NAB Morning Call

Markets cautious in the heart of earnings season

Wednesday 24th July 2024

Financial Services Guide | Information on our services - NAB

Alphabet and Tesla both reported better than expected headline revenue numbers after the US close, but the mood is still cautious. The S&P, Dow and NASDAQ all closed in the red, but a 1% rise in the Russell 2000. JB Were’s Sally Auld talks about the return of rotation, with the prospect of lower rates boosting interest in the growth potential of smaller companies. And Sally points out there are only a couple of countries that are going against the idea of easing interest rates – one is Japan, who could well lift rates next week. The other is the Australia. NAB is not expecting an RBA rate hike, but comments from Michelle Bullock yesterday are getting more people thinking its possible. It’s all down to next week’s CPI number.

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Duration:: 16m
Broadcast on:: 23 Jul 2024
Audio Format:: mp3

Well, equities have been hanging around in the United States, waiting for earnings results because they are real numbers of course to do with how the real economy is doing, but the data lately has been showing a lackluster economy for the United States, and more of that overnight such as the fall in the Richmond Fed Manufacturing Index, more significant PMIs are out today for Europe and the US, who is doing best, and the Bank of Canada! Ready to cut again? We'll find out later today, it's Wednesday, it's the 24th of July 2024, it's the Morning call from NAB, good morning! Well this morning the US dollar is marching up with the Euro down 0.4%, the pound is down a quarter percent, the Aussie down a little over 0.4% down to 66.1 US cents, now in the yen up 0.9% this morning, up about 3.3% since the 10th of July, US equities struggling to stay in the green for most of the day and finishing largely in the red, the Nasdaq for example down almost 0.1%, the S&P is down 0.2%, same for the Dow, but the Russell 2000 is up a full 1% in Europe, the DAX rose 0.8% but the cat car on down 0.3%, makes sense out of all of this, and the FTSE 100 lost 0.4% as well, on the bond markets, well a one basis point falling the 10 year treasury yield down six basis points for 10 year buns in Germany down four for 10 year guilds yields in the UK, Aussie 10 years were up four basis points yesterday to 4.34%, now on futures just one basis points higher than that, and oil down a 1.3% drop in WTI, taking it to the lowest level in five weeks, 1.2% lower for Brent down to 81.30 a barrel, gold is back up a bit, not at its all time high, just 3% off it though and climbing half a percent today and it's JB wears Sally all joining me this morning, well in the heart of earnings season, we'll talk about alphabet and Tesla at the end of the podcast, the earnings results came in after the close, but it seems earnings are the focus right now, but with some trepidation, so on the share market, a good day on Monday, not so good on Tuesday in the United States, largely down, although as I said, the Russell 2000 doing well, so I guess can we start talking about rotation again, seems so. Yeah, that's right, so in the Russell 2000 Apple forming, I guess in the index of the magnificent seven, so this idea that small caps which have been a really unloved part of the market for quite a while now are starting to find favour with investors, partly because they look very, very cheap on most valuation measures, but then also, there's this sense that the fair is getting very close to cutting rates and that should provide support to those smaller companies who benefit from, Yeah, cheap loans and a central bank that wants to put a floor undergrowth, so I think investors are starting to look at some of the risk reward in different parts of the market and say, well, a lot rushed into some of those large mega cap tech stocks, and so maybe, you know, upside is limited there, whereas the small cap sector, which no one's really wanted to touch with the benchmark for a while, is actually looking pretty attractive and maybe fundamentals are starting to turn really quite supportive for that sector. It's like two-year notes are attractive as well, we had an auction of 69 billion worth this morning, strong demand even though obviously the yield is lower this time around, I guess that is a reflection as well perhaps that, you know, interest rate cuts are coming. Yeah, I think so people are happy to sort of pile into the front end of the US Treasury curve, you know, because as the cuts come, we should start to really see that ball steepening of the US yield curve and so that front end part is often where investors like to ride that journey. So, you know, two-year yields are basically, you know, for a couple of years now, traded that four to five percent range where we're sort of in the lower half of that range at the moment. But I think, you know, as the market and Fed officials grow in confidence that they are actually really this time very close to the point where they're going to be comfortable cutting rates. Again, I think, you know, that part of the curve is finding finer with investors. And even I think, you know, this fall that we've seen in existing home sales, a big drop in June in the United States down 5.4 percent, but is that also a sign that rate cuts it just around the corner? Because if you've got a home, I mean, the house prices are record highs, I think a chunk of those because there's just not, you know, the existing homes going on the market and you wouldn't put it on the market. If you think rates are going to come down sometime soon, you're not going to go out and buy another house, sorry, it's a silly old house and buy another one. We've talked about this on the podcast before and I wouldn't mention the closer we get to a rate cut, unless banks are reacting sort of like in advance and cutting their mortgage rates, you're going to wait on you. This would be the worst time to sell. Yeah. I think so. I mean, you know, once, you know, mortgage rates come down and, you know, demand for existing or new homes sort of starts to go back up again, then you have a happier to put your place on the market. But yeah, that's exactly right. And, you know, we are seeing and have seen for a while now those interest rate sensitive sectors of the US economy, like housing, you know, have actually been quite soft and I think it's these sorts of dynamics that are finally giving the Fed confidence that, you know, all that threatening that they put in place a couple of years ago is actually working, albeit with quite a long lag. And so that combination of, you know, disinflation that looks like it's resumed, better on track and slowing growth. You know, as we've talked about, really opens the door for the Fed to, you know, look at less restricted monetary policy settings. Yeah. Well, another sign of that slow growth, I mean, it is just original survey, but it's another one showing weakness, the Richmond Fed manufacturing index minus 17 from minus 10 minus seven was expected. So a bit of a downside surprise and, but the services index, Richmond Fed services index from minus seven to positive five, although that one does fluctuate wildly, but that, that fall in the manufacturing, that's just another sign of weakness. It is. Yeah. And that takes that survey to its lowest point since the pandemic and it sort of bucks the trend, you know, globally, we're starting to see, you know, we've had that divergence between strength in the services sector and weakness in the goods of the manufacturing sector has persisted for quite a while now. And we have just in the last couple of months started to see signs that that is a gap or divergence is starting to close a little bit. But this, this regional survey from the Richmond Fed, you know, broadly stands in the face of that dynamic. As he said, services doing better and manufacturing quite a bit softer. So I think, you know, take it with a grain of salt because it's a regional survey, but wouldn't ignore it completely in terms of some information that might hold for how broader measures of manufacturing like the ISM and the PMI, like my track. Yeah. Well, but I was going to say we can perhaps not pay too much attention given that PIs are just around the corner. That's right. I eat today for, for the United States and for Europe and Europe, broken down to Germany and the UK as well. So it's going to be interesting to see what they bring. And I mean, last time, well, all the services were over 50 for each of those cases, Germany, Europe, the UK and the United States, but manufacturing only over 50 for the UK and the US. Yeah. And manufacturing is still sluggish. Yeah, it is. And I guess, you know, the one that I think people will be looking quite closely at will be Europe in the sense that that's been the other, I guess, missing part of the global story is that you've had this, you know, very dominant narrative of US exceptionalism where the US economy is really outperformed everywhere else. And, you know, talking and continuing that theme of rotation, you know, I think people are sort of starting to say that the US is slowing and the question is, well, who's going to pick up the bat and if the US is slowing? And I guess that's why people are keeping a pretty keen eye on European data at the moment as well. Well, we had the European, the Euro-area consumer confidence yesterday, didn't we? Showing it's bad, but not that bad. I mean, it's been progressively getting less worse every month so far this year. That's how optimistic you can be. So it started the year at -16.1, now we are the dizzying heights of -13. And so I thought, you know, that's still pretty bad, isn't it? But then I looked and saw the long-term average is -11. So we have to accept that Europeans, it seems, are permanently underwhelmed. So maybe, you know, if -11 is the long-term average, -13 doesn't sound that bad. It doesn't sound that bad. That's right. And so if you actually look at a chart of that series, you know, it's been an upward trajectory really for the past couple of years, but like you said, it's sort of slow progress. It doesn't move very fast. But again, you know, maybe signaling that in Europe, things are starting to look a little bit better. It happened a lot. On their plate of the Huskers for years, you know, whether it's, you know, energy prices and conflicts nearby, but you know, the trend, I think, here is a reasonably favourable award. And just to change the US very briefly, so Kamala Harris has narrowed the gap already with Donald Trump in the opinion polls. She's raised a slug of - assuming she is the candidate, of course she's raised a slug of kind of thing. That's almost certain now. She's raised a slug of campaign money as well in just a couple of days. So it's a lot closer than it would have been in Joe Biden and stuck around. That's for sure. But, you know, our market's going to react to any of this. I mean, it's still a few months out, isn't it? And as we were saying yesterday, you know, all this talk about the Trump trade, I mean, what does it mean really? You know, what are people betting on? Yeah. It's a good question. So I think, you know, with the pendulum, obviously, Swan posted the assassination attempt on Trump, you know, when markets started to see a possibility that not only would he win the White House, but perhaps there'd be a Republican claim sweep of Congress. And I guess that opened the door to thinking about, well, the sorts of things that Trump talks a lot about, like lowering taxes, whether they'd be personal income taxes or corporate taxes, all the sorts of things that actually need congressional approval to get done against the markets started to say, well, maybe there's a higher probability of all this happening. And so, you know, all else able, you know, most analysts sort of look at that and say, well, that's all very gross supportive. So therefore, you know, should be supportive of equity markets, less supportive of bond markets and the like. But really, you know, the Trump sort of policies as we understand them are sort of pretty simple. And there aren't that many of them. He likes lower taxes. He likes less regulation. And he also wants to put tariffs on all imported goods in the U.S. and that's sort of the summary of, I think, how he likes to think about, you know, the policy options, should he win. So that means that means more debt issuance, of course, but then we've got used to that and the markets don't seem that concerned about it. This guy likes in U.S. dollars, the reserve currency, you care? Yeah, for the time being, but, you know, I think this is one of the sort of sleep at issues or not even that much of a slavery issue these days is the sustainability of the U.S. fiscal situation, which, you know, neither side of politics in the U.S. really seems to care too much about, but at some point, markets will care and then, you know, it'll be game on. But, you know, in terms of the Trump trade, I think, you know, the developments in the last 48 hours just probably, you know, have forced the market just to curb that enthusiasm around the prospect of a, you know, congressional clean sweep by the Republicans. And the yen, the biggest move of the major currencies overnight, presumably related to the, to the Bosch decision, which is next week. I think markets have a 50/50 on whether there's going to be a rate hike next week or not. Yeah, that's right. And there are a couple of, you know, LDP officials, you know, who've come out in the last 24 hours, basically saying that, you know, there should be a hike next month and the Bank of Japan should do that in order to curb weakness in the yen. So I guess it's a combination of, you know, Fed AZ and getting closer, you know, US dollar looking reasonably expensive on most metrics, the yen looking super cheap. And you know, people having been very short, the yen, it doesn't take much to get a little bit of a reversal in that positioning and you can get some reasonably decent moves in currencies when all those things line up. What about a rate increase by the RBA? I mean, we're saying it's not going to happen, but Michelle Bullock talking at that round table yesterday, saying she's worried about the progress that we're seeing on inflation. So Japan and Australia, you know, the sort of two outliers in that have developed market complex. They're the only markets where, you know, the markets are pricing in some possibility that the next move in rates is up. So Bullock was at a round table yesterday and I guess she made some reasonably familiar comments, but she did say that we are not seeing the same progress on inflation as a number of countries overseas are experiencing. And we've still got this issue where aggregate demand is outstripping aggregate supply and that's keeping inflation elevated. And so she talked about the fact that they need to balance that imbalance with demand and supply with this idea that, you know, monetary policy works with lags and so maybe, you know, the slowing in the economy or bringing that demand and supply to imbalance is actually just around the corner and it's hard to juggle those two beings. So she didn't say, you know, anything new relative to what she's communicated in the last couple of weeks, but yeah, I think that it's going to be tricky. But that says hold for longer, doesn't it? If she's talking about the lag and we haven't seen it yet, they're not going to want to make a move in either direction in any great hurry there. Well, definitely not, not down and I think the issue with that lag argument is that, you know, it's been now over two years since the bank started its tightening cycle. And so, you know, a lot of the analysis around the lags of monetary policy basically say that, you know, two years on the bulk of the impact of what you've done has, has happened. So I don't know that I'd be betting the house on that lag story, you know, working in their favor. But in the end, it's all going to come down to next week's inflation number. And if that turns out to be, you know, stronger than the bank expects and the market seems to be gravitating towards this idea that it will come in around 1% on core inflation. And that'll just tell the bank that core inflation's stock at 4%. So that disinflation that they did achieve through most of last year just seems to have stalled. And I mean, if we get that sort of number, it's going to be an interesting decision. Yeah. They need some sort of response to that. Absolutely. Well, we'll watch with the growth interest. But back to those banks that are cutting rates, Bank of Canada, will they cut them again? They did the last time. Of course, will they do it again? Yeah. So the market seems reasonably convinced that they're going to deliver a rate cut this evening. But if you look at the consensus of economists, they seem to be a little bit more divided on whether the Bank of Canada will go again. And unsurprisingly, you know, the issue seems to be inflation, which for a couple of months look to be doing exactly what the Bank of Canada wanted. And then the last couple of numbers have cast some doubt on that dynamic. And we've seen those core measures, at least in three months, annualized terms actually start to move back up again. And I think that's what has put the sort of doubt into people's minds as to whether, you know, the Bank of Canada wants to go again. It's not a really interesting one to watch. Generally, it does seem to you the message, doesn't it, that progress has stalled a little bit around the world. Anyway, interesting times. Good to talk. Thank you again very soon. Cheers, Phil. Thank you. And we've got the earnings results now. Tesla Q2 revenue, 25.5 billion, the estimate was 24.6. So that is a beat, but the share price is still down almost 2% because Tesla are saying they expect notably lower growth of 2024. That is despite the robots that they're going to be introducing and they're going to have a focus on company cost reduction, they say. An Alphabet Q2 revenue, 84.74 billion, the estimate was 84.37. So again, a slight beat. As always, of course, the devil is in the detail. We've just got those numbers. So we're giving them to you. No doubt. More time to discuss that later in the week. That's it for today. I'm Phil Dobie for Knapp. Thanks for listening. (dramatic music)