Morning Report
Today's economic developments and market movements.
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Key themes: Disappointing results from Microsoft further dented sentiment in US equity markets, pushing stocks lower with tech leading the way.
Moves were relatively tame in rates and FX markets ahead of domestic inflation data, the Bank of Japan and the US FOMC meetings later today.
The US yield curve shifted lower. There is virtually no chance of Fed rate cut at tonight’s meeting priced into markets. However, a cut is fully priced for the September meeting.
The US dollar edged lower as the Japanese Yen continued to gain against the Greenback.
The euro and the British Pound were little changed but slightly lower, while the Aussie dollar held within its range of the past week.
Share markets: Disappointing results from Microsoft further dented sentiment in US equity markets, pushing stocks lower with tech leading the way. The S&P 500 fell 0.5% while the NASDAQ was down 1.3%.
The Euro Stoxx 50 lifted 0.5%, supported by higher-than -expected GDP data.
The ASX 200 fell 0.5% yesterday. There was weakness across most sectors with the exception of financials and consumer discretionary. A lack of policy announcements in China’s July Politburo meeting drove a 1.4% fall in the Hang Seng and a 0.6% decline in the CSI 300. Elsewhere in Asia, Japan’s Nikkei and India’s NIFTY gained 0.2% and 0.1%, respectively, potentially buoyed by a rotation away from China.
Interest rates: The 2-year and 10-year US Treasury yields both finished the day 4 basis points lower. Markets are pricing a mere 4.5% chance of a cut at tonight’s FOMC meeting but a September rate cut is fulling priced in with another cut by December.
The Aussie yield curve flattened slightly yesterday with the 2-year up 1 basis point and the 10-year yield unchanged. Futures had a decent bid overnight, mirroring the moves offshore. The 3-year (futures) yield fell 4 basis points to 3.91%, while the 10-year (futures) yield was down 3 basis points to 4.25%.
Ahead of today’s Bank of Japan meeting, the Japanese 10-year yield fell 2 basis points to 0.97% - falling back below 1.0% for the first time in four weeks.
Foreign exchange: The DXY index fell slightly overnight, finishing at 104.48. The DXY traded between a high of 104.80 and a low of 104.45, holding above last week’s range.
The Yen finished firmer against the greenback after trading a wide range. The USD/JPY ranged from a high of 155.22 to a low of 152.66 and has opened lower in the Asian session, currently trading around 152.51 at the time of writing.
The euro and British Pound were little changed, finishing slightly weaker overnight against the US dollar.
The Aussie dollar moved lower but remained within the trading range of the last week as investors position for today’s inflation data and a slew of key central bank meetings.
Commodities: Crude fell further despite Israel’s attack that reportedly killed a senior Hezbollah commander in Beirut and news of another drop in crude and product inventory reported by the American Petroleum Institute. West Texas Intermediate futures are down 1.4% at US$74.73 per barrel.
Metals remained under pressure with aluminium and zinc making fresh lows. However, copper did manage to stabilise, clinging just below the US$9,000 level. Iron ore markets pushed back below US$100 as the Politburo meeting failed to announce any fresh stimulus. Iron ore futures in Singapore are down 2.6% from the same time yesterday at US$100.00.
Australia: The number of residential dwelling approvals fell 6.5% in June, continuing recent volatility. Private sector house approvals were 0.5% lower in the month but remain in a gentle upswing having troughed in the middle of 2023. Still, in absolute level terms, the flow of new house approvals remains modest by historical standards.
Higher-denisty approvals continue to drive month-to-month volatility, falling 19.7% in June following a 17.4% increase in May. But the broad story remains one of significant weakness with higher density approvals around their lowest levels in over a decade in trend terms.
Overall, the data paints a lackluster picture for new housing supply. Rising prices and surging rents have not yet been sufficient to drive a meaningful supply response given headwinds from higher costs, extended delays, labour shortages and higher interest rates.
China: China’s July Politburo meeting recognised the economic dangers of a divided economy - strong investment in new industry, but entrenched weakness in property and deteriorating momentum in consumption. While no new policies were announced to help stabilise and broaden growth, it is clear additional support is in the works.
News reports of the meeting’s conclusions point to consumption and household income being the focus for additional support, while authorities view recently announced measures for the property sector as only beginning to be implemented. This is not a material shift in policy by any means, but does point to a little more support for Chinese domestic demand through the remainder of 2024 into 2025. Confidence is critical to the growth outlook but extremely brittle. Risks will remain skewed to the downside.
Eurozone: GDP growth surprised marginally to the upside in the June quarter, rising 0.3% against consensus expectations of 0.2%. Annual growth firmed from 0.5% to 0.6%, but remains tepid.
Growth in Germany remained weak in the June quarter, activity declining 0.1% in the quarter and over the year. Spain continued to show strength, activity rising 0.8% in the quarter and 2.9% in the year. Italy and France were in between, GDP increasing 0.2% and 0.3%, respecively, in the quarter and 0.9% and 1.1%, respectively over the year. A solid labour market, falling inflation and improving growth are consistent with a gradual easing in interest rates and support the growth outlook.
Consumer confidence was finalised unchanged at -13.0 in July. Economic confidence edged down from 95.9 to 95.8 but held above expectations for a fall to 95.2. Economic confidence has been bouncing around month-to-month but remains relatively soft compared to pre-pandemic levels.
The German consumer price index (CPI) came in as expected in July rising 0.3% in the month, accelerating from a 0.1% increase in June. In annual terms, the CPI rose 2.3%, slightly above expectations for a 2.2% rise. Annual inflation in Germany has struggled to push below 2.2% in 2024 as price pressures have proved sticky. However, importantly there has been no significant signs of any renewed acceleration in price pressures.
Japan: The job to applicant ratio ticked down to 1.23 continuing its downward trend that emerged since the start of 2023. The ratio is likely to remain above one as strong demand for services, driven in part by tourism, have led to labour shortages. While easing, the ratio still suggests that the labour market remains tight enough to stoke wage growth.
United States: JOLTS job openings were a touch better than expected in June at 8.2m unchanged from May’s revised figure. While the number of job openings is still meaningfully above the pre-pandemic average, relative to employment, job openings are broadly in line with pre-pandemic averages. Separation and quit rates also point to labour demand and supply being broadly balanced with a normal degree of churn.
Conference Board consumer confidence continued to oscillate in July, rebounding from 97.8 to 100.3 - just above the 3-month average of 99.8. The improvement was solely due to expectations, the expectations index rising from 72.8 to 78.2. Views on current circumstances deteriorated from 135.3 to 133.6. Versus a year ago, the present situation and expectations are more than 10% lower despite continued strength in the labour market.
The FHFA house price index was flat in May following a 0.3% gain in April. The CoreLogic measure rose 0.3% in May following a revised 0.4% rise in April. The volume of existing homes sales remain low due to a significant lack of supply, this is providing some support to house prices as higher interest rates quell demand. Against a tight supply backdrop, the expectation of falling interest rates should see prices continue to firm, though a deteriorating labour market will keep price growth contained.
The Dallas Fed services activity index firmed in July to its strongest level since April 2022. Robust consumer demand is supporting services activity. The reading of -0.1 is reflective of relatively stable activity rather than a broad improvement in services conditions.
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