Main Themes: US-Chinese trade tensions took a backseat overnight, helping equities and bond yields to move higher.
Share Markets: US share markets rebounded overnight. The Dow Jones lifted by 224 points (or 0.9%) and the S&P 500 index jumped 24 points (or 0.9%).
Interest Rates: US 10-year treasury yields initially rose from 2.85% to 2.87%, but retraced after the release of consumer prices data in the US CPI data. Similarly, US 2-year yields rose from 2.58% to 2.60% - the highest since 2008 – before retracing. Fed fund futures yields continued to price 1½ more rate hikes in 2018.
Foreign Exchange: The US dollar index is up modestly on the day. One of the best performing currencies overnight was the Australian dollar. Against the USD, the AUD rose from near 0.7360 to an overnight high of 0.7420. Worries about trade wars in the global arena will keep any rally in the AUD capped.
Commodities: Crude oil prices rebounded overnight. In an alert, the International Energy Agency said the world’s spare production capacity may be stretched to its limit as OPEC and Russia strain to cover output falls in Venezuela and Iran.
Australia: Consumer inflation expectations rose by 3.9% in July, after a 4.2% gain in June.
Europe: Industrial production rose by 1.3% in May, after a fall of 0.8% in April. The increase in May was broad based.
United Kingdom: The RICS house price balance stood at plus 2 in June versus minus 2 in May.
UK’s Prime Minister May released a 98-page white paper overnight setting out in detail the trading partnership the UK wants with the European Union. This document comes in the wake of the resignation of two pro-Brexit Cabinet ministers a growing discord within her party.
United States: Consumer prices rose by 0.1% in June, which is less than markets expected. Consumer prices on an annual basis lifted to 2.9% in June, from 2.8% in May. It is the fastest annual pace since early 2012. Core consumer prices matched market expectations, rising 0.2% in the month to be up 2.3% on a year ago (from 2.2% previously). Steep price declines in a couple categories – electricity and hotel lodging - accounted for most of the subdued June reading. Going forward, a tightening labour market, firm energy prices and tariffs point to building inflation pressures.
Federal Reserve Chairman Jerome Powell said overnight a strong US economy should allow the central bank to keep raising interest rates gradually and it was premature to judge how recent trade policy actions could alter those plans.
The Fed’s mandate from Congress is to maximise sustainable employment and ensure prices are stable, which the central bank defines as meeting a 2% inflation target. Powell remarked that the Fed is close to the target but he would not say it has been fully achieved yet.
Other Federal Reserve speakers overnight included Harker and Mester. Both suggested two more rate hikes this year is possible.
Today’s key data and events
NZ BusinessNZ Mfg PMI Jun prev 54.5 (8:30am)
CH Trade Bal. Jun exp US$27.7bn prev US$24.9bn (~)
JN Industrial Prod’n May Final prev -0.2% (2:30pm)
US Import Prices Jun exp 0.1% prev 0.6% (10:30pm)
US Export Prices Jun exp 0.2% prev 0.6% (10:30pm)
US UoM Cons. Sent. Jul P exp 98.0 prev 98.2 (12am)
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.
Besa Deda, Chief Economist