NAB Morning Call

Markets calm before the storm

Tuesday 30th July 2024

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It’s been a quiet session, with shares and bond markets moving very little, as we await the Fed and some high-profile earnings results. We’ve seen very tight trading ranges, says NABs Skye Masters on today’s podcast. The mood music though is one of an anticipated slowdown. That’s why oil prices and industrial metals are down so much. McDonalds reported a fall in global sales in their latest earnings report. European GDP is the major number out today, a long with job openings for the US. And listen in for how US earnings results give a foretaste of where the US employment market is heading.

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Duration:: 14m
Broadcast on:: 29 Jul 2024
Audio Format:: mp3

Well, the share market anywhere doesn't really know where to look at the moment because so much rests on major earnings results coming out this week, we'll look at what's coming up. Not much today, although McDonald's has reported and disappointed, but at least they've told us what they're going to do about it, at the very least. They're going to sell more. Brilliant. European GDP is the major number that's out today and job openings in the United States jolts numbers, I should say, for the United States. But really, today is the calm before the storm because things go a bit crazy from tomorrow. It's Wednesday. It's the 30th of July, 2024. It's the morning call from now. Good morning. Well, the US dollar is up a quarter percent this morning with a third of a percent fall in the euro. The pound and the Aussie both marginally down, but less than 0.1%. The yen has slid 0.2% and bond yields quite a bit lower. Well, I say quite a bit, just two basis points for 10-year treasuries, but five basis points lower in most of Europe, so Germany, the UK, France, Italy, Spain, Holland, Greece, all down five basis points for 10-year yields this morning. Aussie 10 years yesterday, we're down three basis points to 4.27%, but actually up one basis point on futures overnight. But we are not talking big moves here, are we? Anyway, really, including US stocks, a pretty mixed story. The Dow is down 0.1%. The S&P up 0.1%, the Nasdaq only just in the red at the close. The Russell 2000, which has been very choppy lately, down 1.1%. All of those prices eventually moved in that last hour of power when we normally see a bit of movement just before the close, but not today. Oil is down today as well, over 1.5% for both Brent and WTI. Brent is below 80 a barrel now. It got as low as 79.36, so the lowest it's been since early June. So there we are. Sky Masters is with me today from NAB in Sydney, so I guess an uncertain direction, isn't it? Today's stocks clearly not sure where they're going. It's been rotation on, rotation off. This is clearly an off day looking at the Russell 2000. But I guess it's just trepidation, isn't it, in front of all those earnings results, particularly because we've got so many of the Magnificent Seven reporting this week. Good morning, Phil. You've done a very good job there of making it sound like a lot's happened overnight when nothing has really happened. That's my job. It's been pretty tight ranges in financial markets overnight. Not a lot of data coming out to move sentiment ahead of what you talked about with Rodrigo yesterday is a pretty big week ahead in terms of central bank meetings and key data prints. Unfortunately, it all kicks off tomorrow, doesn't it? Yes. Not today. With the Aussie CPA? Yeah, for us, the most important number of the week, of course. But to own the earnings results, well, we've got loads of them coming up. But McDonald's reported before the year open in the US. Today, their earnings well below their forecast, less than $6.5 billion versus $6.62 billion expected. Their global sales are down 1%. Yet, their share price is actually up 4% today, outperforming the rest of the share market by quite a mark. Go figure. McDonald's earnings is just the start of what we're going to see through this week. I think if you're looking at the announcement, it's just a further piece of information suggesting that consumer strength in the US may have peaked. At this point in time, when you're trying to navigate what's going on in the macro data, what central banks are going to do, the detail in the earnings announcements can be quite helpful. Well, we've got a lot of them, obviously, haven't we? So this time tomorrow, we will have just had AMD, Microsoft PayPal. The next day, we'll admit it, Qualcomm, the day after that, Amazon and Apple. So, yeah, a hell of a week for the share market. But other data wise, looking at the US slowdown, we just had the Dallas Fed over now, and that was looking pretty sad, too. Yeah, so that came out overnight. It surprised by falling. So the index fell to 17.5 versus a forecast of expectations of being pretty much unchanged at minus 15. And what was notable in the report was the fall in new orders. Quite a big drop there. It went from minus 1.3 to minus 12.8. And so this is its lowest level since November, 2023. So if you, I think this was the final of the five regional manufacturing surveys to publish before the ISM manufacturing report, which comes out later this week. So overall, I think, if you pull all of those regional surveys together, I think they are pointing to an unchanged reading for the US ISM manufacturing out later this week. And oil is quite a bit lower today as well. So it's actually hit a seven-week low. And obviously, that is related to global demand, industrial metals also well down as well. So that's telling the same story. Because you would have thought, given the tensions that were seen between Israel and Lebanon, so the US is telling the citizens to get out of Lebanon, for example, so they're expecting an escalation there. I mean, when we saw the escalation between Israel and Iran, when those tensions started to ratchet up, then oil moved up quite considerably. But right now, same deal, but oil going lower, so that you know, more than compensated, obviously, by concerns about a global slogan, slow down, let's do that. Yeah, I mean, that's how I think people are reading the overnight price action. You've got Brent crude down about 2%. I think in that sort of seven-week low, but I think also you're seeing sort of widespread down turning in commodity prices overnight. I think the Bloomberg Industrial Metals price index is down 1% overnight. And the pressure on commodity prices is being reflected in your commodity currencies, so the Aussie dollar is down overnight. So everything you're saying is a bit subdued, wherever you look, isn't it? We'll see what it does, what the story is for Europe, but we sort of know that things are going slow there. We get the euro area GDP numbers today, as well as the individual numbers for Germany, Italy, Spain, France, Portugal. We've had a couple of countries yesterday, so GDP absolutely crashed in Sweden, down 0.8% in Q2. From being up, 0.7% in Q1, it slowed a bit in Belgium as well, but you know, really, it's Germany, France, Spain, and the euro area we care about, and we're going to get all of that today. Yes, so you're right, we're getting Eurozone GDP out today, but you're reading our economists sort of what to watch about, you know, what to look at this week. They're suggesting that maybe probably more market moving will be the preliminary CPI, Prince, you're getting for Germany, Spain, and Belgium. Right. And of course, for the euro area as well, in total, which I think we get that on Thursday, Australia time. An interesting piece in the FT today about what would happen if there was a trade war between the US and Europe, who Donald Trump comes in and wants to slam Europe with tariffs, which is quite possible, because I mean, there's a 150 billion surplus, which is growing so much over the last 10 years. So obviously, Trump is going to be very focused on that. So the European approach, apparently, because they've worked, shopped it, is that, first of all, they're going to try and win a deal with him by basically promising to buy more from the US. But if that doesn't work, then they are going to slam tariffs back at him, maybe as much as 50% on things where they think it's going to hurt, like not buying Harley Davidson, that sort of stuff. So yeah, interesting piece to read in the FT. Now, look, today, building permits for Australia, I'm guessing there would be no reason to assume that these are going to be very strong. I mean, we've seen a real split, haven't we, actually, between houses and apartments. So last time housing was up 12% year on year, but apartments down almost 32%, but it has been slowly picking up, of course, February, was the lowest level for opposing approvals or building approvals in 13 years. So I guess, you know, with the oldest discussion about potential rate rise, I mean, we're not going to see any big move. We're not going to see a big bounce back, are we? Yeah, so there's obviously that big speculation around what the RBA is going to do next. You know, all eyes on the CPI print tomorrow. Hopefully that provides clarity for markets, but we'll wait and see. But on a building approvals report today, your knabb is forecasting a pullback of minus 3% following last month's increase of 5.5%. But you know, they're just pointing out that the key implication for the housing market remains that the annual run rate of building approvals is still running well short of population growth. So, you know, it's looking like it's going to be very hard to reach the government's ambitious targets for buildings approvals this year. Yeah, it is. And yeah, what's the answer? Who knows? Otherwise, it would have done it, wouldn't they? And it is an issue around the world. So non-farm payrolls at the end of the week, of course, but the jobs numbers start tonight with the jobs, the job openings, and they are expecting this is the United States. We're talking about obviously, and they are expected to weaken a little bit. Yeah, so, you know, jolts coming out tonight. I mean, I think, you know, obviously inflation prints globally are important, but also what's going on in labor markets. So, you know, I guess, you know, ahead of payrolls on Friday, this report will definitely be in focus for markets. But I don't know, it's hard to see any really big moves in bond yields ahead of the FOMC this week. And, you know, yields are, you know, as we started this podcast, yields are lower overnight. But treasuries did retrace the earlier rallies, so limited moves in treasuries overnight. And I think that's going to be the case until we get some guidance from the FOMC this week, given how well the market is priced for a Fed rate cut in September, and then further cuts later in this year. I just think that the market possibly is at risk of a bit of a disappointment coming out of power later this week. So, you don't think it's going to give any direction at all, really? Yeah, I'm just not sure how much more he can say to get the market to rally further. So, if the market's already pricing in 26, 27 base points of cuts for September, what can Powell say to make them rally even further is what I'm saying. And I think the Fed is still going to be a bit hesitant to really directly point to September being the time when they're going to start cutting rates. It is our call. But I don't think they're going to really open the door for that to happen at this meeting. The only other thing I thought I should mention that's come out earlier this morning or late in the US session was the US Treasury announcing their funding, or doing their funding announcement for the upcoming quarter. So, the Treasury has estimated that their net borrowing for Q3 will be $740 billion. So, this is down from the previous estimate of $847 billion. So, a noticeable revision downwards. And the Treasury did indicate a reason for this downward revision was the fact that the Fed is now starting to slow the runoff of its holding of treasuries. So, this is ease their need to sell more debt to the public. So, that's a factor that was behind the downward revision in their borrowing requirements for Q3. Right. Not had much impact on the bond markets. Just quickly before we go, just going back to earnings. And I guess, if we're looking at the job market going forward, can't we glean something from earnings as well? Because we can look and say, what is the forward guidance and how much of that is coming from cost cutting, which is a fair bit of it. And obviously, if it's cost cutting, the first thing to do is chop jobs. Yeah. So, I think it's interesting when you look at the latest earnings reports out of the US, I was talking to Michael Bush about this yesterday. He's our credit strategist. And while the earnings have been surprising to the upside, it's not coming from the revenue side. It's coming from the cost cutting side. So, how much can that continue to happen without it starting to feed through into the labor market and layoffs? And so, that's why I think the point that I made that it is important to be looking at these leading indicators as you head into your official payrolls report in terms of what's going on in the labor market. And it is starting to ease the US labor market, but the focus is that easing I'm going to start to gain a bit more momentum. Well, we've got lots of earnings results, haven't we coming up if we want to try and put those jigsaw pieces together? A lot of the tech sector, of course, have already done big layoffs already. Can they really do more? And we've also got the conference board consumer confidence index as well. Just mentioning that for reasons of completeness. So, we've given you the whole picture, but that is it for today. Good to talk, Skye. Thanks, Phil. And we'll give you the first of the big earnings results of this week. Tomorrow morning on the podcast. That's it for today, though. I'm Phil Dobby for Knapp. See you tomorrow.