NAB Morning Call

Powell eyes labour market, equity markets eye Trump friendly stocks

Tuesday 16th July 2024

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Equity markets are showing some adjustment to the prospect of a Trump presidency, with oil producers and gun makers doing well, renewables falling and Bitcoin up almost 6% today. Bond markets are still more responsive to Fed-speak. NAB’s S kye Masters gives Phil her take-outs from Jerome Powell's interview at the Economic Club of Washington, D.C. and another session seeing the yield curve ending steeper.

Inflation data is out for Canada tonight, after a business survey showed further weakness in the economy. They also discuss the slump in New Zealand’s PMI’s and more data showing the extent of the China slowdown. Although many are expecting Chinese authorities to announce e very little new in their Third Plenum today, can they really sit by and wait?

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Duration:: 16m
Broadcast on:: 15 Jul 2024
Audio Format:: mp3

Jerome Powell has been talking overnight, not a major shift in direction but we'll look at what was said and what the reaction was more than the reaction to the assassination attempt, it seems, which has been largely restricted to movement and shares in specific Trump-friendly industries. Inflation for Canada today after the latest Bank of Canada business survey, I don't overnight should have still subdue to economy over there. Same for data from China, but what about the third plenum? It's on today. Will President Xi come out with any surprise measures? It's Tuesday, 16 July 2024. It's the morning call from now. Good morning. I don't think I might have just snorted that for a second. I do apologize for that. I just overexcited clearly. The US dollar is up a quarter percent this morning. 10-year treasuries are up four basis points and shares are higher in the US and 0.6 percent rise for the Dow at close to a new record high up up over 40,200, 0.3 percent up for the S&P and 0.4 percent for the NASDAQ, the Russell 2000, at 1.8 percent outperforming the S&P and the NASDAQ now four days in a row elsewhere. Well, euro is down about 0.1 percent. The pound is 0.2 percent weaker. The Aussie is down more than most of the majors losing a third of 1 percent to 67.6 US cents this morning. And European stocks are down at 1.2 percent dropping the euro stocks 50, 0.8 percent lower for the DAX and for the FTSE 100. Bonyled in that part of the world also down two basis points lower for 10-year buns down four basis points in France. Aussie 10 years yesterday were stuck at 4.32 percent on futures since the close. A few basis points lower than that. An oil is down, but not by much. Just 0.3 percent for WTI, 0.1 percent lower for Brent, just below 85 a barrel now. So a quiet day after a lot of excitement over the weekend. The significant event overnight was Jerome Powell's interview at the Economic Club of Washington DC. That's the major thing. There wasn't a lot going on. Let's start on that, though, with NAB Skymasters in Sydney. And not too different, really, to the message we've been getting lately, which seems a little bit more dovish, doesn't it? Yes. Good morning, Phil. I guess in a session overnight, which really lacked key data releases, the focus was obviously on Powell's interview, particularly after last week's US CPI and PPI data. He made a point of not giving any indication as to when the Fed would start cutting rates. But he did continue on that sort of positive tone about the fact that inflation is heading in the right direction. And he did make a point of saying that the last three inflation readings, which did include last week's data, was providing the Fed with greater confidence that inflation is heading down towards their 2% target. And he did also confirm that the Fed is shifting. It is now looking at the labor market. He noted that or Powell noted that inflation, now that inflation has come down and the labor market has indeed cooled off. The Fed is going to start looking at both mandates. So for the market, nothing really new. And I guess that's why you haven't seen the massive moves in bond yields. Can we take this from it, though? Because he says, and again, he said this before, that the only sudden reaction would be if there was a sudden weakening in the labor market. So they're obviously looking very much at that. And the fact that on the other side, they're saying, well, we've got inflation more or less under control. So it sounds like they're more focused now on the downside risk than the upside risk of inflation starting to rise again. They've tilted in that direction clearly. Yes, definitely. And I guess that's what I was trying to say, where he was pointing out the fact that they're now able to focus on their dual mandate, which is the labor market. And you're right, he did say that an unexpected weakening in the labor market could be a reason for the Fed to react. So in terms of market pricing, I think there still are some houses out there calling for the Fed to move in in July. But in terms of the US OIS curve, it's that the pricing is far less convinced. So the market only prices around a 1.9 base points of cuts for the July meeting. But it has added to rate cut expectations further out the curve. So you've now got a cumulative 27 price for the September meeting, 44 for the November meeting, and a total of close to 66 basis points price for December. So the market is confident that the Fed will deliver two cuts this year, and it's starting to price in increased pricing of a third of a third cut. So you know, nothing that overly knew out of his comments. No, and even though we talk about these small moves, I mean, you know, small incremental moves, you just dial them up and then, you know, they can look back and go, wow, that happened. So two year yields in the United States now, 4.45%, same as 30 years now. This last month, two years down, 26 basis points, 30 years up, 10 basis points. So that's quite a divide brewing that. Yeah, it is. And the curve steepening did continue overnight. So while the sort of closing level moves might sort of suggest that not a lot happened overnight, you are continuing to see that twist or tilt where the front end is, the front end of the US curve is being supported by the, you know, the expectations for rate cuts. But the longer end is struggling to rally, you know, US 10s, a backup above, above 420 sort of currently when I last looked at there at 422. And as you said, you know, 30 year yields are up as well. And so the two year 30 year US curve is as you know, yes, edged back up into positive territory. So that's the first time since since late late last year. And recall that late last year, the market was very bullish around Fed rate cuts this year. And you were seeing steepening in yield in yield curves. So yeah, the back end is struggling to rally. You know, I would say that Ken and I've been sort of telling you that on the podcast for a while now that we thought, you know, looking at longer dated yields, they were very well priced for the start of Fed easing cycle. And so we thought they would struggle, struggle to rally too much further. So the steepening would very much be driven by lower front end yields. You know, you're also getting commentary around, and we've talked about it as well in previous podcasts that, you know, weighing on the back end of the curve is, is, you know, the outcome of the US election, how things look on a fiscal basis going into 2025. It's looking more likely, isn't it, that it's going to be at Donald Trump, although the market reaction to the assassination attempt, or the greater chance of a Trump presidency have, you want to read it? Not a lot was that although Bloomberg's basically saying it's share prices or oil producers. So it's gun makers, private prisons, Bitcoin, all the Trump friendly stuff. So Bitcoin is up almost 6% today, but not much difference on bond or currency markets, it seems. Yeah, I mean, no surprise, really, no. I guess for currencies and bonds, look, you know, the focus is the Fed, you know, in the immediate time right now, the focus is the Fed. But as you said, you know, if someone is going to position now for an outcome of the US election or what's going on in the US, it is through the equity market. Yeah, yeah, for sure. And JD Vance, who? He's Trump's running mate. So everyone's going to be quickly reading his bio this morning. He's a former Marine, married to a Supreme Court justice, which is how he knows Donald Trump, and he's written a best seller apparently on growing up in a Rust Belt town. And yeah, importantly for a vice president, he's, if that's what he becomes, he's only 40. So we're getting a bit of youth on the ticket for a change. Yes, yes, look, I mean, I'm not an expert on US politics. So, but yes, that has just been announced this morning. I've read he's 39, maybe not 40, but he's young, a former US Marine. And, you know, reports are saying, you know, this peak is possibly to help Trump win those votes across the swing states in the Midwest. Well, the weakness in the United States that Jerome Powell is looking for in the jobs market, well, we saw it in manufacturing, the New York State Empire State Manufacturing Index, so to slow down in July, minus 6.6 versus minus 6 in June, that is lower than expected, but steady orders, increased shipments, and optimism that maybe better conditions are to come. But we'll see how that translates to US retail sales, which out tonight take out the cars, and they were down 0.1% in April and again in May. So again, another sign of an economic slowdown happening. I wonder whether we'll see that pick up, or is that going to be something that Jerome Powell's going to have to keep an eye on? Yeah, look, I mean, I guess what I'd say about these sort of particles is a bit of, you know, a bit of noise, as we wait for the key data being the USPC. So, you know, what are we really waiting for now to further shift market pricing? It is those top tier data prints. So, you know, your USPC, we've got more USPC, U.S. CPI data coming out, obviously, before the Fed's meeting in September. And, you know, the labor market, clearly the labor market and leading indicators on that, given what, you know, Powell said in his, you know, said overnight. So, you know, I don't know, to be honest, I don't really read too much into the regional manufacturing. Let's move on then. Yeah, done. So, okay, what about top tier data for Canada, then, because we get their inflation numbers ahead of that, though, the business outlook survey from the Bank of Canada, well, that's not moved much in the last quarter there. Q2 survey was out overnight. They say businesses expect the growth of their input prices and selling prices to slow, suggesting that inflation will continue to decline over the coming year, in part because of weak demand for non-essential goods and services. So, that's monetary policy in action, isn't it? Demand slows, inflation slows, central bank slaps themselves on the back. Everyone feels a little worse off. Job done, sort of. So, the inflation number for Canada, the core rate was 1.8 per cent a year on year in May, up slightly from 1.6 per cent in April. But up to that point, five months of steady decline in the inflation rate. So, is it job done for Bank of Canada? Look, I don't think that, you know, the job's done. I mean, the Corley survey of business and consumers that came out overnight was, you know, did remain quite, quite bleak. And it is, you know, that report is seen to support the case for continued easing by the BOC, maybe not at their next meeting, but for the rate cuts to be delivered from the BOC. You know, we also saw, say, you know, in terms of recent data, you know, I'm sure you're going to ask me about it. But, you know, the quarterly, the PMI, sorry, the June PMI report that came out yesterday out of New Zealand, you know, was very, very weak down 2.4 points to 40.2 and the lowest level of activity for a non-COVID lockdown month in the history of the survey. You know, and weakness there was seen across activity sales and new orders. And also the employment reading was quite low as well. So it's a pretty, pretty weak report there. You know, the report did note that a proportion of negative comments coming out, coming out of respondents had risen from, you know, 65% to 67 with respondents continuing to note recessionary aspects of the economic downturn. So pretty, pretty bleak data coming out of New Zealand. Obviously, we wait for their CPI print, which is out tomorrow. But, you know, the market is pricing around a 56% chance of a 25 base point rate cut at the August meeting. And, you know, pretty much pricing in a full rate cut for the October meeting. So significant turn around there in New Zealand for the RBNZ meeting last week. Yes. Well, let's look at a country where things are still very slow as well. China, we had data over the weekend, of course, that showed exports are doing okay, but imports were falling. Well, we saw yesterday industrial production was higher than expected in June, but a big slowdown in retail sales are sort of supporting the same message. So retail sales just 2% year on year and the GDP growth rate for Q2 year on year down to 4.7%. It was expected to be 5.1% from 5.3% in Q1. So there's a real slowdown happening there and it's not going away. Still, yes. You know, the data wasn't great. You know, the sort of misses seen in GDP in retail sales. You know, as you said, industrial production was a little bit better, but I guess the recent data prints it is pointing to, you know, while you are seeing a bit of strength on the production side, that the demand side remains very soft, you know, a very weak consumer in there in China and the retail sales data did sort of confirm that. I guess the one caveat on that print was that extreme weather conditions probably did dampen activity. So and the Communist Party's third plenum today, I mean, we're saying yesterday that not much is expected out of it, even though historically, there's been some big announcements. I mean, Reuters has been saying that they think President Xi is going to announce some pretty major measures to try and reestablish China as investable for foreign money, given how investment flows have been falling since they peaked in 2022, so a year or so of decline. The read we're getting is that no, not much is going to happen. Well, I guess they can always surprise us, can't they? It's worth watching. Don't ignore it, in other words, because something could happen. Definitely look something, something could well come out of it. I think the expectation is that maybe not a lot as you talked about it with tapas on the podcast yesterday. But, you know, wait, wait and see, but obviously, you know, the latest GDP print is likely to add pressure on policy makers. And then, you know, also the increase in likelihood of a Trump 2.0 and how that, you know, the impact of that on tariffs, et cetera. So let's wait and see, we can always be surprised. Yeah, of course, although we've now said, don't be surprised if you are surprised. So, you know, we've covered ourselves from both directions there. We're just covering our back. That's all we do. We're just covering our back. Good to talk, Sky. We'll catch you again soon. Thanks. Thanks, Phil. On this Tuesday on the Morning Call, I'm Phil Dobby from now back again tomorrow morning. I'll see you then.