NAB Morning Call

When it rains it pours: Aussie inflation, Japan’s rate decision. Microsoft earnings

Wednesday 31st July 2024

Financial Services Guide | Information on our services - NAB

It’s a packed episode of The Morning Call today as Phil gets NAB’s Ray Attrill to take us through the latest GDP and inflation data from Europe, jobs data from the US and, from China, the Politburo’s promise to jump into action and reach 5% GDP, without really saying how. Today Australia’s CPI is the main point of interest because it could drive the RBA to an interest rate rise. A rise is expected from the bank of Japan later, perhaps a little more than previously thought. And Microsoft’s earnings results came in stronger than expected, but the after hours share price clearly didn’t like the softer results for intelligent cloud revenue.

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Duration:: 18m
Broadcast on:: 30 Jul 2024
Audio Format:: mp3

Well, when it rains, it pours. We get Australian inflation numbers today. Could they influence the RBA to lift rates? We expect the BOJ is going to lift rates, possibly more than expected today, and we don't have to long to wait for that one. We don't have to wait at all for Microsoft earnings. They're out, and we'll tell you all about them. Plus, how China is going to reach their 5% target this year, and the latest on European growth and inflation, neither of them are good news for Germany, and the latest job numbers from the US as well. It's a busy one. It's Wednesday. It's the 31st of July, 2024. It's the morning call from Knapp. Good morning. And we have any results too as well today, for MAMD, Microsoft and PayPal, and not out as we start to record this, but we assume they will have them out by the end. So stay tuned for that. Meanwhile, ahead of those results, not much difference between today and yesterday for the US dollar, but a quarter percent falling the pound and not 0.1% dropping the Aussie now below 65.4 US cents. The US dollar has lost half a percent against the Japanese yen, so a stronger yen again today, and a stronger Swiss Franc as well. That's up a quarter percent. US stocks are very mixed again. The Dow is up half a percent at close. The Nasdaq is down 1.3%. This is of course before those earnings came in at close. The S&P down half percent, but the Russell 2000 today, that's up a third of 1% and mixed in Europe as well in that the Eurostocks 50 is up half a percent. So is the DAX, but the FTSE 100 is down a quarter percent ahead of the Bank of England later on in the week, and bond yields lower again. 10-year Treasury is down three basis points. That's 26 basis points lower in a month, yields down just two basis points for Germany and France. Aussie 10 years yesterday were flat at 4.28%, but down a few basis points overnight on futures, and oil is down quite a bit. 1.1% off Brent and 1% off WTI. Brent is now around 78.90. It did get below 78.50 during the session. So why these moves? What's been going on? What's around the corner? NAB's Ray Actual has all the information at his fingertips. Talk about a build up. Let's hope he can deliver. First off, what is driving those moves overnight? So yields lower, stocks mixed, but it looks like rotation is back on. A strong Swiss Franc against a weak pound and weak Aussie dollar. So is it central banks? Is it earnings? The latest data? Is it month end? I realize I already know the answer to that because I'm talking to an economist after all, but yeah, give me it. It's a bit of everything answer. It looks like it. Morning, Phil. Yes. I mean, obviously in the scheme of things, the moves are, well, we haven't had really strong moves anywhere, have we? But as you just said, it does look like a bit of a resumption of that rotation trade and not possibly not also that we've got, I know you'll be talking about Microsoft, but we've got Amazon and Alphabet tomorrow. And remember, we did have a big sell-off, and we particularly in Tesla, but also in Alphabet, and they Google last week when they reported, so it wouldn't be surprised if we're seeing a little bit of caution ahead of those earnings results certainly. We'll talk about some of the US numbers, but clearly they haven't made any impression as far as market confidence in the Fed starting a rate-cutting cycle in September. Obviously, it's the first day of the FOMC meeting already, and then we'll have the results tomorrow morning, but the bond market clearly hasn't been phased by the economic data, still too creamy, confident that we're going to have rate cuts. Well, let's plow through some of the data, because we've got a lot of stuff coming today as well. So first of all, European weakness, we've been talking about quite a lot on the podcast, but GDP for Q2 actually picked up a little. Admittedly, it's 0.6% for the year. It was 0.5%, so not a great deal. It's a step in the right direction. But what about Germany? So a double whammy of bad news there in that GDP is down 0.1%, minus 0.1%, Q1, Q, and year on year, so the economy is contracting and has been for a while, and yet inflation is picking up again, so more than expected. So 0.3% month on month, so that is from I think 0.2%, so 2.3% year on year from 2.2% last month. So both of them heading in the wrong direction. That's a challenge for the ECB, isn't it? And the big contrast to that? Look at Spain, you'd be very Spain. I know the exact opposite is Spain, right? You've got inflation falling faster than expected, and you've got growth here in Europe. And GDP up more than expected. Exactly, 2.9% growth year on year in Spain. It's such a contrast, isn't it? Let's not talk about a football match, but they did win Wimbledon as well, basically. So the only, I don't know whether... Well, I mean, I guess it's tourism would be a chunk of this, wouldn't it? I think it is, actually, and I have been sort of reading around the numbers, and there is some suggestion that Germany is... Some of the northern European countries are still feeling the ill economic effects of the ongoing Russia, Ukraine war, whereas the southern European states maybe are a little bit more immune to the goings on there, for example. So whether that's a factor, I don't know. But there is a contrast, but overall, and then start to still say that Germany looks like the proverbial sort of sick man of Europe still, doesn't it, with that outright contraction in the second quarter? That makes it hard for the ECB, doesn't it? As to what direction they take. I mean, we get the overall CPI number for the Eurozone today, but that will be a misleading number, because of the overs and unders, and obviously the Germany is the unders part of that. So how does that influence the decision the ECB makes that keeps everyone happy? Let's remember the ECB is a central bank that does not have a dual mandate. It is exclusively an inflation fighter. So yeah, I think given the sort of the slight overs in Germany, but the unders in Spain, I don't think that's going to dislodge anybody's expectations for the pan-Eurozone numbers that we'll get later tonight, basically. So as things stand, we still think that we're on track for a follow up cut in September, but as ECB officials have been making very clear, that's not a nailed uncertainty and the data flow between now and when they meet in September, it is still going to guide the decision, but I think it's still far more likely than not that we will see another cut in September. Okay, the US, the jolt's numbers last night were pretty mixed. Job openings were down on last time, but still a bit higher than expected, but down, that's the key thing, and quits also down from 3.4 million down to just below 3.3 million. So there's that. We get the ADP employment print in the US tonight, which most people say, you know, well, let's just ignore that until all of a sudden it surprises us, and then everyone pays attention, and then the, I guess this is the big one, isn't it? The Employment Cost Index is out today as well for the US. No, that is the big one, and we did have some of an unpleasant surprise in Q1 alongside those higher than expected inflation numbers, so ECI was sort of, which is probably the most rounded measure of sort of inflation pressures, if you like, in terms of incorporating, you know, soon productivity, et cetera, and it's expected to come down to 1% Q1Q from 1.2% in Q1. So, you know, if that's the case again, that will sort of consolidate expectations, I think, regarding the Fed, the data itself that we've had, you know, generally on the high side, as you say, I love Joltz was down, we did have a reasonably sizable upward revision to the, to the main numbers, and the overall number was, you know, it was almost 200,000 higher than expected, you know, the quits rate remains at what 2.1% of the workforce, so I think that means sort of 1 in 50 workers are quitting their jobs on average during the month, at least, and consumer confidence was, you know, we did see, you know, it was just a little bit of a little bit of a, was it better than expected, but expectations were up, which I would probably attribute to the fact that confidence in lower rates has started to strengthen, so that may have helped, whereas, you know, some of the detail that we've got with the labor market we know has been, you know, has been softening somewhat, so I think that's sort of weighing on current conditions, if you like, relative to that expected. Yes, the current conditions are down on there, but the expected, this is up, so 100.3 from 97.8 last time, those earning over 100,000, actually, it's a large part of the, the optimism as well, or as the confidence board puts it, it's somewhat less pessimistic, less pessimistic, they don't use the optimistic word, so they're not saying it's, it's great, but it's getting better. Well, I suspect that those earning more than 100,000 are probably those with bigger equity portfolios than others. So, despite that sort of rotation thing, that there's probably a little bit of a wealth effect there that's, that's feeding into those confidence of those higher income earners. Now, a strong signal from China's Politburo that they are going to move to boost the economy. They basically are saying, yes, we're going, we're going to reach our target 5% GDP by the end of the year. We're going to restore confidence. They are apparently going to launch a batch of new policy measures as early as possible. It seems like the focus is very much on private enterprise rather than necessarily the government wading in. Basically, they said we should strengthen the market's survival of the fittest mechanism and smooth the exit channels for backward and inefficient production capacity. This is according to the communication housing, it sounds like they will actually bail out companies there by buying up some, some of the inventory and making available as affordable housing. So, yeah, there we are. And, you know, just how much work has got to be done? Well, the official PMIs are out for China today, aren't they? Yes, they are. So, but the expectation there is we'll see some further slippage from pretty meager levels that we got last month for both services and for manufacturing. But I have to say your, your positive summary of the Politburo community community community was, sounds a little bit more upbeat than the Maori dig and others and yeah, so all of the right sort of superlatives there in terms of the needs, but very, very light on specific. So housing you've mentioned, but it really looks like, you know, just rolling out and making sure that the measures they announced a couple of months ago, you know, are put into place, you know, increase them on the fiscal side, you know, I think the subtext is really that nothing necessarily new, but that there's a lot of headroom still within their plans for increase central government bond issuance. So they want to get on with the job there rather than necessarily saying that there's any sort of new fiscal bazooka in the pipeline. And, you know, some further easing in monetary policy, but I think that was pretty much expected after that small rate cut that we had last week. So we should probably expect a cut in the reserve requirement ratio in coming months and maybe another slice off the short term policy rate at some point. But as I say, this does not add up to confidence in a new big bazooka and if I look at the likes of the iron or futures price, for example, that's off over two percent since that statement came out, copper's up a little bit, it's a little bit of a mixed picture, but at the moment, I'd say the market is less than fully impressed by what they heard last night. Because as you say, they haven't actually said how they're going to do it. So today, Aussie CPI, first and foremost, so is this a make or break in terms of a potential rise by the RBA? If it's an outside surprise, could we, I mean, we've been saying, you know, one that's been saying that, no, it's not going to happen, but if we get a bit of a surprise today, could that be on the cards? Oh, absolutely. It's, I think it's absolutely pivotal to what happened. So I suspect that there might be a little bit of a, if we do see at least a modest upside surprise, so let's say we get a, you know, something above one percent on the trimmed mean measure, one percent is NAB's forecast. It's also the market consensus on Bloomberg, although I do note that there are almost as many market economists forecasting 0.9 as there are 1%. So in that sense, 0.9, I think, would be less of a surprise than say 1.1 or higher. Even if it is slightly to the high side of one, I think that the detail will be important as far as whether that necessarily means that certainly it means that the August meeting is going to be live, but whether or not they will, but all the trigger, I think a lot will depend, you know, on the detail and what they see about trends and particularly sort of market determined inflation pressures, you know, relative to those that the result of, you know, public sector price increases and other factors that monetary policy is pretty much powerless to impact. So, yeah, so there's a lot riding on those numbers. So what about retail sales as well? Because we get that today for June. What if they were weaker? It doesn't sound like they are because the online numbers out overnight for last month, yesterday for last month have now seemed quite strong. But if we had weak retail sales generally, I mean, that means consumption is softer than you'd assume that price growth will slow, so could the RBA take that into account? Could one offset the other, for example? Oh, well, I know that they're fully offset, but certainly they'll be important and, you know, the RBA has been flagging, you know, for several months now, concerns about the weakness of the consumer side of the economy. So, and remember, consumption makes up, you know, almost 70% of the overall economy. So, you know, where the consumer goes, the economy goes in very broad terms. So, were we to see sort of weakness in retail sales? I mean, the market's 0.4, after it's a little bit of a moderation from points, sorry, markets 0.2, we're at 0.4, because as you note, our retail numbers suggesting that spending was quite resilient last month, but the potential for a surprise there is quite high. So I think, you know, the margin, and obviously it's going to come out at the same time as the CPI. They're probably going to get lost somewhat in the noise, but yes, it's of some importance, but on the day, at least, it's going to be completely overwhelmed by the messages from the CPI numbers. And they supposedly don't look at the housing market, but I mean, if they did, well, you know, building approvals yesterday, six and a half percent drop in June, I mean, you know, surely they'll be looking at that and thinking, well, if we lift rates, that's just going to get worse. So, well, these are approvals, remember, don't say much about housing demand. These are very much about what the supply pipeline looks like and very volatile. And it's that sort of multi or apartment blocks and townhouses that, you know, produce a lot of the month to month volatility. That said, for sort of detached dwellings, there was a small fall, I think half a percent last month. But I think the broad picture here is if you look at it in trend terms, building approvals and running, well, no, but in overall trend terms, you know, we're running at about a hundred there, a little over a hundred thousand a year at new dwellings. And we need to be putting something like 240,000 new dwellings in place every year for the next five years, if we're going to solve the housing crisis, if that's what you want to call it, I think it is a crisis. So at the moment, the run rate as far as the new buildings is running at less than half of what is necessary to have any realistic prospect of solving that issue. So in that sense, I think it is meaningful, but I don't think it's a direct input into the RBA thinking, but it's from a structural point of view, it's a pretty worrying development. It is, isn't it? Now, the big question today, obviously, is the Bank of Japan, will they or won't they? Well, we've been talking about it being a 50/50 chance. Do they need to? Is the question, you know, is the risk of inflation getting out of control there? Or do they? You know, they quite like inflation. So, you know, I guess that would be the argument for doing nothing or not doing anything in a hurry. But there are press reports out now saying actually it could be more than the 10 basis points expected. It could actually be a 15 basis point rise today. No, absolutely. I mean, when I was leaving the office last night, the yen was the weakest currency. That's you've fallen over half a percent over the course of the APAC session, wake up this morning and it's half a percent up. So quite a dramatic turnaround and it does all relate to this NHK, which is the national broadcaster put out a report, you know, during the European morning yesterday. Let me just quote, I have used Google Translate here just to warn listeners, is there some members are of the opinion that the risks of a weak yen pushing up prices should be closely monitored and accordingly, according to those involved, the BHA will consider further interest rate hikes at its meeting on March the 31st, specifically the bank is expected to discuss a proposal to raise the policy interest rate, which is currently set at around 0.1%, to around 0.25%. Now, they do want to note some sort of dissenting voices, if you like, or some people being cautious. But I think that's a pretty explicit statement that- Is that what Donald Trump would call currency manipulation? Well, currency manipulation of the sort that Donald Trump would say, bring it on because it means a stronger currency rather than a weaker currency. Yeah. And in answer to your question about do they want a weak yen or not, I think the pendulum has clearly shifted among sort of government official to say that we need to see a stronger yen is desirable and that the net impact of a weak yen is negative, those sentiments are starting to come through. So if the government and the BHA want to at least consolidate the strengthening at the yen that we've seen in the last couple of months, then they simply have to raise rates today. And I think it will be a green light for renewed yen depreciation. So our view has been, for several months now, that they will go and we have alluded to the risks that if they do go, then moving 15 basis points rather than 10, it is a realistic option. And at the moment, you'd say that looks like, singularly, the most likely outcome. And since the market is only priced, I think, for about six or seven basis points of five hikes, if we do get a full 15, I think we'll see quite a strong pro-yen impact from that later today. Right. And then go very quickly, the ANZ business survey is out this morning as well. So how influential is that going to be for the next RBNZ decision? I think it is quite important. I mean, it's probably the most comprehensive survey there, equivalent of the NAB business survey here in Australia. And I think price-seeking intentions within that survey is also going to be really, that's probably the most important sort of sub-components as far as how it might feed into RBNZ thinking for the August meeting. And that fell quite sharply in the June survey, and inflation expectations also came down. But the business survey itself just highlighted the pilot state of the New Zealand economy. So at the margin, I think it could move the needle a little bit on those August rate-cut expectations. We've got to move on. Good to talk, Ray. Thanks for coming on. Thanks, Phil. And I can give you the Microsoft earnings results now for the fourth quarter, 64.7 billion. The estimate was 64.5 billion. So it is a beat, but cloud revenue, 36.8 billion. The estimate was slightly more than that, 36.84 billion. At the after-hours share price is actually down over 7%, perhaps because the intelligent cloud revenue, the AI bit, the forward-looking part of the business model, the AI that has been hyped to the hilt, well, that came in softer than expected, 28.5 billion versus 28.7 billion expected. All of this before we have the earnings call, so obviously a bit of colour is going to come out of that, a bit of an explanation. But that's what we can give you right now. And that's it for today. That's the morning call from Knapp. I'm Phil Dobby. Back again tomorrow morning. I'll see you then. (upbeat music)