NAB Morning Call

No right turn in Paris

Monday 8th July 2024

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France looks like it won’t be veering sharply to the right after a. The exit poll out this morning has Marine Le Pen’s party in third place, so it looks likely the country is heading for a hung parliament. Phil talks to NAB’s Tapas Strickland about how the markets will respond. There was plenty of reaction to the non-farm payrolls number on Friday. The headline number suggested a rise in the people in work, but the reality is it showed an easing jobs market which is reflected in raised expectations for a September rate cut. We also look ahead to the RBNZ this week and the question mark hanging over Jo Biden’s head. Will he make it as Presidential nominee for the November election?

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Duration:: 15m
Broadcast on:: 07 Jul 2024
Audio Format:: mp3

Friends, it looks like it won't be veering sharply to the right after all. The exit poll out this morning has Moon Le Pen's party in third place in America. Joe Biden is hanging on to his place as the presidential nominee, but how long is that going to last for? And could he be a liability if he sticks around for too long? An historic win for UK Labor hasn't really moved markets over there, but we knew it was coming of course. And non-farm payrolls in the United States, the headline number, looks like US employment numbers are proving, which could delay rate cuts. But actually, beneath the surface, we see the opposite is true, and maybe a rate cut could happen sooner. It's Monday. It's the 8th of July 2024. It's the morning call from Knab. Good morning. Well, they could have sent falling the US dollar on Friday on the first day of a new government in the UK, and 0.4% rising in the pound. The Aussie is up 0.3%. Bond yields a lower on Friday, two down eight basis points for 10-year treasuries, down 11 in Canada, seven in the UK and France, and five less in Germany. Aussie 10-year yields finished the week at 4.4% on futures this morning, about four basis points low. And that back then, on Friday, stocks were running in the US up 0.9% for the Nasdaq, half percent for the S&P, 0.2% for the Dow, as traders returned from their 4th of July holiday, and oil prices were low as well. Brent dipped 1% on Friday down to around 86.50 a barrel, and 0.9% fall in WTI as well. We'll look at non-farm payrolls in a moment, because, well, mixed news on that, but a bit of politics to cover off first, because this morning, no national rally government in France seems to be a message. Instead, it seems, judging by the exit polls, which you're only just out, a shift to the left of anything. Knab's tapa Strickland joins me from Sydney. So tapas, I mean, it looks like they're going to have a Hang Parliament, doesn't that? I'm not sure if that's good or bad. Jean-Luc Michelin, Melanchon's new popular front, the left-wing alliance, is expected to pick up maybe 200 seats of the 289, which is needed for majority. Macron's party, maybe 150. And in third place, the far-right national rally, they're well below that, well below 150. So they've been well and truly blocked by tactical voting. So how are markets going to respond to this, do you think? Good morning, Phil. Yes, it's an exciting result from the French elections, and it just shows you how the tactical voting really determined, or really helped determine who eventually won this election. It turns out no one really wanted it all. As you're noting, no major party bloc has a majority, so I think that's a key thing coming out of this. So you're going to either having some kind of coalition government, unlikely to be able to have a minority government here, so some kind of coalition government, or some kind of technocratic government. And I think for markets, they can broadly live with that. So when you look at the Euro at the moment, just in early Asian trading, Euro is trading down 0.3%. So not a large move in response to the preliminary polling results from the French election. Yeah, and I guess it flows out of that fear, isn't it, of extravagant spending. I mean, Gavin was talking about if he went to the far left, then there'd be a concern about just how much money they're going to spend. If he's a hangpile, then it's difficult for them to do that. Nothing will ever get done, but nothing radical will happen either. Yes, and I think that's important. So no major reforms likely, and it's another year until another election can be called. So you're pretty much talking about another year of not that much happening in France. Yeah, and in the UK, of course, on Friday, since we last spoke, they've had their historic swing as well with the Labour Party winning 414 of the 650 seats, and the Conservative is down to just 121. No market reactions to that because, as we've been saying, really, it's fairly stable, isn't it? And then they're not going to spend like crazy, so markets aren't too concerned about that. Just quickly finishing off on politics, though, Joe Biden, he beat on ABC TV in the US on Friday, saying that he's still going to run for president again. Well, he was able to run for president, not much of a run, more of a slow amble, and I think that's the issue, isn't it? So there seems to be a lot more Democrats now believing that Kamala Harris should be the presidential nominee. So there's a question. Is he going to make it all the way to November? Yeah, it's a really interesting TV appearance. And for those who didn't see it, I would recommend looking at it. And far from me being able to judge someone's suitability to run for president, but at least the reaction to it, especially from betting markets, was to actually increase the odds of Biden not getting the Democratic nomination. So the TV interview didn't really relay those kind of concerns. And when you look at predicted, so predicted is basically how many cents you have to stump up to get a dollar if that outcome occurs. So Harris is at 44 cents, and Biden is at 41 cents for the Democratic nomination. And on Wednesday, so just prior to Independence Day last week, Harris was on 36 cents and Biden was on 47 cents. So you can see that continued turn within betting markets towards an alternative to president Biden for the Democratic nomination. And it's getting a little bit messy in terms of who will win the eventual presidency. So when you actually look at parties who will win, Republicans are at 58 cents, Democrats are at 43 cents. And that's a little changed from last Wednesday at 59 cents and 43 cents, respectively. That's with Biden running. Presumably that changes slightly more. No, it's very uncertain, actually. So what we can say is in betting markets, they've got a greater likelihood of someone else getting the Democratic nomination and still the strong likelihood of the Republicans winning the presidential election come November. And I think that's very important. You're talking on the podcast with Guy and a few others early last week about how there had been a rising yields post the debate. And a lot of people were talking about whether that was a bit of positioning or a bit of early anticipation or tilt towards an eventual likelihood of a Trump presidency and the kind of fiscal spending that may stem from that and also the impact of potential tariffs as well. It's looking more and more likely, isn't it? As you say, so anyway, that's politics out of the way. Let's look at numbers and confusing numbers. Non-farm payrolls on Friday and upside surprise, they're expected to fall from 218,000, 290,000, but they fell, but only 206,000. But the unemployment rate ticked up. Growth in average hourly earnings are slowed. The participation rate is up a little. So you'd say all of that is signs of a less tight labor market, apart from that headline number. But it's pretty mixed, the picture, isn't it, really? But the upshot is that the out of it comes an expectation that well may be the labor market's moving in a direction which would allow the Fed to cut rates sooner rather than later. It was a very mixed payrolls report. And the key thing there is you're still getting headline payrolls growth of around 200,000 a month. And regardless of whether you think undocumented migration is lifted and that's lifted, the actual break-even rate of how many jobs you need in order to keep the unemployment rate unchanged. Payrolls of at 206,000 is still relatively strong. But the key thing, as you noted, was the revisions to the prime months was to the negative side. So the prior two months were revised by a combined 111,000 lower, and the unemployment rate rose at 10. So it does suggest that- Yeah, I didn't say that, but that is the telling number. We've had that revision. Yeah, so it does suggest the labor market is definitely becoming less tight. But at the same time, there's nothing alarming in Friday's payrolls report to really, I think, lead Fed officials to push for July rate cut at all. When you think whether FOMC's longer on natural rate of unemployment is, it's at 4.2%, so he's still one-tenth away from that. And it's true the FOMC did have a 2024 unemployment dot projection of 4%. And so it's still pretty much around there. I was just looking at an article written by the Wall Street Journal's Fed, Whisperer Nick Tamarales. And he headlined an article late Friday, saying case for September rate cut builds after slower jobs data. So I think that's the way most people will kind of play it. Still unlikely to see a July rate cut, but probably building the case towards a September rate cut there. I think the pricing for September's risen a bit, hasn't it? Just a little bit, but not too much. And that's what I find really interesting. So September is now 82.4% priced. It was 78% priced on Wednesday, the day prior to Independence Day last week. So not that much of a change. And then if you look at cumulative cuts for the rest of 2024, it's at 50.8 basis points, up from 47.8 basis points on Wednesday. So some moves, but you wouldn't have to, you couldn't say they were especially large, large moves there. And I think I think the other issue here is this is the employment mandate, so the employment bit of their mandate. And it looks like they're broadly at full employment, if you believe the longer run natural rate of unemployment is at 4.2. Well, here we are, because if you look at 4.1%, I mean, if you ignore the late 2000, I mean, it was higher than that continually from the early 1970s to 2017. Okay, 2000 dipped down to that level. So we've got this massively restrictive policy, and yet employment is still at this very low level historically. So why so much attention being paid? Yeah, well, I think it's the case classically is in most down turns, unemployment rate rises a little bit, and then all of a sudden just accelerates higher. And so that's what policymakers are very conscious of. But in terms of how the Fed will interpret this, if you recall back in May, a power spoke that a couple of tents in the unemployment rate would probably not do that in terms of getting them to start to cut again. And that was back when the unemployment rate is at 3.8%. So maybe they're becoming a little bit more concerned. Another issue, both for the Fed and for the RBA, and I think this was really summed up in a really good question at the June FOMC press conference, is a question that you've got restrictive policy in place, virtually no change in the major things for all of this year. How do you get continued improvement in terms of inflation? And so we've met the full employment mandate. We've still got too high inflation. And I think from here on in, it's going to be the inflation principle going to be quite important. And of course, the US has CPI and PPI later this week. And I think that's where a lot of the focus is going to be. If you're getting further progress on inflation and your meeting in full employment mandate, then that does open up the scope for some insurance rate cuts. But if you're not meeting your inflation mandate, and it doesn't look like it's going to be met soon, then you're still in that kind of holding for longer kind of environment. So there's that balance going on at the moment between the full employment mandate, which looks like it's being met now, and inflation that is still a little bit too high for the company. Yeah, but I mean, so you say that there's a chance, because you know, four to 4.1%, you know, so what? You know, there's a chance that when it does move, it could move quite markedly. And we could be back to where we were levels that we were seeing maybe five years out from before the pandemic, you know, when we were obviously high fours and eight to the fives. Well, that that's a concern from policymakers. But at the same time, if you're getting payrolls, jobs prints about $200,000, it's hard to see people, sorry, 200,000. It's hard, it's hard for that to eventually. So I think the headline payrolls is going to be as important as the unemployment rate here in order to give you some kind of sense. How quickly could that unemployment rate deteriorate if we're heading towards that kind of. So Canada's employment data, of course, that came out exactly the same time as non-farm payrolls there. Unemployment rate also up a little from 6.2% to 6.4%. Again, again, the same deal. If you come from 1975 to 2017, way higher than that if you ignore 2008. But anyway, that's where they are. And it's it's ticking up a little bit. So what does that mean for the Bank of Canada? Well, you see markets pull forward the probability of a July rate cuts are now sitting about 60% from 48% previously. But again, not a huge movement in terms of rates there. And so one reason why is maybe you look at unemployment, it did rise. You look at employment, it was flat, but you look at wages growth, it came in at 5.6% year and year versus 5.3% expected. And this goes back to the earlier question that I posed before. Central banks think they can get inflation back down to target without inflicting any pain on the economy or without moving too far away from where full employment actually is. That's a very rare thing to occur. And it still remains to be seen whether inflation will get back to target without seeing a little bit more of a tick up in the unemployment rate. Yeah, using that line from the from the movie, the castle, they're dreaming, perhaps. And so today, well, not a lot going on. But this week, the RBN said, obviously on Wednesday, a hold is expected. But you know, there's no question mark about whether they could actually raise rates at some point. I think it's unlikely to happen this week, isn't it? So is it going to be quiet from the RBNZ middle of the week? Yeah, that's that's what our BNZ colleagues suggest. They think they will acknowledge the weakness in the economic activity, which is very clear, especially in the survey data that we have seen in the A&Z survey and the QSP. Which is an argument for a car, wouldn't I mean, the sort of balanced either way between a kind of rate and rate? Yes, definitely. But I think they probably don't want to do anything until they get the Q2 inflation report. So I don't think we'll get too much out of this meeting, but going to next meeting, depending on how that Q2 inflation report prints, then that could change the equation. Right. And in the UK, the monthly GDP numbers, and well, this would be interesting. Japan's cash earnings. So more ammunition for the BOG? Yeah, so we're really looking closely to see whether they shouldn't wage outcomes this day to filter through there. And Joe Jerome Powell as well in front of the Senate Banking Committee on Tuesday in front of the House on Wednesday as well. So, well, these are interesting, aren't they? Because I mean, he obviously will be fairly guarded, but he's also going to answer the questions. That's right. And I think his interpretation of the payroll's reports are going to be quite important. Speaking in central a week ago, he seemed to be still not elevated concern, but still looking at what's going on in the labor market and looking for turning points there. And you'll have to say, if you are looking for turning points there, perhaps Friday's payroll's report feeds into that kind of flavor and feeds into the probability of a September rate cut, which is well priced there. And so we'll be looking quite closely exactly what he says. But I think the Glamour Stat really is going to be CPI and PPI. And really, last month's moderation in the inflation prints, is that continuing into this month? And if it is, then you're probably lining up more towards a September rate cut. That US CPI number is out Thursday for the United States Thursday Australia time Thursday night. All right. Well, thank you for being the the first one to get out of bed really early this week. Tap us. We'll catch you again soon. Cool. And that's it. That is the morning call for this Monday morning. I'm Phil Dobby back again tomorrow morning. I'll see you then. Thanks for listening in.