NAB Morning Call

What did Powell say to spur on US equity markets?

Wednesday 3rd July 2024

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US shares rallied late in the session, on the back of comments from Jerome Powell. So what did he say? That’s the first question Phil puts to NAB’s Rodrigo Catril on this morning’s podcast. Meanwhile, Europe's inflation barely moved and unemployment is sticking close to where its been for more than a year. There’s fresh concerns about the French election at the weekend too. Today Australia’s retails sales are out along with US Services ISM, which should show further slowing of growth. And the US knocks off early in readiness for the 4th July holiday tomorrow.

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Duration:: 14m
Broadcast on:: 02 Jul 2024
Audio Format:: mp3

Well, a session in two parts. The second part was a lot more confident than the first with shares rallying bond yields pushing higher and what Jerome Powell said had a lot to do with it. So what exactly did he say? We get retail sales for Australia today and it's also worth dipping into the RBA minutes from yesterday. We'll do that. And the US services ISM today. How quickly is growth in the US services sector slowing? And everyone takes an early mark in the United States today as well to get ready for the big day tomorrow. It's Wednesday, July the 3rd, 2024. It's the morning call from now. Good morning. Well, the US dollar is down 0.2 percent. The Aussie is up, but only 0.1 percent to 66.66 US cents. It seems to like it there, that mysterious number. The Canadian dollar is up 0.4 percent. The pound is up a quarter percent. The euro has hardly moved. US equities are higher, 0.8 percent at close for the Nasdaq, 0.6 percent for the S&P, 0.4 percent for the Dow. There are still 2,000 is up 0.2 percent. But in Europe, shares closed down half percent lower for the US stocks 50, 0.6 percent lower for the FTSE 100. But it's only since Europe closed that we've seen US shares rise by quite so much. And bond yields are down. Well, 10-year treasury is the two basis points lower down, three for 10 years in the UK and France. But Canadian yields are up 11 or 12 basis points. Australian 10 years, we're up three basis points yesterday to 4.41 percent, only up a little, about one basis point from that now on futures. An oil is lower, a half percent off WTI, a quarter percent off brand, which is now below 86.40 barrels. So why this surge in stocks in the last few hours of trade? Well, apparently Jerome Powell had something to do with it. And Abzur Jiggo Kecil is with me. So with Jiggo, he used the D word, didn't he? Disinflation. And it's being interpreted by many as sort of concreting in that cut for September. Yeah, morning Phil. So, well, I think Powell sounded quite relaxed and quite happy with how the recent data flow has been playing out in the US, emphasizing that we've seen that progress in terms of inflation, which has been welcome. But then he also emphasized that more of the same is needed in order to feel comfortable. He also stressed that at this stage, the strength of the labor market and the strength of the economy also allows him time to wait and see. So in essence, nothing's changed. But suppose for the market, we got a bit of confirmation of what the recent data has been telling us and reaffirmation in terms of what the market is pricing, so that the market is still pricing close to two rate cuts this year, with the first one in September, looking like a strong possibility if the data continues to print as it has recently. But he spoke before the job openings, didn't he? And you would have thought that would have the opposite impact because that showed a surprisingly high number of job openings. So 8.14 million up from 7.9 million last time. It was expected it would stay around 7.19 million, but it's 8.14 million. So there are more jobs out there for people. Yes, so that was a little uptick in the Joel's report. If you look at the chart of the Joel's report, it's probably important to emphasize that we've seen quite a steady downtrend in that number for quite a lot of months. So this little uptick, if you like, of strength doesn't really change that downtrend that has been well entrenched for now. Also, when you look at some of the details, like, for instance, the vacancies pair and employment worker, that kind of one of the ratios that Powell talked about at the beginning, you know, when it was close to two, that he wanted to see it close to one that held at 1.2. So it's not a huge signal in terms of a change in direction, if you like. But certainly, it is showing that, you know, the progress, if you like, in terms of this labor market tightness is not going to be a smooth path. No, well, the quick rate also increased. I mean, we're only talking 7,000 out of, you know, close to three and a half million. But who quits when the economy is supposedly it's like, yeah, that's right. So what about Europe then? Inflation there isn't slowing year on year. The core rate is still at 2.9%. It was expected to drop a little. It didn't. June is still where maize, in fact, we are talking about trends. We were in March, basically. And so it's as though disinflation stalled in Europe. Yes. So particularly when you look at the core rate in, you look at the rounding numbers, it's basically just about 1/10th higher than what the market was expecting. So if anything, it sort of indicates that the narrative coming from the ECB that although they did cut, you know, in June, they're not going to be in a hurry to cut again, and to the extent that now maybe posed a bit of a challenge for cutting September, unless we start seeing an improvement in the data as well. All right. We've had ECB speakers mostly on panels at Cintra. So some of them were actually introducing panels as well, weren't they? So if they actually given anything away on timing of the cuts, maybe the format didn't allow for that sort of stuff. They didn't. But the general thing there is that, you know, two cuts this year looks about right. You know, we got to remember that even in their forecast, the progress on inflation wasn't significant. So basically we need to wait for the data to make the case for another cut, and at the moment, you know, based on overnight data, we know they're yet. All those pieces of overnight data was unemployment, which is not moving either. It stuck at 6.4%. Actually, it's been around 6.5% by and large since March last year. So, I mean, you wouldn't want it to come down, of course, if your sole focus is bringing inflation down. But I mean, that is definitely stalled, hasn't it? Almost a year at exactly the same rate. Well, more than a year, actually. Well, and if anything, that's sort of the interesting thing in Europe that the European economy has been essentially stagnating, going sideways, if not a little bit backwards, and yet then employment rate is being quite steady and hasn't risen enough. And similarly, when you look at Germany, which has kind of been at the epicenter of that weakness, again, the labor market still being relatively resilient. And I suppose that kind of fits a little bit into those inflationary dynamics that have not yet eased or as expected. Yeah. So what are all those people doing then? If they're employed, but they're not actually producing anything, we're not seeing GDP increasing. What are they doing? They must be sitting around, treading their thumbs, gets back to that productivity question, doesn't it? And also, just to stay in Europe as well, the election, of course, we talked yesterday in France over the weekend, we've got part two of it, and how many candidates opposed to Marine Le Pen's party were pulling out so they didn't dilute the vote against her. So is that working? It sounds like it's not gone far enough from what we're hearing today. Well, yeah. So there's a bit of debate around what is the ideal number of candidates that need to pull out. So depending on what you read, what we know is that around 200 candidates have pulled out from the second round, meaning that it increases the chances of RN not winning those seats. But there's still close to 100 that are still in it. So there's still a three-way sort of bet, if you like, on that 100 number. And many analysts that we follow are suggesting that that implies that the chances of RN winning a majority is not insignificant. So it basically remains finely balanced that the prospects that the RN could have an outright majority or a majority where they just need basically just a couple of independence, if you like, or people to cross the aisle and support them. So to us, it remains finely balanced. And we just need to be wary that whilst the French election risk appears to have eased a little bit, the uncertainty remains elevated to us and come Sunday. We could still see some fireworks at the open on Monday. Right. Well, yeah, the market reaction to all of that. I don't think there'll be much market reaction to the UK election, which is tomorrow, because I think we know who's going to win. Well, maybe there would be. I mean, if the Tory party romped home, then maybe there will be a market reaction to that. That would be a massive surprise. Yeah, there would be a very big, big surprise, wouldn't it? So what's going on with Canada then? Let's have a look at that before we look at what's coming up today. So the Canadian dollar of 0.4%, actually hitting a 30-year Canadian 10-year yields up 11 basis points. What's going on? Well, to some extent, when you look at the chart, some of the weakness seems to be kind of a bit of an exaggeration or a reaction to those PMIs, that kind of flood line. And now we've seen a bit of a correction. Now that the gains in the Canadian dollar have also been lifted by Canadian yields, Canadian yields that have gone up, particularly in the long end of the curve. We've seen the 10-year rate, for instance, climb 10 basis points. Whilst in the US, after Powell's comments, we've seen 10-year yields a couple of basis points lower. So that's kind of reversed, if you like, earlier weakness in the Canadian dollar. And it's kind of put it back to where it should be, if you like, rather than any significant moves. Today, retail sales for Australia kind of flat-eared a shoom, not good for shops, but we wouldn't want it to rise too much because those RBA minutes yesterday suggested there was serious discussion about potential rate rise, wasn't there? Yeah, there was a discussion around that. I'm supposed to make sense that if anything, the discussion would have been on the hike side, rather than on the cut side. But overall, in terms of the theme, if you like, when it comes to retail sales and the consumer, there's a general continuation, if you like, of a pullback in terms of aggregate spending and softness in consumption growth. So we have a slightly lower number for the month, so we expect retail sales to climb 0.2%. And the consensus is 0.3. So nothing is sort of... We're not expecting a collapse, if you like, in terms of consumption, but certainly a little bit of weakness as we all feel the pinch from the community of hikes that we've had in the past years. And the other big number, overseas, the biggest number, is US services ISM. So I should imagine, other than the inflation number itself, and maybe GDP, I mean, this is the key number to watch, isn't it? Because it's expected to slow a little. It's still going to be over 50. But this is the number we don't want to be too hot, because obviously, it pushes, it wages up. It's inflationary if it gets too strong. It is. And if anything, the ISM manufacturing did show weakness, and particularly we saw that softness in prices paid as well. So a similar sort of dynamic coming from the services side would be encouraging in terms of the desired progress on inflation. But certainly, the theme has been that the services sector's economy has been forming way better than the manufacturing sector. And the expectations are, for instance, for prices paid too easily a little bit from still elevated levels. So it was 58.1, and it's still expected to decline to 56.7, I think it is. So overall, that is the one theme. And the other one, of course, is the employment side. And again, the services employment index was quite soft at 47.1 last time. It's expected to improve a little bit to 49, but still remain in contractuary mode. So again, those two themes, a little bit of weakness coming or softness, if you like, coming from the labor market side or the employment side, and also a little bit of an ease in those price pressures will be welcome. The services PMI, didn't that rise? Yeah. So when it comes to those two, the ongoing sort of divergency, if you like, well, not ongoing, but sometimes we see them move together. And now we've seen again that divergence increasing in terms of what the PMI is seeing, and what the ISM is seeing, but overall, the market still puts more weight into the ISM because it's a much bigger, more comprehensive and more established survey compared to the PMI. Well, we get the global PMIs, which have certainly been split across two weeks, haven't they? This is the second part. So we get them from Japan, UK, US, and Europe today. These are the final numbers, though, aren't they? These aren't the flash numbers. Yes, they're the final numbers, and we also get the composite one as well. So as opposed to always that kind of theme of looking for reaffirmation, if you like, that none of the numbers have changed significantly. But certainly, it's also like that divergence that we see in particularly not only in terms of services versus manufacturing, but also within, for instance, Europe, that wingness coming particularly in Germany and France, whether that continues to persist. Well, early tomorrow, the FOMC minutes are out. You might think, well, that's not going to move markets, but then look what Jerome Powell did a few hours ago. We also get initial jobless claims tonight as well, and the ADP employment numbers all ahead of non-farm payrolls on Friday. So it's jobs, jobs, jobs for the rest of this week, really. It is. It is all about lining up to non-farm payrolls on Friday, so that will be important. And if anything, the Joel's report just a reminder that things don't decline on a steady line. So again, a reminder that the risk there is that we get an upward surprise as well in terms of non-farm payrolls on Friday. Well, the US knocks off early today. The stock exchange closes at 1pm in New York, rather than four, their time, ready for July the 4th, which of course is tomorrow, but there we are. That's it for today. Good to talk with drink. I know you've been fighting the manflu, which obviously is devastating. It's the worst dealness that anybody, women, have no idea do they have bad manfluids, so I hope you get over it. They will never know how bad it is. No, I hope you're in some sort of intensive care unit to cope with it. We'll catch you soon. Thank you. Cheers for that. Yeah, I know what the ladies are saying. Childbirth. Yeah, yeah, get that. That's it for today. I'm Phil Dory from Knav. We'll be back again tomorrow morning. Have a great day. See you then.