NAB Morning Call

Are equity markets looking more at a downturn than rate cuts?

Friday 19th July 2024

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US equity markets fell sharply overnight. It’s not just tech stocks feeling the hurt, the weakness is spread more broadly than that, implying that concerns of an economic slowdown are outweighing the benefits of rate cuts. Rate cuts could be happening more slowly in Europe, with some in the ECB indicating that there might be only one more cut this year. NAB’s Ken Crompton returns from his holidays to discuss the market moves and the latest data, including Australian and UK employment numbers, and looking ahead to Japan’s CPI today. We also cover the Netflix earnings results, just out.

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Duration:: 16m
Broadcast on:: 18 Jul 2024
Audio Format:: mp3

So a bad session for US equities. Is it just more of a rotation as we see greater likely in the break cuts? Or is it fear of a downturn before those cuts happen? We've had employment numbers for Australia and the UK. Will they alter the speed of cuts by central banks? The ECB is being on hold and some talk to them maybe. We'll only get one cut more from them this year. Could that really be the case? And inflation in Japan. Yes, it's a thing. We all know that. A bit of a novelty. What happens next? It's Friday. It's the 19th July, 2024. It's the morning call from Knapp. Good morning. So the US dollar is up 0.3% on the DXY index with a similar size fall in the euro, a little more of a fall for the pound. But the Aussie is only down about 0.1% to 67.2 US cents. Bond yields are a little higher. Up four basis points for 10-year treasuries. Up one for German 10-year buns and up two in France. But UK 10-year gilts down the one basis point. In Australia, 10-year yields were down one basis point yesterday to 4.24% now. Up a few basis points higher on futures overnight. And US shares continue to take a bit of a hammering with the Dow down 1.3% at close, 0.6% lower for the Nasdaq. The S&P is down 0.8%. The Russell 2000 also closing off 1.9% in Europe. We also saw a half percent fall in the DAGs, a little less for the Euro stocks 50. But the FTSU 100 managing a gain of 0.2% today, the same for the cat carant in France. Annoyal was higher. Well, it was last time I looked. Brent was up half a percent. Now I look again. And it's down 0.4%, down below 85, a barrel. WTI also down 0.6%. We've also got a 0.6% fall in gold and a big fall in copper down about 3.4% today. So later on, we'll give you those earnings for Netflix. Those results just stay to the end for news on that. I'll tell you, it's good, but that's not how the markets reacted. We had Taiwan semiconductors earlier. They're Q2 revenue of $763 billion against a forecast of $653 billion. So that is quite a beat. earnings per share, 9.56 versus 9.06 expected. So all goods you would have thought, even so their shares are down 2.4% this morning. So what is going on? Well, it came Compton from now in Sydney on the call today. So big falls in tech again, 2% lower for Apple. It's down well over 4% if you look over the last couple of days, 1.9% off Google today, 2.2% off Amazon, Eli Lilly, the pharmaceutical company. They're down 6.3% in this session. But that is largely down to a weight loss pill that's competing against their weight loss pill. So these are all very sizeable falls. Nonetheless, so is it fair to say, do you think, Ken, that equity markets are looking more at the economic downturn than they are the prospects of rate cuts? Because we're not seeing a rotation anymore. Yeah, good morning, Phil. I think that's a pretty fair summation just looking at how different indices have moved overnight has been a much more broader base decline than we have seen. I mean, if you look at the Russell 2000, sort of a better small cap guide, which people have been pointing to relative out performance, there is being something that's indicative of the rotation of the mega caps. It's actually down to a 1.9% out close, actually, is where it is. That probably does point to being a bit of a bit more of a broader base decline now. Having said that probably nothing in particular in news or data overnight that's pointed to that, I guess, just with an accumulative accumulation of the accumulation of news that have lasted a while and the rotation trade sort of running its course. It's probably just about time for everything else to join into some extent. I do see the only thing that's positive in this and people 500 at the moment is energy and utilities just barely in the green. What if we look at the Philly Fed Manufacturing Index? I mean, the headline index has gone from 1.3 to 13.9. So actually positive news going the other way. So everyone's worried about slowdown. Look at that. Mind you, it was 15.5 in April, but the employment index has gone from minus two and a half to positive 15.2. It's actually not been at high since October 2022. So that seems like quite a bounce back. I'm not sure if that's good or bad, because it goes against the numbers we've been seeing in the US jobs data, because of course, jobless claims, they rose last week from 223 to 243 for initial claims. So numbers seem to be contradicting each other somewhat, don't they? Yeah, there's actually not much to dislike in a headline sense on that Philly Fed survey. Shiptons and new orders up, delivery times, employment components, everything are looking pretty good. I mean, looking at the usual caveat with this survey is the others that it is a relatively small regional survey volatile for month to month as you've already pointed out. So a bit tricky to extrapolate too much into it. I think it's probably why the market probably tended to set that aside a little bit. I mean, having said that, the general trend in interest rates for the session was upward. But I mean, looking at that, the short jobless claims print, you mentioned, yeah, well above consensus come in nearly 245k. But as usual in the short term, a lot of analysts pointing to weather events from Hurricane Beryl as well as one thing you often get this time of year is auto factory retooling. So in states with a lot of key car manufacturing centres, there was a big jump in claims. It probably does point to some retooling there. But I think you also have continuing claims remaining elevated. So it's pretty clear that the trend is upward there. So still some gradual easing in labor in labor is obviously concerned about it, isn't it? Because I mean, Goldsby was saying overnight, you know, the cooling of the job market is definitely an area of concern. I mean, they are keeping very close on it. Yeah, they are. That's certainly one comment that we've gotten sort of very directly on it. And I mean, I think in combination with a couple of good months of sort of ad expectation CPI data now, the Fed is probably feeling more comfortable in being able to think if that deceleration, low market does continue, they've actually got a bit of a bit of capacity to respond now. So sure, it is slowing, but it's probably still of a magnitude, but the Fed's probably still feeling pretty comfortable. Well, talking about the jobs market, let's look at the Australian employment numbers yesterday. They were interesting, weren't they? Many more new jobs than expected over 50,000 up in June. I think a lot less than that was expected. And most of them are full time jobs, not part time jobs. But because the participation rate is that much higher, so more people are out looking for work, the unemployment rate is actually ticked up a little. So is that good or bad for the RBA when they're looking at rate cuts? I think I'd characterise the employment report yesterday. It's pretty much neutral for the RBA in terms of their short term outlook. Yeah, look, the unemployment rate did tick up 4.1%. They're playing Ray's favourite game of second decimal points. It was 4.05% in an unrounded sense. So could have could have very easily rolled over into a four. Yeah, look, the RBA themselves have got a pick of 4.2% for year end for the labor market. So arguably they would see this as trending towards that forecast. I mean, for what we're seeing now, I mean, look, as you noted, the actual underlying employment growth was pretty strong. And I think either way, the employment growth is still positive. It's just that it's slightly underrunning population growth or the neutral rate you need to keep down employment rates steady. So here we've got trend unemployment at 4% now. That was 3.5% a couple of years ago back in 2022. So we're still talking pretty gradual increases. Yeah, if that changes, then that's an issue. But at the moment, the RBA is going to look at that and say, look, we've got an unemployment rate of 4% on average through 3Q2, which is pretty much broadly aligned with what they were thinking. So it's not going to change the dial much for them. Interestingly, the market did actually increase its pricing for a potential August or September rate hike from the RBA a little bit. You know, we're still talking pricing of barely a barely sort of 35 odd percent. So the market's not putting a super strong probability on it, but it did increase a little bit with the with that labor force. That did happen. So that 4.2% that is either 4.2% of the forecast of within the year was at 4.16. Are they going to the second decimal place? I wonder, I don't know there, but it's not great to excited. Well, OK, I didn't stay in the UK because they had their employment numbers as well. So what about the 19,000 more people working? Not a great deal. The unemployment rate stuck at 4.4% well up on the 3.8% of the end of last year. But average earnings, that's the concern, isn't it? Because they are down a bit. But really, they are not in any rush to really come down. So it wasn't a significant move today. So that is going to be a concern for the back of England. Yeah, that was probably the potential concerning point in some of those wages numbers. I think in regular wages, 5.25%. And the private sector numbers probably of particular interest. Having said that, you're like, public sector wages are actually running a little bit hotter than that again. The potential for an August rate cut from the BOE, the CPI period we got, we got recently that arguably sort of pushed against it a little bit but probably still kept it in play. This number overnight from employment and wages is probably relatively neutral but certainly doesn't dramatically add to the case for that August rate cut. So that's still looking to be, you know, line balls probably not quite the right word. I mean, we still think it's reasonably likely to happen. But this, once again, as you've seen with, you know, New Zealand CPI, for example, doesn't quite make the the imminent cutter lay down, Missouri and this data print for the UK hasn't been the same either. Yeah, and the ECB, where do they go now? Rates on hold, no surprise there. In the press conference, Christine Lagarde said she was still worried about wages, growth in labor cost will remain elevated in the near term, she said, but she expects it to moderate in the course of the next year. And inflation is going to fluctuate near its current level for the year. And none of that sounds like an environment where they'd be in a mood for cutting rates, doesn't it? Yeah, unchanged, as expected. I mean, they were pretty clear in their signaling when they first did the first cut in July that there was going to be no immediate follow up. And in the press conference, the September meeting was described a couple of times by President Lagarde as being wide open. And I mean, in terms of what the markets actually done with that, that September meeting a cut there has been about 20 basis points priced for a few weeks. That barely changed overnight. So the market certainly didn't take too much new information from the meeting or the press conference. And even if you look further along the Bund curve, very minimal moves in yields. But there was a story that came out a little bit later on Bloomberg quoting ECB officials, similarly with the matter, who said that there's increasing speculation within the ECB that they may and they'd be able to deliver one more cut this year. Now the market's got to be a bit more than that price. So yeah, whether there's some sort of some attempt at signaling there. And I mean, we've still got on their forecast, we still only have sort of getting inflation sort of family back to the target by late next year. So there's still a bit of uncertainty there. And I think there is a clear element of signaling here that the ECB doesn't want the market to run away from itself too dramatically, which is arguably maybe what the something they might have learned from what happened to the Fed late last year. Also, what about inflation for Japan? So we get that today. The core rate last time was two and a half percent year on year. It's expected to be a bit higher for June. So you know, Japan, they've got inflation too. Now, a whole new experience for them. The question is, what's the bodge going to do about it and when? Yeah, it is obviously a key input to the to the bodge meeting later in the month. You know, we're going to even with that sliding crepe up to 2.2% for the XX fresh food energy measure is the is the consensus. I mean, arguably it's within the ball park that's going to allow the bodge to do something, send a lot of movement on the on the yen side of the equation though, lately, which which may be enough to a sort of for stall any move from them. Yeah, I think there's as many sort of political questions as economic questions around around bodge activity. So it's difficult to sort of get a get a firm read on exactly what the outcome from any particular printed day might be. The markets got about five basis points of tightening priced in for that July bodge meeting, given the assumption is that bodge is probably going to move in sort of roughly 10 basis point increments. So I'm argue that it's 50% price for a for a hike. Yeah, that that may that may or may not may not change after today. But with with the in with the recent in moves arguably sort of pressure within markets for for a move from the bodge has been reduced. But whether that translates into a difference in their actual action. So I guess, I guess we'll see. Well, we will see. And we'll talk about it actually on the weekend edition, not this weekend, but next weekend. So we're a bit of a deep dive into all of that. We get retail sales for Canada for May today as well. So, you know, that would may was a while ago wasn't a piece of history really. But we were expecting to see quite a fall and retail sales for the UK as well today. Yeah, both of those sort of good reads on the on the consumer. You said that the candidate are a little dated, obviously. You know, I think the UK retail sales have been bounced around a little bit by weather over the past over the past few months, either sort of very wet or slightly less wet. So that will potentially cloud any any interpretation there. But but obviously important reads on what the on what the consumers up to. And I think the obviously the Canada data, we even sort of predates the BOC beginning to beginning to ease. So maybe the UK number is the more timely one to to be to be paying attention to. Right. And John Williams from the New York Fair, Draffell, Bostick, they're both talking overnight tonight. If you want to hear more from from Fed speakers. But that's it for now for you, Ken, because I'm going to open the magic envelope and look at what the earnings results have been. So thanks for coming on. Cheers. Thanks for below. The Oscars, isn't it really? Well, let me tell you Netflix Q2 revenue, 9.56 billion estimates were about 9.53 billion. So a slight beat on that EPS 4.88 4.74 was expected. Q2, 8 million subscribers added expectations around 4.9 million. Of course, a lot of their subscribers are advertising subscribers on them paying subscribers. Q3 guidance, 9.7 billion markets were looking for 9.8. So they'll let people down a bit on that price is actually in aftermarket trade down 4% on the news that some of that is to do with less free cash. They're bending up cash a bit faster. So maybe that is part of the problem. And that's it for the morning call for today, except to say that the weekend edition is out this afternoon. An interesting one talking about net zero. I mean, Australia has got the funds, the resources. We've got the economic stability. We've got the space to be ahead of the pack when it comes to reaching net zero. Yet we're not. We're quite a bit behind. So I ask Deloitte Raquel Hoffman, why is that? And how quickly might things change? That's this afternoon. It's sort of been that the curse in a way of being in a country which has an abundance of fossil fuel commodities where historically our alliance on coal fly generation has been the easiest and most commercially viable option for us. Then you add on top of that, the fact that we also have access to gas, and that has gone into the gas fired power stations. And then you add on to that up until recently our policy environment and just the rhetoric around decarbonisation, particularly the energy sector, has been, I guess, communicated in a way which has been quite unuseful to a lot of investment actually coming through into this space. Deloitte Raquel Hoffman, she is my guest on the weekend edition coming up this afternoon. Listen to it at your leisure over the weekend. You'll find it wherever you've got this podcast from. I'm Phil Dobby for NAB. Join me for that. And then again on Monday morning for next week's Monday morning edition of the morning call. Thanks for listening.