NAB Morning Call

A quick response to slower inflation.

Friday 12th July 2024

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Big market moves to a softer than expected CPI read in the US overnight. Bond yields are lower, the US dollar is lower and a big response in equity markets. Basically tech stocks have been hit hard, whilst industrials have climbed. Rotation is the key word for the day. The other word is Yen, which fell 1.8 percent on the CPI news. NAB’s Ray Attrill says there’s clearly been some opportunistic intervention by the Bank of Japan. Meanwhile Joe Biden gives his press conference at the NATO conference shortly, which is widely billed by some commentators as the make or break moment for his Democrat nomination for the Presidency. And UK GDP better than expected but lost on the British people who seem more obsessed with the outcome of a certain soccer match over the weekend.

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Duration:: 17m
Broadcast on:: 11 Jul 2024
Audio Format:: mp3

Well big market moves to a softer than expected CPI read in the US overnight bond yields are lower The US dollar is lower and a big response in equity markets. Yeah, they are pretty mixed Well, look at why that is so while slower inflation is a good thing a slower president isn't an all eyes and ears Will be on Joe Biden giving his press conference at NATO very soon plus what else is coming up data wise? Well, we'll tell you stay tuned. It's Friday to the 12th of July 2024. It's the morning call from now. Good morning Well, quite a falling the US dollar this morning is down half percent and it's all down to that CPI number out overnight Well, if it's not down to that it's a big coincidence timing wise The fall has helped the pound rise by half percent at one point eight percent rise in the Japanese yen We've got to talk about that this morning. The Aussie meanwhile up just naught point two percent So wealth short of that fall in the mighty US dollar the Aussie around sixty seven point six US cents Now US stocks are mixed but generally down the S&P back off. It's all-time high from yesterday It's down 0.9 percent at the close today the Nasdaq falling 1.9 percent The Dow is just in the green the Russell 2000 though is up 3.6 percent. Yes 3.6 percent So tech stocks are really feeling it met her down four percent for example Amazon down even more than that Europe in contrast Well shares are up there, but they did close before the CPI numbers out in the United States of think so 0.7 percent up for the Dax and the Cat current 0.4 percent for the footsie 100 and the euro stocks 50 and bond yields well down nine basis points for 10 year Treasuries even more for two years down seven in Germany Aussie 10 year yields were up three basis points yesterday to 4.37 percent But after all that action overnight on futures they're now five basis points lower and oil is up half a percent up for Brent to just under 85 50 a barrel and 0.7 percent half a WTI So Ray actual is with me this morning having just about calm down after England's victory in the Euro Semi-final so could be coming home Ray for anyone who's interested in English football if they can it's coming home Yeah, you're not gonna sing it. No, don't sing it. Don't sing it. It's um, it's um, can they get it through customs though? If they do get it, you know, they've got the trophy I'm just worried about Brexit rules that might prevent the import of trophies Which we might have thought, you know, was never an issue for England But that's right and if Harry Kane's got a home sandwich in his back pocket Basically from the flight that could cause problems as well. Yeah, but look never understood make England's ability to stuff things up at the last moment So we're perfect disappointment on Sunday. That's not the attitude. Does it look? Let's look at CPI That's the that's what people are here to hear about Obviously down in the United States in a nutshell It's falling faster than expected and that has obviously translated into an expectation that the Fed can cut sooner Hence, we're seeing this move down in in bond yields a two-year treasury notes Down 12 basis points this morning. Yeah, it's all really about CPI isn't it and really nothing nothing not to like for those that are You know wanting to position for the onset of that Fed easing cycle Commencing in September one almost wonders whether you know at the July meeting You know the Fed chair might be more prepared than he has been to to give some hints that you know Red cats might not be too far off, but let's not get ahead of ourselves on that basis, but but yeah looking through the CPI and I haven't actually looked at the second decimal place bill But I think it might be 0.06 or cent so a low point one percent and I think significantly It's things like looking for core services ex rents has been flat now for two months at two months running There was some I mean the headline number was depressed We had a 5% fall in airline fares. There was a one and a half percent drop in in used car prices But but it's that sort of rents and what we call owner equivalent rents effectively what you could rent your house for You know even if you own it, you know those numbers are down You know around a quarter percent each basically so the lowest levels that we've seen I think since April 2021 so we've got a clear Acceleration there perhaps add that you know the PCE number is still the more important one What happens to PPI tonight? It's obviously going to be influential it very crudely I think it's sort of two-thirds CPI one-third PPI with a little bit coming from elsewhere So the PPI is expected to be relatively benign tonight. So that does set us up I think for you know the sort of PCE number at the end of the month that will Further cement those expectations of Fed easing which I do note this morning You know an outflirting with the idea of three rate cuts this year I think we've got something like 60 basis points of cuts now priced by the end of this year from Just under 50 days that up the expectation for July then is that how we're squeezing another I haven't seen anything for no It would be that they're going September and then we'd have back-to-back increases in November and December. I think that's the view but September incidentally is now a hundred percent priced from You know something around to 80 to 85 percent in the days leading up to this CPI release So two responses other than obviously the response in in bond yields But also in currency markets a big response in the yen and then a mixed response on equity markets But let's look at the end fest. That's quite a move over certainly is it's you know some point one point We were two and a half percent down and and as I'm looking now We're one point eight percent off and the last 24 hours having been pretty flat Leading up to the CPI now that is an outsized move I haven't had any confirmation that and we don't in these things, but we strongly suspect the hand of the bank of Japan there If we wind back a week or so You know we were speculating that for the BOJ to have any chance of being successful Intervening against yen weakness. It really needs to be looking for an opportunity to sort of push on a half open door You know waiting for some soft us numbers and lower bond yields And we thought that might have happened after the PCE numbers that we had previously, but but obviously not but The bond reaction you know to the CPI in itself obviously has has pulled the rug a little bit from dollar yen But it's a size of this move I think it's fairly inconceivable that it hasn't had a helping hand from the bank of Japan So you know we'll find that out at the end of the month, but you know It's um, you'd have to say hats off to the to the BOJ and they've been pretty smart here as I say pushing on an open door rather than you know The idea that they've just intervened and then doing anything other than just gift speculators the opportunity to resell the yen at better level. It's had the impact doesn't it? So what about equity markets then because are you you would have thought you know rates coming down? Equity markets had like that, but look we've got well tech stocks not liking at all I mean the Dow is doing somewhat better. So industrials okay Tech not so good. So is this a bit of rotation going on if inflation is coming down Is it because tech loses its advantage and other industries perhaps are going to see a bit of growth? Is that the theory? Is that what's going on here? Absolutely I think rotation is the buzzword you're going to be doing a lot of that on the news what has over the course of today and You know generally speaking if you if you you know get out of bed and turn on the radio Whatever and find that the NASDAQ was up to with that bond yields were down two percent say all the NASDAQ outperform Didn't it well not so I've always been a little bit perplexed In the sense that you know the big tech counters So you're thinking about the you know the Microsofts and the apples of the Amazon's of the world You know have got cash bleeding out of their ears Effectively I don't care what interest rates are doing But there are other you know the more leveraged companies smaller caps They sickly riskier entities are really going to feel the benefit of of lower borrowing costs and I think that's why you're seeing that sort of rotation and as you know the lines of the Dow outperforming and and and the S&P as well, you know even though it's down It's it's doing much better than the broader net stack. Yeah. Well, I mean if it's a soft landing the economy looks like it's doing Okay, and the cost of borrowing goes down then obviously, you know go for growth. That's that's clearly what's happening, isn't it? So what what will we see though in banks so we get after the close on Friday in the United States? They're still of course to still mopping up Thursday, but on Friday We get the earnings reports for several of the banks city group shares are down a bit today But that's because they've had a hefty fine over there who risk management But you'd assume that generally finance stocks would be doing okay, wouldn't you but well, let's see I think generally the market's been sort of traveling, you know reasonably hopefully that you know We aren't going to see big earnings for us I think the focus is is actually going to be on the revenue numbers actively and obviously we have been in a you know Relatively low volatility environment so you know which normally doesn't play well as far as sort of top line earnings particularly in sort of thick Businesses, but but let's say yeah, we got JP Morgan City Wells Fargo and Bank of New York Melon I think and actually I'm not sure if it's before the open or or after the close Tomorrow their time, but yeah before the open most of them. So yeah, that's certainly going to be be a keen focus I think obviously going into the weekend and what is a you know, it's not a particularly heavy calendar elsewhere So I think that will clearly be the focus Yeah, and on the soft landing we do get the University of Michigan consumer sentiment for July, don't we tonight? This has been falling quite bit though. It hasn't over the last few months. That's not saying soft landing at all But maybe it's gonna turn around. Let's yeah, let's see I mean the cap of the consensus is for it to edge slightly higher I think 68.5 from an upward revised 60 68.2. I think would Was the revised number at least last month, but you know, but these are still some of the sort of lowest level So I think it's the case of you know, we've seen a little bit of improvement But in absolute terms, you know consumer sentiment is still very very depressed But it's and as ever it's been a case of you know watch what us consumers do rather than what they say at least anyway but and that's sort of five to ten year inflation expectations reading this there's kind of been oscillating either side of three percent for Well, every year now, so you know anything other than you know, but something between 2.9 and 3.1 would be would be interesting But you know with with the obvious, you know positive signals coming now from the heavy inflation numbers You know, maybe that takes a little bit of a backseat tonight No, we won't talk about Joe Biden very much next week if nothing happens this weekend if nothing happens this weekend It's all you can put on the back burner, but Joe Biden is giving the press conference of his life. It seems in a in a few hours I mean the Democrats might as well be standing there with their scorecards Finally and hold them up afterwards as to how he's done because he will either alleviate the pressure on him or increase it depending on You know, how good he is how he holds his thoughts. Were these able to complete sentences? satisfactorily It's all all eyes are on Biden, aren't they? So Something could happen over the weekend. No, I'd say you could and you know, I think the you know The tide is is clearly running out on on Biden. I'd be personally be very surprised if you know, if Biden doesn't doesn't care versus his decision, but you know, the precious building and you know, I think that Mr. Clooney's probably had more influence than either, you know Nancy Pelosi or Chuck Schumer basically in influencing that sentiment and as to our apparently are quite close and Clooney's obviously has been a major donut of to their said to come out publicly and say the things that he is I think is I think he's quite telling you know, my sense is that you know The Democrats effectively are probably quite happy to see mr. Biden president Biden should I say, you know, assisting He's staying in the race because it buys time effectively for the Democrats to you know behind the scenes, you know decide how they want to play News that he is going to step down and potentially, you know, present a unified candidate as the nominee rather than get into the You know, the spectacle of a contested Democratic convention in in August. So, you know, in that sense, I've got a slightly cynical view of Quite the way that mr. Biden is behaving here, but you know, but let's say maybe he still thinks he's he's still up for the job But I'd still be very surprised if in the next week or two, not necessarily this weekend We find that he's not going to be the candidate Well, the UK's Daily Mail is reporting today that Kia Starmer the new Prime Minister in the UK Of course met with with Joe Biden and was talking to him as though he was a nursing home resident So anyway, we're talking about the UK GDP did a little better than expected than their 1.4% growth for the year To May, 0.4% month on month from flatlining in April and the expectation was 0.2% So actually twice as good as expected. So is this, you know, it's just one reading enough to influence the Bank of England in any way Well, quite possibly anyway, I'm still trying to get my head around dissecting the impact of the euphoria of England's victory from the fact that we did have that modest upside surprise and that you know, the UK economy You can here continues to defy the naysayers doesn't it with some pretty and decent monthly and more important quarterly? Numbers there It does soon. I think it does put a little bit of a question mark over over August There's some mixed views out there as you know from your last conversation with Gavin, you know Our baseline view is that we will buy probably by a split decision have a rate cut in August But you know going back and you know reading the the Hugh Pill speech effectively there There's some reasons for caution there and even to believe that he himself could be a holdout for for an August cut I've seen one Elissa respect suggesting it might be something like five four for a cut with with Hugh Pill the chief economist dissenting and Yeah, the Bank of England does have form for even governors being outvoted on the committee So, you know for choice, we still think that um, you know the bank will go But you know the data flow just as it is at the moment is saying that it's you know, it is far from a done deal No, and China trade data a little bit confused by Chinese data lately and so new wine loans I'm not quite sure when are we getting those it's sort of like being seeing those appearing in the calendar I use almost every day and I'm not quite sure when we get the the trade data I do know we get Q2 GDP early next week So obviously that's quite important, but trade data is imminent. When's that coming out? Well, I think it's coming out today and the calendar I'm looking at today is today But another one I was looking at yesterday. So it's coming out over the weekend. So when I was looking at it Yes, it'll come out when it's coming out basically and So so it'll be interesting. Obviously, this is just a lead into the Q2 GDP and the various monthly activity data Which I think is coming out next next Tuesday. So if the trade numbers do cross the cross the wires today The expectation is that we might see a slight pickup in the annual export growth From the 7.6 that we had in May to something like 8% with imports also up a little bit stronger But you know if so, I don't think that'll have any particularly strong signaling and you know I think the worry for us is particularly after those PMI numbers in the service sector that we had You know earlier this late last month should I say in the beginning of this month? They don't bode well I think for particularly things like retail sales So I think that will be the real focal point in terms of you know Just how well the Chinese economy is traveling in the second quarter and New Zealand very quickly the manufacturing PMI and card spending for June out today So I guess this is you know just how subdued are things over there question mark very is the answer very very enhanced the the New Zealand RB and Z pivot that we had earlier in the week and You know as you know the the and Z economist pulled their first rate cut call back from next year into November Which is where they had been since the beginning of the year But they acknowledge that the risk is that November seems an awful long way away given the part of state of the New Zealand economy You know and if the inflation numbers that we're going to get I think next week do show a meaningful decline Then that certainly means that the August meeting becomes live So maybe that manufacturing might the margin feeds into that discussion today Yep, I can't spending maybe down as well. We'll see won't we we don't have a long to wait for that at all very good Enjoy the weekend ray. We know what's gonna happen. He's coming home. Well, we have anyway We keep on I think isn't it? All right, very good. Anyway, well, we'll enjoy it. Whatever the outcome Good to see you see talk see religious Phil and on the weekend edition today at one of the morning call regular tapa Strickland We'll be joining me along with a couple of folk from knabs credit research We've all been doing a deep dive on the return to the office the increase that we've been seeing in those retaining to work seems to have Stalled since the pandemic so we have now hit a new normal perhaps so what is that compared to pre-covid traffic and what does it mean for commercial real estate in terms of prices and yields and Future demand so we'll look at all of that on this special edition of the weekend edition That's out this afternoon wherever you got the morning call from today It'll be there for you again, and I'm back on Monday as well for another edition of the morning call with tapas again a bit of tapas Overload. I'll see you then. Thanks for listening (upbeat music)