Main Themes: Financial markets were fairly well contained overnight. Investors are looking ahead to the key event this week – Federal Reserve Chair Powell’s testimony to Congress. This testimony should provide clues to the outlook for US monetary policy.
Share Markets: US share markets were lower overnight, as investors continue to fret that the US Federal Reserve might not lower the federal funds rate when it meets this month. These concerns stem from the strength of the jobs report on Friday. Investors are also bracing for a slew of speeches and remarks from Federal Reserve officials later today. Moreover, Federal Reserve Chair Powell testifies to Congress later this week.
The Dow Jones closed down 116 points (or -0.4%) and the S&P 500 index eased 15 points (or -0.5%). Apple fell more than 2% after another downgrade by a broker.
Interest Rates: US bond yields rose slightly across the US yield curve overnight. US 2-year bond yields rose by 2 basis points and US 10-year bond yields lifted by 3 basis points. Investors are looking ahead to testimony by Federal Reserve Chair Jerome Powell's before Congress later in the week for clues on monetary policy.
Friday’s jobs report revealed a sharp rebound in US jobs growth in June, which cut market expectations that the Fed will cut interest rates by 50 basis points this month. A week ago, the market forecast an 80% chance of a 25-basis-point cut and a 20% chance of a 50-basis-point cut. These probabilities are now around 92% and 8%, respectively.\
Australian 3-year government bond yields ranged between 0.92% and 0.94% and Australian 10-year yields ranged between 1.32% and 1.35%. Interest-rate markets are pricing only a 15% chance of a rate cut in August from the Reserve Bank.
Foreign Exchange: The US dollar advanced modestly against other major currencies overnight. Moves among the major currencies were contained overnight. The AUD/USD was slightly weaker, moving from an overnight high of around 0.6995 to an overnight low of 0.6967 and is currently trading near 0.6970. Since July 4, the AUD/USD has been pressured lower.
In news among emerging currencies, the Turkish lira lost considerable ground after the Turkish President sacked the central bank governor.
Commodities: World oil prices finished firmer, but down from the session’s highs, after BP Plc diverted a vessel in the Persian Gulf. BP Plc said it feared it might be a target of retaliation after British forces seized an Iranian tanker last week. Saudi Arabia, meanwhile, said it had foiled an attack on a commercial ship in the Red Sea by Iran-backed Houthi rebels.
Australia: Job advertisements rose by 4.6% in June, partially retracing an 8.2% decline in May. On an annual basis, job ads remain in decline, down 9.1% in June, but an improvement from the 14.9% decline in the year to May. As a trend, job ads continue to point to a moderation in employment growth.
Eurozone: The Sentix measure of investor confidence deteriorated to minus 5.8 in July, from minus 3.3 in June. In other data, German industrial production undershot market expectations for May, after a weak report in April. Production rose by 0.3% in May, but on a year ago contracted 3.7%.
European Union (EU) Trade Commissioner Malmstrom stated concern over US-EU trade tensions with respect to EU aid to the aviation sector and mounting risks of tariffs being imposed initially by US and then EU in response to two-way disputes under WTO. The dispute has been running for 14 years and is not a new Trump-related issue.
Japan: Machine orders fell 7.8% in May, which is the first decline in four months. The uncertainty in the global economy is beginning to weigh on capital spending in Japan.
United States:Consumer borrowing expanded at a solid pace for the second straight month, according to the Federal Reserve. Total consumer credit increased $17.1 billion in May, after a gain of $17.5 billion in April. US consumers are one of the remaining bright spots in the US economic outlook, as the outlook for business investment and manufacturing have dimmed. The continued growth in credit is viewed as a positive sign for consumer spending growth in coming months, especially amid ongoing strong jobs growth.
Today’s key data and events:
AU NAB Business Monthly Survey Jun (11:30am)
Business Conditions prev 1
Business Confidence prev 7
US NFIB Small Business Optimism Jun prev 105.0 (8pm)
US Fed. Reserve Chair Gives Opening Remarks (10:45pm)
US Fed Reserve’s Bullard Welcoming Comments (12:10am)
US Fed Reserve’s Bostic Gives Speech (4:20am)
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