NAB Morning Call

Tech stocks tumble, PMIs weak, Dudley warns recession

Thursday 25th July 2024

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Bill Dudey, former NY Fed Governor, now Bloomberg pundit, has said the FOMC needs to cut rates next week and it might already be too late to avoid a recession. NAB’s Ken Crompton says this comes from a man who had advocated staying higher for longer. His opinion certainly impacted 2 year bond yields overnight But the bigger news is the large falls in US equities, led by tech stocks, with the cost of AI and the slow delivery on promises taking the blame. PMIs came in weaker than expected, not just for Germany, where the fall was particularly pronounced, but also for US manufacturing, which might help Dudley’s arguments, but US GDP (out tonight) is expected to rise.

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Duration:: 13m
Broadcast on:: 24 Jul 2024
Audio Format:: mp3

Well, three things today. Tech stocks have taken a bit of a tumble, though earnings haven't really been that bad. PMIs are generally soft, so economies do seem to be struggling. And Bill Dudley, who used to head the New York Fed, says he thinks the Fed should cut rates next week. And when does whether it's already too late to prevent a recession? We'll look at what they do to the bond markets overnight. It's Thursday. It's the 25th of July 2024. It's the morning call from NAB. Good morning. So this is where we are this morning. Big falls in US equities. Look at this. The NASDAQ down over 3.6%. 2.3% lower for the S&P and a 1.2% fall in the Dow. These are the biggest declines since late 2022. And ignore any rotation talk for today, because the Russell 2000 also down by more than 2.1%. Not as quite as bad in Europe, but still quite bad. The US stocks 50 is down 1.1%, the Dangstang 0.9%. The FTSI, only 0.2% lower, though. So they got a way where it relatively got through. The US dollar is slightly lower. The yen is bouncing back, though. It's up over 1% today. The Aussie is down again, losing over 0.5% down quite a bit below 66 US cents now. And bond yields up a little. 10-year Treasury is up 3 basis points. A similar move for 10-year guilt yields. But German bond yields are just 1 basis point higher. Aussie 10 years have gone from 4.32% at the end of the day yesterday to 4.35% on futures now. So 3 basis points higher. And oil is ticking up. An 0.7% rise in WTI and Brent went to 81.60. A barrel, copied down 1.6% this morning. It's lost 12% since the 5th of July. And it's Ken Crompton from NAB in Sydney on the call today. And look, it's all about equities, isn't it? The headline earnings from Alphabet and Tesla seemed OK yesterday. But it was the strue behind the headline that has spooked the markets. Tesla is actually doing the worst. They're sort of leading this move downwards. And the forward guidance isn't looking that great. So tech has been taking a hammering, but they're not alone. Yeah, good morning, Phil. I see the summary on the Bloomberg market wrap at the moment is that AI hits the wall, which sounds a bit catastrophic. Hopefully that's not too much of a direct reflection. Well, it's a headline, isn't it? I think that's fortunes. But yeah. But their point is that AI is just seeming like it's very expensive and we're not seeing the returns in it yet. So is it the new.com bomb? Is the question mark? Or is it just being overplayed? And this is just a bit of an adjustment. Well, yeah. I mean, in terms of if, I mean, obviously AI is behind a bit of a thematic about longer run productivity growth in sort of services economies to some extent. And that could well be true. But is the AI advance better? We're at the point now where desktop computers were in the late '80s when they were first getting invented or at the point where they were in the late '90s when they first started getting sort of widespread deployment. It's sort of hard to tell at this point where we are in terms of the near-term gains. And I mean, you don't want us to extrapolate too much into one or two nights of market movement, but that question does have to be asked. And I guess that's a fair part of it. Yeah. And the dominance of AI in the earnings of these megacap. Well, look, if it's volatile today, just wait till next week because we've got Apple, Microsoft, Amazon and Meta all report their earnings next week. So hold tight for that. Elsewhere, let's just do the central bank quickly. There's only one bank of Canada, Canadian dollars a bit lower, 0.2% lower. I think as we're as we're recording this, they've lowered weight rates. Easy for them. You know, inflation is slowing. So is the economy, and they're saying fair the cuts of inflation continues to moderate. That was the message in the press conference, wasn't it? But they are going to take one decision at a time. I tell you you could talk about AI. You could get chat, TPT to write a central bank's monetary statement, couldn't you? Because they're all saying the same thing. But I mean, it was an easy decision, wasn't it for the bank of Canada? Yeah, certainly that cut last night had been well flagged since they began cutting at the previous meeting. And the market's interest was always going to be more in what the forward guidance was like. And this was around where we got a full set of forecast updates from the BOC. And I mean, looking at those forecast updates and reading some snippets from the press conference, certainly they weren't leaning too much against having the market take a fairly davish reaction or a fairly davish take on their on their statement, speaking a lot to the amount of spare capacity in the economy. And I guess the difference too in Canada with a lot relative to a lot of other developed market economies is their unemployment rate is sitting north of 6%. So that's a bit of a differentiation point. And they did actually revise up their near term inflation forecasts a little bit, but revised down some of the some of the back years, a bit of a net wash in the end. But but yeah, a fairly davish, a fairly davish take there from the from the BOC. And it's a question of just sort of how how many more by the end of the year maybe. So the question of economic slowdown, is that what we're seeing in the PMIs? Because we look at them around the world, not looking too good, but look at Germany falling for both manufacturing and services. So both below 50 now, the composite has gone from 50.4 to 48.7. So a real slowdown is happening, it seems. Yes, some very mixed numbers across that bag of PMIs that we did get last night. I'm certainly you I'm sorry, Germany, sorry, sort of being the highlight amongst the weakest, that's for sure. And that has helped pull the the sort of overall European figures down fairly sharply as well. You know, offsetting a little bit was UK, once again, another sort of fairly big surprise in the UK, UK manufacturing PMI again. So interesting outcome there. And I'm in looking, it certainly does sort of paint a picture that this sort of brief period of European, not quite exceptionalism, but that sort of a slower pace of decline in the in sort of European economic prospects to be near there that that has sort of maybe sort of turned again. And I guess that's, and if you look at the fact that the ECB has begun easing and is is continued to do so ahead of ahead of the Fed, maybe this does potentially point to why that's that sense. Yeah. All right. And US manufacturing, if we look at their PMIs, manufacturing lower services rising, so services now on 56 manufacturing down from 51.6 to 49.6. So actually manufacturing in the United States dipping into contraction territory. Yeah. That was also a bit of a surprising outcome the way those US flash PMIs have fallen. I mean, if you look back at the ISM for this month, you actually had, you know, you did have sort of surprise declines in both of those, both of those, both, both manufacturing and services to some extent. PMIs going the other way. I mean, in the short term, a bit of divergence isn't too unusual, although there are quite a few commentators pointing out that, you know, of late in the ISM is the sort of more established and more widely followed survey. But in the, there have been some people pointing out that the PMIs have actually been a slightly better lead in, in some circumstances. So, you know, we'll get an update on the ISM next week. But I guess we'll see where that goes. But I mean, all of these are showing, aren't they, that, you know, there's a slow down going on. Oh, you know, in many parts of the world, it seems. And so does that just, you know, that just points, doesn't it? Central banks have got a move. And yeah, we've got, I mean, and Bill Dudley on Bloomberg TV, Bill Dudley, who is, of course, the head of the New York Fed. Now he's a TV commentator. So it's a lot easier for him to say what he thinks or whatever he thinks is going to create a headline and to keep that gig. So we've got to bear that in mind. But he was saying on Bloomberg TV yesterday morning, US time, that the Fed should definitely cut rates next week. They shouldn't wait any longer. And he's worried actually it might already be too late to prevent her recession. Yeah, wow. Yeah, a bit, a bit, a big change from, from Dudley, who has definitely been in the high for longer camp, even by his own, own admission that that's how he does open up that, that opinion article that was on Bloomberg. And that had quite a significant effect on interest rate markets overnight, helping to steepen the US yield curve sort of quite, quite significantly with sort of shorter and rates, shorter end rates falling a bit. Interestingly, it didn't drive pricing too much of sort of Fed expectations in the very short term. It was sort of slightly long, long curve that had the impact. And I think in particular to his sort of raising of a recession concern flag was it was a big reason why. And look, he does outline in his article a few reasons why he thinks the Fed is likely to hold off for another meeting, looking to build a bit of a broader consensus around it, and also to not wanting to sort of cut or not wanting to get too dovish too early like they did in November last year. But on balance, he sort of leans towards this recommendation for the Fed to get going and get going now. And I think part of that too is, we're talking about Canada in there, the looser employment market up there that's helping them get into easing a bit quicker. And that was a big flag that Dudley raised as well, mentioning the sarn rule about the pace of unemployment rate increase. And his view is that the argument that if the unemployment rate is increasing because of a broadening labor pool, or that's not necessarily so bad, he's not so sure on that. And still thinks the sarn rule should be respected, and you should probably be trying to get going with easing a little bit ahead of that. So that's put the cat amongst the pigeons in some parts of the bond market overnight. Right. And so we had a bond auction, didn't we overnight as well? So it's like a day ago, just over a day ago, we had a two-year auction, or was it early in the week anyway, a two-year auction that went particularly well. But we had a five-year auction that really didn't do well at all overnight. So is that a result of that editorial piece? I certainly think it would have been a contributing factor, that's absolutely for sure. I think there had been a big sell-off in all rising bond years beforehand, but even so, the auction still cleared it back from market. And yields are still sort of trading around those high levels. So it was a bit of a weak outcome. And is this affecting the yen, then? Is that getting tied up in all of this? Because it's interesting that the yen is so strong again. I mean, it's losing a lot of that weakness, isn't it? But incidentally, we're going to talk about this on the weekend edition this week, an interesting discussion about Japan generally and what's been driving the yen. But the fact he's getting stronger again is that because of expectations, perhaps, that the Fed will be doing more cuts. Is it all tied up in that? Well, it's one of the fiddle-doo more cuts, or whether the bodies themselves will do something at their meeting next week. I suspect there's a combination of both that play there. I've got the yen. I think it's sort of USC JPY down through 154 overnight, I think. So sort of continuing a relatively rapid decline. I guess we're in the point now, whether the market will sort of be satisfied or disappointed by whatever the budget might or might not do next week. Clearly, with these, there is a growing expectation that there will need to be an actual cash or target rate adjustment by the budget being built in here, which we still do think is somewhat likely, as well as the sort of well flagged bond buying changes as well. So you're probably going to need a bit of action on both ends. But I mean, as Ray and Rodrigo have been pointing out, the move in the years at a well north of 160 there was pretty disconnected from where the yield differentials were anyway. So there is sort of a bit of a narrowing to reality needed as well. All right, and look, and without a bit of a spoiler alert, I mean, a lot of the discussion in the weekend edition is they want the inflation, obviously, but they're just going to make sure it doesn't get out of control. But it's really changing the shape of the Japanese economy actually being able to push prices up for once. So it could be driving a lot of investment in the future. So tonight, drawable goods orders for the United States and the GDP growth rate for Q2. So it was 1.4% Q and Q last time. It's expected to pick up a bit this time, isn't it? Yeah, I think consensus for GDP tonight is sitting at 2% annualized. You're pretty decent pick up from the Q1 pace. I mean, well below that exceptional pace we're seeing Q3 last year, of course, but still still likely to be a north of trend result, which I guess you've got to sort of lean back and look at Dudley's comments that we were just talking about here, how aggressively do you need to ease when you've got, sure, a slightly higher unemployment rate versus still pretty solid growth. And the land effect, sort of the final read on their GDP now for what that's worth is even better at 2.6. So potential for a reasonably solid reasonably solid print date. Well, 2.6% Q and Q, that's a long way, isn't it, from Bill Dudley's recession? Well, it certainly sounds like it to me. Yeah, and to be fair, that is GDP now and not economist forecasts, but to the extent you can view that as maybe a risk around the numbers, that number is out there. Yeah. All right. And the weekly jobless numbers, obviously always worth keeping an eye on those as well, they're out tonight as well. But that'll do for now. Thanks, Ken. Well, it's been a bit of a session, hasn't it? We just leave the question, what happens next? Well, we will be here covering it all tomorrow morning for the next edition of the morning call. I'm Phil Dobby for NAB. Thanks for listening.