Main Themes: Developments on trade policy continued to be of focus. Last night, there was a positive turn in sentiment on a report from a German newspaper which suggested at a thawing in tensions between Europe and the US. There was also positive data from Europe, and minimal reaction to the Fed’s FOMC minutes.
Share Markets: Share markets in Europe and the US were higher boosted by a report that said US would drop the tariff threat on EU cars if the EU lifted duties on US cars. In Europe, shares rose 0.9%. In the US, the Dow lifted 0.8% and the S&P500 rose 0.9%.
Interest Rates: Yields on US treasuries initially lifted amid an improvement in risk appetite, but yields then fell as the session wore on after weaker-than-expected US jobs data. There appeared to be little reaction to the FOMC minutes. US 10-year yields were unchanged at 2.83%.
Foreign Exchange: The US dollar index fell as the euro rose. The euro was boosted by positive German factory data. The Australian dollar improved marginally on the weaker US dollar, probing above 74 US cents temporarily before settling at 73.9 US cents this morning.
Commodities: Oil prices slipped on a rise in crude stockpiles.
Australia: The RBA Head of Economics spoke on the outlook for the housing market and was mostly upbeat despite recent weakness in housing conditions. Heath noted that demand for housing was to remain strong because population growth was to stay strong. The RBA was however, paying “close attention” to house prices given the effect on household wealth.
Europe: German factory orders jumped 2.6% in May, rebounding from a revised 1.6% decline in April. It was the strongest increase in five months, and provides a positive signal that Europe could be emerging from a slump earlier in the year.
United Kingdom: Bank of England (BoE) Governor Carney boosted expectations that interest rates will rise soon after expressing confidence that weakness in the UK economy earlier in the year was due to weather and that cost pressures were continuing to build. An 81.9% chance of a rate hike is priced in to financial markets for August.
United States: The minutes of the FOMC board meeting was mostly optimistic on developments in the US economy, and in particular the labour market. It continued to suggest that the Federal Reserve was on track to gradually increase interest rates. There was a mention of the risks from recent trade tensions and concern that it would have “negative effects on business sentiment and business spending.” There was also discussion on the flattening of the yield curve and that it would be monitored closely given that an inverted yield curve indicated an increased risk of recession in the US. That said, most participants highlighted factors that “might temper the reliability of the slope of the yield curve as an indicator of future economic activity”.
The ADP job report saw private payrolls increase 177k in June, following a 189k increase in the previous month. June’s increase was less than the market estimate of 190k.
Another jobs indicator, initial jobless claims lifted from 22k to 231k for the week ending June 30. Both seem to suggest some slowing in job growth, but still suggesting strong conditions in the labour market.
The ISM non-manufacturing index rose from 58.6 in May to 59.1 in June, suggesting ongoing strength in the services sector. It comes despite recent concerns with regards to trade.
Today’s key data and events
AU AiG Perf. of Construction Jun prev 54.0 (8:30am)
JN Household Spending May y/y prev -1.3% (9:30am)
JN Labour Cash Earnings May y/y prev 0.6% (10am)
UK Halifax House Prices Jun exp 0.2% prev 1.5% (5:30pm)
US Trade May exp -$43.7bn prev -$46.2bn (10:30pm)
US Non Farm Payrolls Jun exp 195k prev 223k (10:30pm)
US Unemploy. Rate Jun exp 3.8% prev 3.8% (10:30pm)
US Avg Hourly Earnings Jun exp 0.3% prev 0.3% (10:30pm)
Times are AEST. All data forecasts are m/m or q/q and seasonally adjusted unless otherwise specified. Forecasts for Australian data are our forecasts and for other countries they are consensus forecasts.
Janu Chan, Senior Economist