.
Commodities: The US payrolls data added to concerns about demand for crude, sending markets sharply lower and adding to the aggressive losses for the week. West Texas Intermediate contracts closed down 2.1% at $US67.67 per barrel. That’s a fall of around 8% on the week, the largest fall since October 2023.
That was despite OPEC+ last week confirming that it had agreed to “extend additional voluntary production cuts of 2.2 million barrels per day for two months until the end of November 2024”.
Metals lurched lower, also weighed down by US employment data. Iron ore ended the week just above the $US90 level, weighed down by continued weakness in spot steel prices.
Australia: The value of housing finance approvals rose 3.9% in July, extending a broad upswing in finance activity. Owner-occupier (+2.9%) and investor (+5.4%) lending were both firmer in the month reflecting both higher dwelling prices and a gradual upswing in the volume of financing approvals.
Eurozone: June quarter GDP growth was edged lower in the final estimate to 0.2% as household consumption and investment both contracted, offset by government spending and net exports.
Annual growth remained at 0.6% however, thanks to an upward revision to Q4 2023.
United States: Nonfarm payrolls surprised marginally to the downside in August. Payrolls gained 142k in the month against the consensus expectation of 165k. Of more significance, June and July’s gains were revised down by 86k, equivalent to almost a third of the prior estimate for those two months. In three-month average terms job creation slowed to its weakest since mid-2020.
Employment from the household survey was a little stronger in August at 168k, but over the past three months household employment is in line with nonfarm payrolls at 117k per month.
The unemployment rate rounded down to 4.2% in the month, but remains in a modest uptrend, with an upwardly skewed risk profile.
Hourly earnings growth accelerated from 0.2% to 0.4% in August, but the annual rate of 3.8% is still broadly consistent with consumer inflation at 2.0%.
Fed members John Williams and Chrisopher Waller backed a series of rate cuts starting at the September 18th meeting. Waller noted he would be open to larger front-loaded easing if the data dictates. However, both did not foresee a recession.
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