NAB Morning Call

Fed holds, BoJ lifts, BoE set to cut. Shares go crazy.

Thursday 1st August 2024

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It’s been a busy session, with US shares shooting higher as the Fe keeps rates on hold but the market reading the fed’s commentary of a September cut even more likely. During the press conference Jerome Powell basically said it was on the table if things carried on as they are. NAB’s Taylor Nugent talks through the latest from the Fed, and suggests that yesterday’s softer than expected CPI print for Australia puts paid to any further talk of rate rises. But it’s also not good enough to bring forward cuts. The Bank of Japan did lift rates by 15bp, pushing yields up and a 2 percent rise in the Yen. Today the Bank of England meets. Will they really cut rates head of the Fed? And Meta reported strong earnings after the close, helping bolster after-hours trade.

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Duration:: 18m
Broadcast on:: 31 Jul 2024
Audio Format:: mp3

So the Fed has kept rates on hold, but the Bank of England, interestingly, could well be cutting before them. We'll find out later today and we'll probably find out about the Fed in September, certainly the markets seem to think so. And Jerome Powell did seem to say it could happen if things just carry on the way they are. Also, Aussie CPI. Can we now stop talking about the potential for a rate rise from the RBA, and oil pushing higher as we wait to see what happens next in the Middle East. It's Thursday. It's the 1st of August, 2024. It's the morning call from NAMB. Good morning. And on top of all of that as well, it's a big day for earnings. Meta, eBay, Qualcomm and a bunch of others reporting after the close before the open. In the United States, ADP beat the market on Q4 revenue, earnings per share was forecast at 2.06. They came in at 2.09, interestingly, though, their share price is up, but only 1.75% today, which is well below the overall move in the market because the NASDAQ closed up 2.6%. The S&P gained 1.6% a quarter percent for the Dow. They did pay back a little in the last day of trade. The Russell 2000 closed up half a percent as well, strong in Europe too. The Eurostox 50 was up 0.7% at close, 1.1% for the FTSE 100, and with all the Middle East news this morning, no surprise, perhaps that oil has shot a lot higher as well today. WTI is up 4.4%, Brent up 2.7%, Brent almost back to 81, a barrel, and Bondiels getting lower. Another 8 basis points off 10-year Trezis, 5 of those since the Fed announcement this morning down to 4.06%, down 7 basis points for 10-year guilt yields in the UK, now 3 basis points below 4%, and down 4 basis points for 10 years in Germany, France, Holland, even bigger moves for much of the rest of Europe. Japan, as you might expect, they're going the other way, so they're 10-year yields up 5 basis points, and Aussie 10-year yields down 16 basis points yesterday, a 4.11% down another 4 basis points overnight as well on futures. So you want more big moves? Well, the Canadian dollar is down half percent on the DXY, the biggest move has been the Yen, it's up 2%. The Canadian dollar is up 0.3%, the Swiss dollar up 0.5%, basically, was the Aussie dollar is up, but only just 0.1% to 65.4 US cents, so it's a busy one today. Nabs Taylor Newton is with us to guide us through it all. First of all, let's look at the Fed on hold, but it seems, if anything, a September cut is looking more likely, is that how the market's seeing it? Yeah, so the Fed on hold does, as universally expected, the initial post-meeting statement at stop short of teeing up fairly explicitly at a September cut, there were fairly modest changes, but certainly all consistent with the Fed getting closer to the conditions to move. Well, he was asked, wasn't he, Jerome Powell was asked during the press conference, what would it take to cut in September? And he basically said no surprises, he said the inflation move down in line with expectations, if growth was reasonably strong and the labor market was consistent with our current conditions, then he said a rate cut could be on the table. So in other words, he's saying, if we don't get any surprises, is it going to happen, wasn't he? Yeah, so the messaging was very clear, still making more progress in that post-meeting statement. The most noticeable change was they removed the phrase that the committee remains highly attentive to inflation risks that was replaced by the committee's attentive to the risks on both sides of the dual mandate. So just kind of confirming that shift in communication I've seen, where they're more worried about labor market deterioration, they've seen progress on inflation. And so stopping short in the statement of explicitly teeing up September, did say yields a little bit higher, but that's more than reversed through Powell's commentary, which as you say, again, KG not willing to commit to anything in advance, but he said we've made no decisions about future meetings, and then includes the September meeting. But he also pointed out that the reduction in the policy rate could be on the meeting as soon as September. So that was enough for markets to grow more comfortable, and of course, markets were already fully priced for September going into this meeting. But they are much more focused on jobs. So this point about being concerned about the risk on both sides of their dual mandate. So that means, and in fact, during the press conference, he said the labor market was now not seen as a source of inflationary pressure. So that would mean then a cooling in the labor market, an unexpected cooling in the labor market is going to be just as important as seeing inflation coming down, which is very different to the language that we saw earlier in the year. Yeah, that's right. You know, we've seen the reason inflation data come in reasonably benign, as long as that doesn't look like it's re-accelerating, and certainly nothing in the data backdrop is given the much reason to be concerned that it would be re-accelerating, then the labor market is front and center. Powell said in the press conference that the downside risks to the employment mandate are real now, talked about the labor market again being in better balance. And you know, we got in the data flow ahead of the FOMC meeting as well. We got that employment cost index for the second quarter. And that was helpful. Once again, showed why the Fed is now looking and sees things as more balance, that kind of confirmed that slowdown in wages growth. That was a bit stronger in the first quarter. Once again, the second quarter just kind of confirmed that was a blip. That was up 0.9 percent quarter on quarter, touched below expectations for 1 percent. And it was driven by the kind of base wages and salaries components. So, you know, that was also up 0.9 percent quarter on quarter. It's the smallest rise in three years. So all suggesting that the labor market isn't generating the types of wages growth that would make the Fed concerned about re-acceleration. Right. But it's interesting, isn't that a question that was put through them during the press conference with non-farm payrolls on Friday? If that shows weakness, I mean, would they be wishing that they'd actually cut today? Could the Fed be behind the curve? One of the questions that was asked, if we find that, you know, the job market is slowing more than they'd expected, and they, you know, look back and say, "Gosh, we should have gone then." Yeah. Certainly, you know, markets are toying with the Fed needing to, you know, the risk that the Fed needs to come to the party and deliver a quick sequence of cuts in market pricing. You know, I think it's still fair to say that, you know, the summary of power of the discussion was that they're, you know, they're getting closer, but they're not quite there yet. They need to see a little bit more data. But, you know, as you say, with the risks, there are risks in kind of both directions, and certainly when we think about the most recent dot plots, which only had one cut in the median dot for this year, I think, you know, the commentary here has moved on from that. I think kind of the next test, as you say, payrolls on Friday, and then we've got a July CPI number out in mid-August ahead of the Jackson Hole Conference in late August. So that's kind of the next step where, if they do want to tee up it, a September cut more explicitly and, you know, potentially frame the cadence of cuts to come, then Jackson Hole is the place to do it. And the next bit of data we get as well, not quite as influential, but the ISM manufacturing number is out today as well for the United States. But let's look at the other big news, CPI for Australia yesterday. So the headline rate, year on year for Q2, was up from 3.6% to 3.8%, but the good news was, was the trim mean, wasn't it? There was down Q1Q. Yeah. Yeah, that's right. So, you know, the inflation data yesterday, it was obviously, it was obviously key, as, you know, markets were sizing up the risk that the RBA maybe, you know, pushed kicking and screaming to, to tighten further. It all said and done. I think we can say on, on balance, the detail and the data suggests that, you know, some of that residual high-risk that was there is, has, has effectively been, been removed. And so the RBA is, is likely on, on hold, you know, in terms of- Interesting. And we've gone from talking about the potential for a rate rise to now saying, well, how fast are the cuts going to come? I mean, surely, you know, there's the, there's a middle scenario, isn't there? Which is, again, the, you know, holds the longer. Yeah. And you know, that, that has been, that has been knabs view that the RBA wouldn't be pushed to hike. There might be, you know, certainly some residual strength in inflation, but not enough to, to, you know, cause them to move up their longer term forecast, not enough for them to abandon their assessment that we are making gradual progress, but that it would still be some time before the conditions for, for a cut are, are in place. And so, you know, while some of that, you know, near-term risk that they might tighten further, maybe has reduced, certainly we're not reading in this data that the conditions for a cut are in place in any, anytime soon, in terms of what we saw in the data headline inflation in line with expectations at 1% quarter on quarter and, and moving up on that year ended rate, as you say, kind of some, you know, fruit and veg prices, travel prices, especially were, were big contributors there. The good news relative to expectations was that trimming number, it came in at 0.8% quarter on quarter, our and consensus expectations were for 1%. So, you know, certainly optically a very good surprise, you know, temper that a little bit. It was 0.84. We got some upward revisions to the previous quarter. So, you know, on a year ended basis, underlying inflation was 3.9%, again, a little bit better than feared, but still a tenth higher than the RBA was forecasting in May, three cents higher than they were forecasting as recently as February. And so, you know, this data, you know, it's good news relative to, to expectations going into the data, but it isn't, it isn't necessarily saying where we're out of the woods. Encouragingly there, and this was, you know, largely as expected, so while that underlying measure was a little bit better than we'd penciled in, some of the themes on, you know, this persistence and stubbornness in inflation that we've seen through the first half of this year, it's not being driven by, you know, this neat sticky services, domestic driven inflation proving persistent story. There were evidence, there is some evidence of a progress through those parts of the basket that the RBA is looking at for signs that domestic demands that prices subject to that domestic cost base and influenced by domestic cost pressures. It does seem to be a little bit of progress there, certainly not enough to say, should be cutting soon, but certainly enough to keep the RBA thinking that they're heading in the right direction. Well, that was reflected to be in retail sales yesterday as well, wasn't it? Because, I mean, they were a bit highly expected for June, up 0.5%, but volumes for the quarter were down, and the chunk of the growth is down to end of season sales. So people are shopping, but only, but, but anyway, again, a bargain. So that's a sign. Yeah. And once again, in retail sales, another month of reasonably healthy, healthy nominal growth, but nothing to change that overall story on a quarter-on-quarter basis that volumes down a little bit in the quarter. And that's really no surprise. Growth has been weak in Australia through the first half of this year. I think what's interesting now, looking forward, is we know that the worst of that pressure on real household incomes and the, you know, the pressure on households from, you know, taxes moving higher, higher interest rates, high inflation outpacing wages growth, those pressures are largely in the past, things should be improving a little bit from here. And so while we don't expect growth to, you know, rocket hire back to train, we're expected to remain somewhat subdued. We do think that kind of that worst of the growth picture is behind us. And so, you know, that speaks to that point I was making before, where, you know, it looks like we're slowly heading in the right direction on inflation, a little bit better than feared. But when you're looking at an outlook for growth, the trough in growth to be, you know, probably in the rear view mirror and some potential for a nascent pick-up coming through now, that means an RBA that isn't likely to be in a position to cut quickly. Right. Okay. Meanwhile, going the other way, the Bank of Japan, as we talked about yesterday, the surprise, 15 basis point, well, not a surprise because we told you, but it happened, 15 basis point rise in rates, now at a quarter percent, which the highest has been since the end of 2008. So 16 years ago, and what's it done to the end? Well, it's shot up today. Yeah. Yeah. So a bit of a reaction in the end. As you say, it was, you know, a bit of a will they won't they heading into this decision from the BOG and, you know, in the event they did take the opportunity to increase the policy rate to around 0.25%. And they've also kind of confirmed that they will slow the pace of bond purchases as well. So the plans there for that to be scaled back from the 6 trillion, yeah, and monthly pace to about 3 trillion by early 2026. So having that pace over the next couple of years, and then, you know, the BOG did move the policy rate higher, interestingly there, when we think about, you know, the path forward, it looks to be much more of, you know, taking the opportunity to normalize policy rates from extremely low levels while the conditions allow rather than kind of, you know, seeing a nascent inflation problem that they need to get ahead of that kind of two year ahead forecast for, for course, CPI was actually stable at 1.9%. But, you know, who later did say that, you know, the plan is to continue raising the policy rate and adjusting the degree of accommodation if the economic conditions and inflation move in line with their forecast. So there is that potential for a little bit more normalization to come. How quickly, you know, one other comment that I think is worth pointing out is that, you know, he did say that if they're raising the rate again, they'll need to mow the impact of the previous hike. And so that, you know, suggests that it's probably October with the next set of forecasts update and a little bit of time to see the reaction. They're just kind of the earliest time you might expect something else, but certainly not suggesting the start of a rapid tightening cycle. We're into four-word answers now. Well, we want to talk a bit about the Bank of England, obviously, but just a few other quick ones. So European inflation, not too bad considering the German numbers that we saw a day ago. So the core rate stuck at 2.9%, we're still too high, of course, and we've got it rising in Italy as well as Germany in the numbers we got yesterday. And Germany's unemployment as well stuck at 6%. So it's, you know, Europe's really going nowhere. Yeah. A couple of over and under is at the country level and a tenth higher on European CPI, but, you know, I don't think there's too much there to kind of meaningful shift things for the ACP. And weakness in the Canadian dollar, presumably that is a bit to do with their GDP, which fell from 0.2% month on month to 0.1% growth, but month on month there, you know, it's been a bit volatile over the last 12 months. And oil prices up today, no surprise there, that is because markets now are paying attention to what's happening in the Middle East with Israel killing the Hamas leader and the Hezbollah senior commander during strikes on Beirut and Tehran. This obviously signals the potential for a major escalation and probably throws out the chance of a ceasefire for Gaza in any time soon as well. So oil reacting to that. China's PMIs were out yesterday too, no surprise. The manufacturing PMI marginally higher than expected, but still below 50. Non-manufacturing has weakened a little, but no more than expected. So still slow growth in China, isn't it? And that's no doubt going to be confirmed with the catering manufacturing PMI today. Yeah, that's right. So, you know, not too different from expectations, as you say, but certainly suggesting that there is not much momentum in growth heading into Q3, we saw kind of the construction PMI notably around its lowest in a year. So maybe some of that offset that infrastructure had been providing to soggy housing construction is starting to fade, you know, all in all, suggesting that domestic demand is soft as we know. And you know, it's really up now for the noises around follow through from some of this fiscal stimulus that we've heard out of the Politburo meeting. It's now about, you know, seeing that, seeing the follow through from that to support growth. Yeah, if it happens. Yeah, exactly. And the final Lesson Peak Global PMI is today, only interesting if they are revised in any direction, but look, the Bank of England is the next central bank 50/50 chance of a cut. We've been saying, but looking at the falling guilt yields, I wonder if the chances have moved up a little on that considering, you know, it's going to be interesting if they do move before the Fed, isn't it? Yeah, certainly, analyst expectations put a bit more chance of a cut today than market pricing has been putting in, as you say, market pricing has been hovering around a 50/50 bet. Certainly, you know, Gavin has been on this for a while, that August is probably about right for the Bank of England to cut, that's been kind of the no-view for quite some time, and that's our expectation going in. But, you know, it will be interesting, there's kind of plenty of things in the data backdrop for the, you know, the hawks to point to delay a little bit further if they want to with services inflation and things proving a bit stubborn. But, you know, our expectation going in is that, you know, it's probably more likely than not, they will get over the line for a cut today. Look, one more thing, just to throw in at the end, a piece in Bloomberg this morning, a poll showing that Kamala Harris has gained a great deal of extra support. So, of the swing states, Harris has got an 11 percentage point lead over Trump in Michigan, a two-point lead now in Nevada, Arizona, and Wisconsin. Trump leads in Pennsylvania and North Carolina, and a neck-and-neck in Georgia, so the editorial around this from Bloomberg is that they stand a chance. So it's not a done deal as far as Trump is concerned at the moment, so we'll see, you know, watch that with interest. But, look, I think that is the maximum information we can squeeze into one edition, so we've done it. Well done, Taylor. We'll catch you soon. Thanks, Phil. Except to say, of course, we haven't quite finished the meta earnings. We can tell you they hit 39.7 billion beating in the last quarter, beating there 38.3 billion expected, so that's an EPS of 5.16 against 4.74 expected. That's been good for the share price, which, you know, after hours traded up over 4%. The only downside is they are a warning of significant capital expenditure growth in 2025. But overall, good result for meta, and so share prices keep going up. That's it for today. That's the Morning Call from NAB. I'm Phil Dobby. Thanks for listening. (upbeat music) [MUSIC PLAYING]