NAB Morning Call

US retail runs hot and inflation day for many

Wednesday 17th July 2024

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US retail numbers came in stronger than expected. Phil asks NAB’s Ray Attrill whether this could delay any moves by the Fed? Certainly, equity markets ae banking on cuts coming soon, with the rotation in stocks continuing and another strong session for the Russell 2000. Today the focus is on CPI. We’ve just had it for Canada, who seem to have it under control, and later we get it for the UK, where services inflation is putting up a fight, and New Zealand, where the economy is hanging out for a rate cut.

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Duration:: 17m
Broadcast on:: 16 Jul 2024
Audio Format:: mp3

Well, a relatively quiet session, but a few inflation numbers to get stuck into today, including New Zealand and the UK, so what will it take for their central banks to move cuts forward? Well, I'll ask that question in a moment, not long to wait, and we've just had CPI for Canada, where prices fell in June, yes, fell, imagine that, and an upside surprise in US retail sales as well. It's Wednesday, 17th of July 2024, it's the morning call from NAB, good morning. Well, bond yields are falling lower, seven basis points lower for 10 years in the United States, down five basis points in Germany and the UK. Aussie 10 years were down seven basis points yesterday as well, to fall in a quarter percent now on futures, four basis points below that. US shares doing really well, European shares not so today, so we've got a 1.9% rise in the Dow at the close, 0.6% for the S&P, although the NASDAQ only 0.2% higher, but the rotation continues, in fact, the Russell 2000, up 3.5% today, big rises over the last few sessions, whereas in Europe, well, the Euro stocks 50 closed down, 0.7%, the same size fall for the cat car aunt, the DAX lost 0.4% and the FTSE is a quarter percent lower at the end of the trading day. A small rise in the US dollar, but the Aussie is down 0.4% to 67.3 US cents, the pound and the Euro haven't really moved much at all, the yen, though, down 0.2%, so those gains that we saw from last week, not lasting, perhaps. And oil, well, down today, 1.3% off Brent and WTI, Brent is now around 83.60 a barrel, so a few things to mull over. We've got Canadian CPI, we've got the German Zeus survey and US retail sales, maybe we'll start on that, first of all, with Navsrae Natural in Sydney, so, I mean, one word could be flat, zero growth in June, but that's the headline figure, year on year, down from 0.6% to 2.3%, but take out gas and autos, and it's a completely different story, a much bigger surprise. Yes, it is. Morning, Phil. But yeah, flat isn't the word I would use to describe this, as you say, beyond that headline number, much stronger than expected, I think is a better descriptor, and particularly looking at something like that control group, which includes a lot of the components that will feed into the personal consumption expenditure element of US GDP. That was up 0.9% against just 0.2% expected, ex-oil and gas up 0.8 against 0.3 expected. So trying to sort of read around it, it's not abundantly clear whether this is all the usual volatile items, although I would, you know, what one else is pointing out, this was the second hottest June, since records began in the United States in 1895, I'm reliably informed. And, you know, think about some of the retail numbers that we've had, you know, the UK being probably a good example, where, you know, weather extremes do seem to have had an impact. They play havoc with the ability of statisticians to appropriately, seasonally, adjust the numbers. And there was a big rise in non-store retail, 1.9% clothing sales are up 0.8, things like building equipment, garden furniture, all that kind of stuff, hardware, that was up very strong. So probably there's a little bit of a weather effect in there, but, you know, regardless of that, looking at the likes of the Atlanta feds, latest GDP, now cast and seeing what a few US analysts are doing with their Q2 GDP estimates, you know, they are being revised up. The Atlanta feds back up to 2.5% now from 2%. And, you know, although we can propose those, you know, earlier in the quarter, you know, we're down less than two weeks away from the advanced estimate of GDP, so we can treat them with a little bit more seriousness, I think. And so, you know, potentially GDP growth of a little north of 2%, you know, versus what we call 0.4 in the first quarter. So, you know, it does seem as though, you know, overall, weakness in Q1 or sub-train growth in Q1 hasn't necessarily followed through into Q2, you know, and all that said, it's had absolutely no impact as far as markets are concerned. We had a knee-jerk sell-off in the US two-year notes, for example, I think went up about four or five basis points, but they pretty much retrace much of that move since. And, you know, the market has still got more than 100% confidence that the Fed funds rate is going to be at least a quarter percent lower come to September 20th. Right. And, yeah, wouldn't this be sort of firing a warning shot over the bow for the Fed that, you know, because they've been saying, "Well, you know, we don't think it's going to come back, inflation's going to come back, we're going to focus on jobs a bit more." And the consumption suddenly shows a sign that it's starting to rise again. Although, if you look at import next book prices on the month, it actually failed, didn't they? Yeah, I know. I don't think you can extrapolate anything from this as far as what it means for pricing. We will, incidentally, get the Fed's beige book out in the wee hours of tomorrow morning, and that's obviously ahead of the end July meeting. So that'll give us a little bit more sort of granularity, I think, in terms of anecdotal evidence of how firms are fairing, but particularly in terms of their ability to, you know, to connect to passing on price increases. So I think it's right that the market isn't sort of jumping to any conclusions about what it means for inflation. We've had Ann Kudler from the Federal Reserve, she's been out speaking overnight, pretty much on message there saying that if things continue as they are, then rate cuts later in the year are likely, and, you know, everybody, you know, Powell yesterday, we had Mary Daily as well on the wires, and now Ann Kudler all sort of saying, "Oh, we're going out of their way not to give any indication on possible timing for a start of rate cuts, but anyway." And yeah, the share market clearly, and if you look at this rotation and what it's doing with the Russell 2000, I mean, several days now, of very sharp rises, I mean, that surely implies that people are assuming that smaller businesses are going to do well because we're going to have greater consumption, you know, like we've seen in those retail numbers, which, you know, which you presume comes from lower interest rates, but whatever the expectation is it's going to happen. Yeah, no, absolutely. And, you know, we're not disagreeing with that. We do think that growth in the U.S. in the second half of this year will probably be a little better than the first half of this year. So let's assume the first half ends up roughly, you know, somewhere close to trend, maybe a little bit shy of 2% overall. We do see, you know, perhaps growth closer to 2.5% in the second half and a little bit stronger still in next year, but lower rates are definitely part of that story. And so, you know, going back to the rotation theme, you know, look at what 10-year treasuries have done. They've actually made new, you know, new lows. We were what? Four points. We were just shy of 4.5% before the, you know, the car crash, Biden, Trump debate as far as President Biden was concerned, you know, and we've actually gone through the, you know, the 4.18 low, I think, that we have, I think 4.17 is where I'm looking at just as the moment. And I think that he's, you know, the key driver of this rotation into small caps, but it's not just that. If you look at the S&P, you know, it's up, what, over half percent, the NASDAQ's doing really well today. And interestingly, but then the S&P, I've noticed that, you know, industrials and consumer discretionary. So then linking that back into retail sales have been the outperformers today, whereas the theme, obviously, you know, either side of the weekend was really the, you know, the Trump, the so-called Trump trade. So, you know, the sectors that are likely to be the main beneficiaries of, you know, particularly of sort of deregulation. So we saw, you know, energy and CPU curves. So we saw energy in financials leading the charge at the beginning of Monday, at least anyway. And that's given way a little bit to a bit of old school enthusiasm for industrials and those that will benefit from perhaps somewhat stronger consumer spending. And maybe, you know, with energy, maybe less renewables and a switch to, you know, the old fossil fuel agenda, should there be a change in the White House, just imagine. I still have that, I still have that adage, is it burn, baby burn? I don't know if it came out of the mouth of President Trump or somebody else, but obviously deregulation that will encourage, you know, much more expansive exploration as far as Shailor is concerned, I think is pretty. drill, baby drill is what you think is the case. It's really what it is, isn't it? Did I say burn, baby burn, which goes back to Enron? So drill, baby drill, yeah, we're certainly going to see lots of that. You know, look, so inflation, we've got quite a bit of it, haven't we? We've got it, we've just had it for Canada, we're getting it for New Zealand, we're getting it for the UK as well, and we've got the final read for Europe as well, don't we? So let's look at the Canada number, first of all, because the core piece as CPI for June was down 0.1%, minus 0.1% from a rise of 0.6% for the month before, actually a negative number. That's good to see, isn't it? No, it is, actually. I mean, the way that we look at that is there are two underlying measures that come out of Canada, effectively, sort of similar to Australia, basically, sort of a weighted median and a trimmed mean measure, and if you add up the two and divide by two, it's it's 2.75%, that's down a tenth from the May reading, so that was in line with expectations and so the headline rate was a little, I felt a little bit more, down to 2.7 from 2.9, it was expected to be 2.8. So the upshot of that is that Canadian money markets went into those numbers, about 80% priced for a back-to-back rate cut, so when the Bank of Canada meets next week, and they've moved that to 90%. So it looks to be almost cemented in, I don't know, there's anything between now and then that is going to drive a wedge between those expectations and what the Bank of Canada might deliver. So we had been thinking that they might sort of hang on for another month or two, see what the Fed does with one eye on the Canadian dollar, but at the moment you have to say it's far more likely than not that they will deliver another cut next week. Well, the housing industry is going to like that, because housing starts really slowed last month, 241,000 from almost 265,000 in May, although they have been as low as 240,000 in just a few months ago, and that's actually a lot more than it was before the pandemic, so maybe you shouldn't get too excited about that. It's just where we're on housing. The NAHB housing market index in the US fell from 43 to 42, it was expected it would rise a bit, it was 51 in April, so it's quite subdued, and we get housing starts out today as well. Obviously, the housing industry is just waiting for those interest rates to come down, isn't it? Well, no, absolutely, and I think the housing market index, it's improved a little bit, or it's holding up okay, because of the shortage of existing housing stock, which we know is a familiar tale, basically, of people not being able to move house and then having to re-mortgage at much greater rates, but obviously, if longer-term 30-year bond yields continue to track lower, which is the benchmark against which mortgage rates are set, then that situation will perhaps start to ease up a little bit, but housing starts themselves I think expected to be not much changed effectively, but housing starts are certainly benefiting from that lack of available existing housing stock. And knowledge changing in Europe, it's still looking pretty grim, isn't it? So the ZU survey for Europe was a downside surprise, 43.7 from 51.3 in May, 48.1 was expected. In Germany, it's down to 41.8, now the ZU folks say it's all down to political uncertainty in France, the decrease in German exports and the lack of clarity from the ECB. That's what's done it, they reckon. Seems to be, at the same time, look at the current conditions reading, as far as Germany, and it's actually a slightly less dire, -68.9 from -73.8, at least, so the fear factor there in terms of uncertainty does seem to be. This is a poll, mostly, of financial analysts, certainly in what they're thinking, but they're obviously feeling that political uncertainty is going to weigh, and in that respect, even if France does cobble together a government that does exclude the far right and far left extremes, and worse fears about an explosion already, a very poor French debt metrics is avoided, fast forward to September, we've got three state elections in Germany, with a reasonably strong chance, you have to say that the far right AFD will be victorious in potentially all three of them, so I don't think the concerns about the European political fragmentation are going away any time soon, certainly that German ZU survey seems to reflect that to some extent, doesn't it? But also not a lot of borrowing going on, so the ECB bank lending survey came out as well yesterday, no change in demand really for loans, credit standards still very tight, so lending is stagnant, I think it's the word, not moving at all, but there is an expectation that we'll pick up in the next quarter, presumably, because the ECB hopefully will low interest rates, so that's going to help a bit. Yeah, and hopefully lending standards will improve a little bit, so I think the lending survey from what I've seen is less bad really, we've gone from effectively almost like outright negativity or contraction to something closer to flack, so at least the direction of travel seems to be correct, even if in absolute terms banks aren't lending, I'm bending over themselves to lend money and neither are businesses and consumers banging on the door trying to borrow it. Yeah, well, standards are tight, who cares if no one wants it anyway, so first off today, the inflation rate for New Zealand, so let's hope it's down for their sake, maybe more than expected, so the RBA and Z can go earlier, perhaps that would be nice, wouldn't it, because the economy is certainly hurting over there? Well, bearing in mind that the New Zealand money markets are coming into this number, almost 50/50, I think it's about 56% priced for them to move in August, even though what most analysts, including our colleagues, are being zed down effectively, given the obviously power state of the real economy evident in some of those recent surveys, is pulled forward their expectations for easing from early 2025 into Q4/2023, but Q4/2024, but the markets themselves are clearly prepared to believe that having pivoted as sharply as they did two weeks ago that August is definitely going to be a live meeting and those CPI numbers will probably be quite decisive in that sense, so 3.5% down from 4% is the expectation from our B&Z colleagues, I think the consensus is maybe for a tenth lower to that, so 3.4%. So if we get 3.4 or south of there, I'd imagine those expectations for August are likely to ram it up a little bit further. Yeah, good, and UK CPI, I mean it was 2% year to June, but of course it's the core rate, isn't it? That's the concern, because that is a 3.5% and service is the real way, because that's even higher. That's right, 5.6% right, is the expectation there, so there are a lot of headlines in that headline CPI below the 2% target for the first time in, I can't quite remember how long, and the first of the major is basically actually Switzerland will be there, actually was first cab off the rank with sub-target inflation, but UK now behind, and even if it's seen as somewhat temporary, it's still going to grab a lot of headlines, but as you say, I think it's particularly that service sector inflation, that is the one that I think is concerning, the more hawkish members of the Bank of England and then PC. So we're still, for choice, we still think that they will go in August on the view that policy doesn't need to be quite as restrictive, but we agree it's going to be a fairly close call, and then no CPI numbers will certainly move the die level of thought on August one way or the other. And King Charles gives the King's speech today, where he reads out what he's told to read out, basically the priorities of the new government, I don't think he enjoyed doing it very much last time, he might like it a bit more this time. The Eurozone CPI is out as well, but it's the final read, isn't it? So we'll just be looking for any chance of a revision, I'm not sure how likely that is. And Fed Speaker's barking and wallard tonight, the base book, I think you've already mentioned, is giving us some colour, ironically, on local economies in the United States, even though it's beige, earnings season continues as well, banks have been doing well, haven't they? Before the start of the session, Bank of America and Morgan Stanley both beat on revenue forecasts, not much today, but Netflix and Taiwan, so many conductors later on in the week, so there's still stuff going on, but we're out of time, we're able to go, good to talk. Thanks for spending way too long on some of the early stuff, so we had to rush towards the end, but I don't think anyone noticed. That's it for today, I'm Phil Dobby from NAB. Back again tomorrow morning, I'll see you then.