NAB Morning Call

Powell says labour market is no longer an inflationary pressure

Wednesday 10th July 2024

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Jerome Powell has been speaking to the US congress and says the labour market is no longer an inflationary pressure. So, what does that mean for the timing of rate cuts? NAB’s Skye Masters says there hasn’t been too much change in expectations, with a September cut seen as most likely. With a light calendar today, a lot of the focus will be on the US ten year note auction early tomorrow morning and whether weaker demand could push yields higher. The RBNZ meets today with any expecting a fairly dovish hold. The hold is extremely likely, but dovish? Let’s see.

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Duration:: 16m
Broadcast on:: 09 Jul 2024
Audio Format:: mp3

Jerome Powell has been speaking to the US Congress and says the labor market is no longer an inflationary pressure, so if that's the case, a rate hike would seem a bit weird, wouldn't it? So the big question is when do they catch still the question? We'll look at whether his comments have moved the dial on that at all today. Plus, the NAB business survey yesterday. What are the takeouts from that? And the RBNZ today and Joe Biden not out of the woods yet. He's still making headline news over in the United States. It's Wednesday, it's the 10th of July 2024. It's the morning call from NAB. Good morning. So the US dollar is up 0.1% today. The Aussie up ever so slightly to 67.4 US cents with a 0.1% falling the pound. Not big currency moves, are they? The euro marginally in the red. The yen is down 0.3% and it got down to 161.5 yen to the dollar, which is less than a third of 1% off that 38 year low that we saw a week ago. Still no movement in government bond yields though in Japan. Yesterday Aussie 10 years yesterday, we're down one basis point to 4.34% on futures now up four basis points on that. Meanwhile, one basis point higher for 10 year treasuries, five added to 10 year gilts in the UK, four basis points higher for 10 year buns in Germany. In France, 10 years are up eight basis points. So the spread between French and German yields for 10 years now rises again. So it was sub 50 before the election was called up over 17 mid-June down to 58 at the start of the week, but on the rise again to 62 this morning. Shares well up in the United States down in Europe. Well, I actually want to say well up the S&P not well up at all. Really, the S&P is up 0.1% the same for the NASDAQ. That's not well up is it? Just in the green really, the Dow is down 0.1% the Russell 2000 down a third of 1%. Compare that though to a 1.3% drop in the Euro stocks 50 and the DAX the cat car on down 1.6% down more than 1% in Spain as well. And 0.7% lower for the putsy 100 in London and oil is down today as well. 1.2% lower for Brent below 85 a barrel now, a 1% drop in WTI heading down to 8150 a barrel. So now Sky Masters is with me today. It's all Jerome Powell. Isn't it? This morning skies giving his testimony to the US Congress. This is the first time he's spoken publicly since the payrolls numbers in the US last week. But he's basically saying that the labor market's called. We've seen that from a few different sources now. It's not a source of inflationary pressure. So that's a pretty clear statement, isn't it? That's leaning towards a rate cut. Good morning, Phil. Yeah, you're correct that I guess the focus in a data light session, the focus clearly was on on pals testimony. We did see a bit of market movement ahead of that. But answering your question around Powell, I think his written statement was pretty similar to the post meeting statements. So nothing really new on that front. But in his statements, he did point to the fact that the employment sector, it's no longer overheated and neither is the economy. But he did point out that there were two-sided risks. They're risks around easing too soon, too much, which could harm inflation while reducing policy too late or too little. It could unduly weaken economic activity and employment. But I think if you look at the market price action initially, Bondiels actually sold off on the headlines of Powell's statement. So US10s reaching their intraday high, which I think was at around 433. But they're currently back at around 429 or just below 430. Why was that? Then because Fout Powell made it clear that he wasn't going to send any signals about the timing of future actions. While he did note that he didn't think the Fed needed to hike, he wasn't going to signal when rate cuts were coming. And he also noted that while there has been good progress on getting inflation down, the Fed needs more good data before cutting rates. So I think that sort of quashed the idea that maybe the Fed could go in July. And I think going into this statement, the price action would suggest that the market was possibly expecting or hoping to get a little bit more of a signal around when they would go. Having said that, we know that they're going to get three more CPI prints won this week before the August meeting and another jobs report. So that will be enough in terms of if it's good for the Fed to go in September. So it is that question. It is those two things, isn't it? It's the balance as to whether we wait too long until the economy is stumbling. Is that going to push unemployment a lot higher? Or is there a risk of inflation if they go too early? So I guess they're the indicators to look for both of those. But the markets are expecting September now, aren't they? Yeah, they are. So market pricing in the OS curve is a little changed. They're pricing cumulae of 19 base points of cuts for September and around 50 basis points for December. So just pricing into 25 base point rate cuts by the end of the year. So as I said, you did see yields and issues sell off. They were rising ahead of Powell's statement. So you said in your introduction, you know, French ones, 10 years they're closed up about eight basis points. You had the CACDA and 1.6. So you did see a bit of weakness in French financial markets. What drove that? You know, no real clear catalyst. But I guess just the ongoing uncertainty on how over how a coalition can be formed. And so that's likely impacting market sentiment. So that did drive in the start of the overnight session. You did see yields were heading higher. That sell off gained a little bit of momentum, post-POWS testimony. But then actually, treasuries sort of quickly retraced. They've been retracing in the last couple of hours and supporting the bidding treasuries was a reasonably good three-year note auction that happened in the early hours of this morning. So they issued $58 billion of three-year bonds. And the bid to cover ratio was was coming at 2.67 times, which was well up on the previous, which was at 2.43. So that provided a little bit of support to US US treasuries. And there's another sign of the economy is slowing in the United States. I mean, just a small sign. This was a secondary bit of data. But the NFIB small business optimist survey, even though that rose a bit higher in June with numbers out overnight, so it went from 90.5 to 91.5 as the index. But it was 91.9 in December last year. So it's down on that and the historical average is 98. And it's been below that for 30 months in a row. Inflation is still a top issue with small business owners. But capital outlays were the lowest in June since August 2022, falling six points from May to June. So that's not a rosy picture, is it, if we add to that? So we could just add that to the list of signs of a slowdown in the United States, which the Fed will no doubt be looking at when they're weighing up those two driving factors. Yes. I mean, this report did come in on the highest side of expectations. So in contrast to recent data out of the US where it's been coming in on the softer side. So it's at the consecutive rise. So the index is currently at its highest level since December. But as you've said, it's coming off a very weak base and it's still quite soft. And if you look within the detail, you know, a large part of the gains were driven by economic expectations. And you know, these are heavily influenced by stock prices in the political backdrop. So I don't think we can read too much into that report. Well, maybe they're thinking, well, Donald Trump's going to win. Maybe they're optimistic because they're looking at what's happening with Biden, which actually is still making front page news in the United States is leading the bulletins over there. This whole Biden question that had closed door meetings for House and Senate Democrats, no consensus about whether they should get a new candidate for the presidency or not Wall Street Journal reports. One Democrat, Steve Cohen, was asked if the Democrats who are on the same page. He said they're not even in the same book. So they are trying to figure out what they do. And it seems the one consensus there is. Well, let's see how the president performs at the NATO summit. And if he doesn't perform well, then that's going to increase the pressure for them to find somebody else to throw in at the last moment. What is your model? This whole thing is, isn't it? Imagine, you know, the world's leading democracy and they still can't figure out who's going to run the country. But if they do switch, I mean, what could we see market volatility around this? Because it's looking like, you know, an increasing chance that this could happen. So how would the markets react to that? Yeah, I mean, interesting question for like, I know you've, you know, we talked about this this last week. You know, you've been talking about it on previous podcasts. You know, when I when I look at where US 10 years are currently out, I've got them at around 429. I think that that they were heading into the Biden Trump debate. They're at 427. They sold off got close to 450. But we're back at 429. So you know, is a political backdrop driving driving treasure yields at the moment or is it the economic backdrop? For now, I think if you're looking at the right here right now, it's the economic backdrop and you know, the market pressing in, you know, when is the Fed going to deliver their first their first rate cut? But if you look at the, you know, I think the political backdrop, whoever leads whichever party, whoever, whoever wins, I think what we got out of that debate was that they're not going to rain in their spending on the fiscal front. So, you know, ongoing, a high budget deficits ongoing issuance of treasuries. I think that's that's, you know, a factor that's going to weigh on the on the long end of curves. And so, you know, maybe that's where the if we're looking at the bond market, that's where the political backdrop is, is influence in treasuries. It's in the longer end of the curve. Yeah. And whoever comes in, maybe if someone comes in left field, they're not going to be coming in on a ticket that says, Hey, we're going to cut government spending, are they? So, you know, that's just a fact of election year. So maybe that's why it doesn't matter. I mean, I'm just on that front. So I feel I think I think what what will be focused tonight in a very light data calendar session today will be the US 10 unit auction. So that's out in the early hours of tomorrow, tomorrow morning. And so I think, you know, with 10 years back at the lower end of their recent trading range, you know, I'll be watching, you know, how much support do we does does that auction have, you know, and if it is a little bit, you know, my expectation is that that it may not be strong. And you may see back up in, back up in yields. And that would be, you know, just that reflection of the fact that investors are uncertain about going forward. And, you know, that's where the political backdrop, you know, might be seen in in treasury yields, political uncertainty, almost everywhere, isn't that's the problem right now? Where do you run for cover? The the now business survey yesterday, business conditions slowed a bit further, but confidence that fell into negative territory in May jumped back in June. So what do we make out of that? Yeah, I mean, interesting, interesting result. I think, you know, a couple of things just on the on the conditions front, you know, did fall and other two points to land at at four. So it's well off the highs that we saw, I think back in 2000 2022. But you know, overall, the, you know, the conditions index is reflecting the slowing in the economy that we saw through late 23 and early 2024. And the NAB economic teams overall take on the survey is that it continues to signal another soft outcome for Q2 growth. You know, but on the confidence side, yes, it did, it did bounce, it bounced from being negative into a small positive. So what I was doing there is sort of closing the gap that had developed between conditions and confidence. And also, I think you should be should be noted that the the survey was done in the week that this monthly CPI print came out. So, you know, recall that it wasn't until that print came out that expectations on the RBA change. So you know, some some houses start to call in the risk of a hike at the August meeting. And other economists push their expectations, the rate cuts out into 2025 now being one of them. So I'm wondering whether that wasn't really reflected in that side of part of the survey. So, you know, hence the confidence number did pick up a little bit. But the point is that, you know, I wouldn't read too much into the confidence number. I'd be focusing a little bit more on the conditions one. Yeah, and companies are saying one of the issues that they're facing is obviously still inflation, but also profitability. I mean, that could be a good thing. If, you know, if they're saying, well, we're having we're struggling with profitability, then presumably that means costs aren't being passed on, their margins are being squeezed. And we saw labor and purchase costs, which rose in May have fallen back in June. So not good for companies, but good if we're tackling an inflation, I guess. So, you know, it's a mixture, it could always, I can see why economists love their profession so much. You can always, you can read these in so many different ways, can't you? Yeah, no, you can. But I think the overall view, as I said, was that, you know, the survey is signaling ongoing softness. So even though, you know, and so, you know, because the conditions number did drop, and on the employment front, you know, while it was only one month's read, the index is now, you know, well below the long run average. And so, you know, it's sort of could be signaling that that's slowing in the economy is now flowing through into into labor demand. Well, I'll be in Z today, early afternoon, Australia time, the New Zealand dollars fallen a bit the last couple of days, perhaps in anticipation of this, even though it's widely assumed that they're going to keep rates on hold. I mean, they've got a slowing economy. So I guess it's all down to the details. Now, what's said in the monetary policy statement today? You know, I got BNZ colleagues sort of believe that although rate cuts will eventually occur ahead of what the RBN Zs may and PS statements suggested, they think the RBN Z today will continue to warn that they are in no rush to respond to the weakening economic activity. And so I guess the risk is that the statement isn't is unlikely to read as it dovishes the market possibly would like. And on that front, I think the market is going into this meeting, pressing around a basis points of easing for the August meeting. Well, the New Zealand Institute of Economic Research, they've got a shadow board and they've got rates on hold today for what it's worth. We get more of Powell's testimony today to the House rather than to the Congress this time and China's CPI and PPI as well. But I think we've done enough for today. Could you talk sky catch you next time? Thanks, Phil. And I've got a soccer match that is on pause. I watched the first 20 minutes. It was a very exciting game. If you're following the euros, you've got to watch today's match. And of course, a big one tomorrow as well. But that's it for me for now. I'm Phil Dobby for NAB. I'll see you soon. See you tomorrow morning. [MUSIC PLAYING]