NAB Morning Call

Weaker Services data pushes equities higher and bond yields lower

Thursday 4th July 2024

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The S&P hit new highs as bond yields fell overnight. Markets clearly thought the latest ISM Services number, which came in surprisingly weak, is just the sort of slowdown indicator that will encourage the Fed to act sooner rather than later. JBWere’s Sally Auld talks through the numbers, the market reaction, and the diverse attitudes of Fed members displayed in the latest FOMC minutes. There’s also discussion on yesterday’s Australia retail sales, that came in a little stronger than the RBA might like, but it’s just one month and there are a lot of seasonal factors at play. Prepare for a quiet day today, with the US on holiday. But keep an eye out for the Bidden story. Could pressure be mounting for him to step out of the race, for someone younger who is able to finish sentences.

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Duration:: 11m
Broadcast on:: 03 Jul 2024
Audio Format:: mp3

Well new highs for the S&P as the US services sector weakens so assuming a slowdown means lower rates faster but the FOMC minutes were somewhat more cautious on all of that but of course that was well before these services numbers came out and the RBA will they be more cautious after an uptick in Australia's retail sales yesterday or was that just one month that can be reasoned away by a bunch of factors influencing that number and it's the 4th of July holidays for the United States an election day for the UK a quiet day for everybody else it's the morning call from NAB good morning well the US dollar is down 0.3% the Aussie is up half percent over 67 US cents now the pound up 0.4% 0.3% for the euro the yen is weakened a bit further but not by much and bond yield to down 7 basis points lower for 10 year treasuries down 8 for UK 10 year gilts down 7 basis points in France and Italy but just 2 basis points low in Germany Aussie 10 years were up 2 basis points yesterday to 4.42% now on futures closer to 4.1% so quite a dropping yields overnight and a shortened trading day for equities in the United States with the NASDAQ finishing up 0.9% half percent for the S&P which is a new record and the Dow just in the red in Europe a 1.2% rise in the US stocks 50 same for the Dax and the Cat Courant half that for the FTSU 100 up just 0.6% so US equities higher bond yields lower we can see why here's JB we're study old it was the services ISM number wasn't it's gone from 53.8 down to 48.8 well below expectations into contraction territory all of a sudden another reason for the Fed to cut rates a bit sooner yeah that's right Phil so quite a sharp drop in the headline number and then the business activity sub-component that had basically an 11 and a half or a little bit over a point decline in the month so really big for their new orders 61.2 down to 49.6 so also getting below 50 yeah new orders were down the employment sub-index was down a touch so so all in all a pretty pretty week showing by the ISM services survey but similar to the manufacturing one we saw a couple of days ago but what's interesting about these numbers is that they're at odds with the PMIs so finally completely which have gone up have been actually been revised upwards that makes no sense actually looking pretty good so I guess if you were to sort of you know have a bit of a competition and say well which one of those series does the better job of predicting GDP the ISM would probably win but you know it's not a sort of perfect relationship well certainly that is the number the markets reacted to isn't it yeah that's right so we know which has the most credibility as far as they can say one thing that is interesting and whether two data series are consistent is that they both reflect stabilization in that price is paid part of the of the survey so I guess adding to this idea that you know as we heard the Fed chairs say earlier this week that there'd be more confident around the inflation outlook and so I think that's interesting that the one thing that does say the same message or tell the same story is the one around you know the dynamics around pricing so the FRMC though basically saying obviously this is well before those this is from the last from the last meeting but basically saying not yet in their rather bland central bank language in the minutes they said participants affirmed additional favorable data were required to give them greater confidence that inflation was moving sustainably towards two percent participants emphasized that they did not expect that it would be appropriate to lower the target rate for the federal funds rate until additional information had emerged in other words we'll head all before we're waiting for more data we haven't got enough yet well maybe that that ISM number will be taking a step closer to it yeah well I think this is interesting because when you look at the minutes you could probably distinguish a little bit between the policy debate which was a bit more balanced so as you say we need more information bit more patience not ready to cut rates just yet and it also reflected the fact that you know there were several participants who thought it was possible that rates might need to go up there were some who are worried about a sort of higher than expected rise in the unemployment rate so broadly balanced there but if you look at the commentary around the economy that all seem to be a bit more doubish so talking about the labor market being less tight talking about prevalence of disinflationary pressures talking about growth continuing to moderate so that discussion on its own I guess gave the minutes a slightly more doubish lean and you're right you know the ISM number overnight and some of the other numbers that we'll talk about a bit in a minute also reinforcing that view well yeah I mean the other numbers are going oh what's to come isn't it really with the with the non-farm payrolls but we have had other jobs numbers so the weekly jobless claims rose even though that we saw the job openings rise yesterday but the claims jobless claims were up from 234 000 to 238 000 we've had a couple of weeks when they've been sliding but this is the direction obviously that the Fed wants if they want to a weaker jobs market and then the ADP number for what that's worth 150 000 new jobs in June which is down from 157 000 in May was actually expected it was going to go up to 160 000 so we're undershot expectations yeah that's right so this is I think on net all consistent with this idea that the labor market is continuing to to call but doing so in a pretty orderly sort of fashion so jobless claims are you know slowly drifting higher but you know historically they're still at very low levels and and you're right new this week's payrolls number is is going to be a pretty important one just sort of given that that's been I think quite critical to the Fed strategy you know we've heard Powell say look one of the reasons we've been able just to sit here and watch and wait and be patient this is simply because the labor market has held in pretty well and so there's been nothing really forcing our hand to cut rates because at the moment you know the labor market is a little bit softer than it was but still pretty close to levels that most economists would regard as near full employment yeah now closer to home retail sales yesterday from May beat expectations actually twice the consensus I read a nav note on this saying that you know there's so many variables influencing these numbers it is very hard to draw any conclusion from from one month but particularly this month there's been a lot to pull numbers in all directions yeah that's right so there are six tenths of a percent in May which as you said was quite a bit more than the consensus had expected and the Bureau of Statistics noted that there'd been some pretty aggressive end of financial year or early end of financial year discounting by retailers and they think that might have lured consumers to open their wallets a little bit earlier in in May then might usually be the case so we'll see whether there's a little bit of a you know reversal of that in in June it is interesting though because I think the Reserve Bank's a little bit confused it's probably too strong a word but they've got some question marks about the consumption outlook because they have been I think quite worried about the weakness in consumption in in recent times and that's been sort of one of the reasons keeping them firmly on hold but then in the GDP numbers in early June you know we've got some pretty significant upward revisions to consumption and you know the savings rate fell again so like you say you know nothing's going to turn on on just one number but for a central bank who I think is sort of sitting there saying well you know we've had higher than inflation outcomes than we would have liked that's not the only story the deputy governor said look there's a whole run of data between now and the August meeting he highlighted the retail sales as you know one of the important ones and you know if you were putting things on one side of the ledger or the other you'd have to argue that yesterday's numbers if anything probably go on the column that you know add to the case for for a hike but look again there's a bit more water to flow under the breach the employment numbers are pretty pretty critical and obviously as well that next inflation number at the end of the month yeah for sure building approvals as well also higher in numbers at yesterday 5.5 percent month on month versus 1.6 percent consensus a lot of that was a growth in apartments in townhouses but again just one month and if you know if we look over the year the run rate versus population growth still nowhere near high enough yeah it's still desperately behind where we need to be in the sort of targets that you know federal and state governments have set to try and resolve the shortfall of of housing but look you know I would put that down yesterday's numbers you would say generally better than expected and you know at the margin might suggest that the economy is starting to in that second quarter of the year bottom out and perhaps show some signs of upward momentum as we head into the second half of the year well look we uh we've got a quiet one today and we are america obviously is away for the 4th of july and markets already closed the uk is working but the managing to squeeze in the trip to the polling booth to throw out the the conservative government almost certainly will be the biggest surprise if they don't otherwise quite today we go Australia's trade balance German factory orders uh you know we're really just hanging out for non-farm payrolls really it's very quiet yeah that's right i think it's going to be a you know pretty quiet um run into the end of the week and then as you as you said you know people's um attention will be back on the screens when those payrolls numbers get delivered uh Friday night out on the outline might be if something happens with joe biden so there was a uh a report that maybe he was going to pull out of the race for the white house there was a wall street general poll that says that donald trump now has a six-point lead over over the president whereas they were pretty much neck and neck uh biden's approval rating is falling uh trump's is staying about the same there's apparently a meeting here tonight so in a few as time in the us between biden and democratic governors but he has said he's come out publicly and said you know since this article that um he's staying he's not stepping down he's there for the fight he's going to go to the to the very end but you know they always say that don't they that's going to be interesting to see i mean it's not without the outside the realms of possibility that something happens here yeah i think that's right so this is a you know new york times article i think that in reported that you know biden had perhaps reflected to a you know a close confidant um but one of the better word that you know maybe he should consider stepping down and that was very quickly very firmly denied by the white house and the democratic party so um you know i guess we'll see but you know in a world where you feel like um the risks are pretty asymmetric for the democrats at the moment they don't really i think have you would think a whole lot to lose by considering change at the top but uh yeah it feels like a story that probably won't go away anytime i want to know what the market reaction would be to that well i mean perhaps there'd be more of a market reaction if if he keeps on going down in the polls but i love the idea that you talk to a confidant who then got straightaway got on the on the turn to the new york times uh good good talk sally uh we'll catch you again very soon thanks cheers thanks phil and enjoy independence day and i'll be back again tomorrow morning it's going to be very quiet tomorrow morning i suspect but anyway we'll always find something to talk about i'm phil w for now i'll see you then thanks for listening