NAB Morning Call

US Goldilocks again, Germany Brothers Grimm

Friday 26th July 2024

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A sharp turnaround in US optimism it seems, with this week’s disappointing PMIs easily overwritten by an upside surprise on GDP. Jobless claims were also down a little. The response – rising equities and falling Treasury yields. Phil asks NAB’s Rodrigo Catril whether Goldilocks is back on the horizon, offering a faster path to cuts with minimal economic damage. It’s a very different story in Europe though, where we saw PMIs sharply lower in Germany and reaffirmed by the IFO numbers out overnight. Of course central bank decisions ultimately rest on inflation numbers, so Tokyo’s CPI and June’s US Core PCE Deflator reads will be watched keenly.

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Duration:: 16m
Broadcast on:: 25 Jul 2024
Audio Format:: mp3

Well, I was thinking that we've called today's episode "Let's Go Round Again" given the rotation is back, but you know what, obscure references to the average white band from the 1970s might be lost on a few people, anyone under 60 probably. So instead, how about this for today's story? Is the US back in the land of Goldilocks whilst Germany is more brother's grim? US GDP is surprised on the upside, job claims also down in Europe though, after those bad PMIs where they were reaffirmed by the German IFO overnight. That's why equities are clearly divided back up in the United States, well down in Europe and Japan will hear quite a bit about them today as well on this podcast and on the weekend edition as well. It's Friday, it's the 26th of July 2024, it's the morning call from NAB, good morning. Well the US dollar has been relatively flat, it's up and down a bit during the session, but only 0.2% from the top to the bottom and right now it's pretty much where it was this time yesterday. Compare that to the Aussie dollar which is down 0.7%, another fall for the Aussie dollar taking it down to 65.4 US cents, the pound also down 0.4% but the Swiss franc up half a percent, the euro up 0.1% and US stocks have recovered a little bit from yesterday's nightmare, the Dow is up just 0.2% at close, half a percent for the S&P, 0.9% for the NASDAQ, the Russell 2000 is at 1.6% though so raising the 2% drop that we saw on Wednesday whilst the magnificent seven mega caps put them all together and they've fallen 1.1% so yes, rotation, let's go round again. You really should check out the average wine band you know, in Europe though, the euro stocks 50 is down 1%, the DAX down half percent, 1.1% lower for the CAT current, bond yields lower just about everywhere, down three basis points for 10 year treasuries, down three across much of Europe as well for 10 years in Germany, France, UK, Netherlands, Aussie 10 years yesterday, down two basis points to 4.31% which is pretty much where they are now on futures and on the commodities front, well oil is on the rise again, 0.9% high for WCI, 0.8% for Brent which is heading back up to 82.50 a barrel. Knabs Rodrigo Catrille is our man for the day for this Friday, our man Friday in Sydney so it's bad news and good news for the United States isn't it really, the bad news is durable goods orders which fell sharply in June. The good news is GDP for Q2 which has grown 2.8% which is well above expectations. Yes, Morningfield, that was certainly well above expectations although when you look at the now cast numbers, you know like that's underfed, they were pointing to a stronger number that 2% economies were thinking and looking into the details, it's worth highlighting that a personal consumption was still quite solid and we also had a jump in business investments which suggests maybe this whole craze around AI, it still has a bit of legs going on but saying that you mentioned durable good orders and the investment side on that side of the economy wasn't as strong, so when you look ahead, the one there or the question is, is, will you see a repeat of all of that and there's a bit of a question mark on that sense as well and similarly, you know the strong personal consumption has been declining when you look at previous quarters and in the past year and then when you look ahead, you know the potential or expected weakness in the labour market as well as the depletion of savings also suggests that maybe personal consumption will not be a strong, you know, overcoming quarters and finally government spending, again defense was the driver there but other indicators suggest that the government spending should also be trimmed, so overall a much stronger number than expected but when you look at sort of the trend particularly over the past four quarters, there's certainly a strong argument to suggest that the US economy is slowing down gradually but certainly slowing and when you look ahead, further slowing should be expected, so from a fair perspective. That's good now, I mean that's actually, I mean it's in the land of Goldilocks, it's good now, it's not going to be quite so good so the Fed doesn't need to worry because you'd look at personal consumption and say if that's rising surely that's an excuse for the Fed to say we want to see that consumption come down but the expectation is going to come down and the Fed might go well, yeah let's play with the soft landing scenario, let's go with the Goldilocks look at the world and let's stick with the plan. Yeah, yeah and then sort of the Fed that lease or X Fed that lease sort of urgency to cut and next week it's not there in terms of the data that we got today and therefore you know pricing for Fed using in September looks about right and Fed using before the end of the year as well, so as you say Goldilocks scenario and not a massive change in terms of their consensus view of what the Fed should be doing over coming quarters. Yeah well we'll wait and see, but certainly no sign of the recession that Bill Dudley was talking about, is that? No, I mean there are still, I mean there's a fair period of number or even increasing number of leading indicators that suggest we should be expecting further weakness in the labour market, the cumulative effect of tightening is also quite evident and the lack of credit for instance and also, so it does suggest that some easing or rather some cooling particularly from the consumer side is coming and then the Sam Rule tells you that once you've reached that infliction point, that cooling or that accelerates quite quickly and that's at that least point you need to be mindful that once you've reached that turning point, you know you might be too late and therefore, by the way, I think you meant inflection points didn't you, sorry, inflection. Yeah, exactly, because you said inflection points sounds like something altogether different doesn't it, something you probably don't want to get involved in on this programme, but you mentioned jobs, so the job market supposedly, you know, there's less jobs around and yet you look at the jobless claims for last night, for last week and the number of claims actually fell. Yeah, I mean jobless claims at this time of the year are quite messy because you have all those factories particularly, you know, in the auto industry shining down and then they come back and now they've come back and I suppose they came back a little bit stronger than what the system has suggested, so particularly around this time of the year and the summer time, it has to be quite volatile, so it's dangerous to make conclusions on one print, and you just have to look at the trend and for now it's still sort of going up rather than down. Right, so the message is that out of all of this, you know, it's a slow down happening, but the economy is still looking strong, it looks like it'll be a relatively soft landing and that's why equities are getting excited, that's why we are seeing this rotation, there's an opportunity for the broader commercial sector to grow, so that's why we are back where we were just a few days ago. Yeah, yeah, a little bit of a comment in terms of concerns around the economy, you know, this idea of fair easing does play into sort of that move towards small caps that should benefit from, you know, easier financial conditions as well as lowering costs in borrowing and so on, because they tend to be more leverage, so that sort of makes sense, whilst at the same time, the issue on the political side is still a little bit calmer, you know, particularly in terms of what all these uncertainties a Trump presidency may bring, it's not clear yet how that will play out. Right now, as I said in the introduction, it's Goldilocks versus the Brothers Grimm, because Germany has just been, and they were German, so you see, it's well worked out, all of this isn't a Germany, it's just bad news, isn't it? We saw the PMIs earlier in the week and that has been repeated basically in the German IFO last night, so from 88.6 down to 87 for the business climate, expectations that we sort of thinking, well, you know, people might be saying things are bad, but they're going to get better, expectations actually down from 88.8 down to 86.9, they were expected to lift a little, hence, while the U.S. share market is up, the DAX is down today, nobody is happy in Germany, it seems. Yes, and we should also add that the other originals from Belgium and France were not pretty reading either, so there's certainly been a slowdown, not only in activity, but in terms of those, you know, PMI reading now we have this business service as well, suggesting that the outlook doesn't look that great, and now this, you know, we've had a few combination of factors also affecting sentiment, arguably, you know, Trump presidency prospects are a concern for Europe, so that would have been one thing, and of course, their uncertainty, political uncertainty around France would have also affected sentiment, so, but overall, it just doesn't look great, and hopefully, for Europe, it's just those sort of short-term uncertainties, and we could see an improvement looking ahead. Now, on the more positive side, we also had the ECB releasing that credit impulse readings, and while still negative, they are showing improvements, and it does suggest that the growth in credit should be changing and potentially moving upwards, and of course, if you expect the ECB to continue to ease, that sort of makes sense, and then, so that is more encouraging from sort of the credit side of the economy. Well, it's not just interest rates, it's confident, so you could have very low interest rates. People are still not going to borrow, if they don't think the economy is going to grow, so it's a positive sign for the economy, for the outlook for the economy. Yes, it is, and, you know, to your point, you know, that's the opposite in China, for instance, where rates, borrowing rates, are arguably low by historical standards, but the appetite to borrow, given the uncertainty in the level market, and the growth outlook for the economy is so great, plus this whole, you know, concerns around the housing market, and nobody wants to borrow, except for the government, so that is the problem. So, is China a bit behind why we are, I'm just saying this because it all seems to be, why whenever we see the Aussie dollar falling out of kilter with the US dollar, because the US dollar is relatively flat, the Aussie dollar is about, down half percent, the Kiwi dollar also down quite a bit today, so has China got something to do with that? Yeah, we think so. There's certainly, you know, when you think about the link of the Aussie dollar and the Kiwi and China, I would say why, it's not just the currency, it's resentment in China, as well as the impact, of course, on commodities, and if anything, the latter has been hammered in recent days, so for the past nine or ten days or so, what we've seen is that commodity markets in particular are expressing a great deal of concern in terms of what's going on in China, and the near-term growth outlook for China, and we've seen a broad decline in industrial commodities, you know, I know getting close to 100, copper getting hammered, and that's never been a good story for the Aussie. Now, on the flip side to that, typically when you start seeing the yuan, the currency sort of stabilizing, that tends to be good news for the Aussie, but the yuan have been weakening for so much that its stabilization in recent times or in recent days hasn't actually helped the Aussie, whereas the commodity story and the sentiment particularly around equity markets in Asia and China, it seems to be weighing the Aussie and the Kiwi quite significantly. So you're saying the Aussie dollar is responding to the movement, but if the CNY was to settle lower and to stay there, then we'd see the Aussie drift back, even though it's almost like you got to remember your starting point. So the CNY weakness was telling us that the Aussie was too high, and now we've seen a bit of an adjustment, if you like, from the Aussie side. We think that that adjustment is now close to being complete, and even when you think about from a technical perspective, both the Kiwi and the Aussie look oversold at these levels. So a little bit of stability is coming, I wouldn't say emphatically, but certainly it does look a little bit more encouraging from that point of view. And then there's the other story, of course, of this sort of readjustment that is happening between CNY and the yen. We've seen that strengthening of the yen coming in for several reasons, you know, pressing Trump express explicit comments that he doesn't like the weekend and the weeks in why we've seen the currencies react to that, was at the same time, you know, ahead of the BRJ meeting next week. The data coming from Japan is also suggesting that at least from an economic perspective, the BRJ has the arguments to continue its normalization process, so hike next week. And then finally, from a political perspective, which has been a major issue for the BRJ, now we have LDP leader saying that, you know, the banks should do something about the weakness of the yen. So all of these factors plus the readjustment from, you know, carry trace and speculative positions has played into the strengths of the yen, and that is also helped the CNY strengthen against the US dollar. So overall, we are now getting to a point that was seeing quite a significant increase in the yen's appreciation, and overnight we've seen a little bit of a consolidation, and now the market is going to start thinking, okay, is 152 a level where it's going to settle, or can we actually extend the disappreciation, but we think that the data will have to make the case. And of course, we have the Tokyo CPR today, and that will be important ahead of the BRJ meeting next week. Right, because they like the inflation, of course. And in fact, that's something that we talk about with Harry Ishihara on the weekend edition. I think you've had a listen to that. He's a, you know, entertaining talker and yeah, a bit of a fun conversation. And if you don't really fully understand Japan, have a listen to this for half an hour this weekend. And you'll start to understand some of the key concepts, including, you know, the benefit that they get, they're getting from inflation and also the importance of that value of the yen. So look, just on one other slightly important inflation number called PCE for the United States, which was at 2.6% last time. So what if that, you know, wave us from that? What if it's on the downside, what, you know, how a market, how responsive a market is going to be to this number today? Yeah. Well, so we got the Q2 GDP reading and in there you also have your PC reading for the quarter. So on a quarterly basis, the deflator on the core reading ticked up a little bit to 2.9 versus the 2.7 expected. Now in terms of what we get tonight, we get the June reading, so you would think that the number could be easily predicted based on what we know. But because of all the revisions that occur, there's still a little bit of uncertainty in terms of what the number would look like tonight. So all that you'd expect it would be ticking up in other words, I think, because the quarterly number is, but maybe not. Maybe it took a dive in the last month. Well, yeah, it depends on how those revisions get affected on a monthly basis. So for instance, if all the upward number came in April, then there's potential therefore for the June figure to be a little bit lower. Right. So the markets... So we don't know if you had to therefore, it really could drive sentiment today then, really, the way the markets have been, which is responding to, you know, the smell of an oily rag almost. Yeah, but I think overall, if an number comes in around, you know, 0.2 or somewhere between 0.2 and 0.1, it will retain the narrative that the market is sort of focusing on that inflation or the economy is cooling. And therefore, from that perspective, you know, imminent threat rate cuts should still be expected. Right. Very good. Thanks for taking us through all of that, Rodrigo. We'll catch you again soon. And thanks for coming on. Thanks for getting up early. Great. See you. And as we've mentioned, the weekend edition this weekend is all about the Japanese economy. Are they set for a big recovery as inflation comes back and a week a yen reignites the incentive to invest? Does that mean more businesses are going to come back on shore in Japan? Harry Ishihara will be explaining all of that, his views about Japan's inflation revolution. It's a good one. It's out this afternoon. Wherever you got this podcast from, that's the weekend edition of the morning call. Join me for that. And then again on Monday morning. I think we've got Rodrigo again on Monday morning for the next week, day edition of the morning call as well. I'm Phil Dobby for now. Thanks for listening today. (dramatic music)