Main Themes: Expectations of lower US interest rates continued to be the key factor underpinning markets. US share markets closed at new record highs, while bond yields and the US dollar edged lower. The AUD is back above 70 US cents. Markets appeared to shrug off stronger-than-expected US producer inflation data.
Share Markets: Share markets continued to gain on Friday, after Fed chair Powell cemented expectations that the Federal Reserve would lower official interest rates soon. The Dow, S&P500 and the Nasdaq all hit record closing highs. Over the session, the Dow rose 0.9%, the S&P500 rose 0.5% and the Nasdaq lifted 0.6%.
Interest rates: Yields on US treasuries were marginally lower. US 10-year yields edged down 2 basis points to 2.12%. There was little reaction to stronger-than-expected producer inflation data, as markets continue to price in rate cuts by the Federal Reserve.
Foreign Exchange: The US dollar continued to weaken on expectations of easing by the Federal Reserve. The combination of stronger risk appetite and the weaker US dollar was supportive for the AUD. The Australian dollar bounced above 70 cents to trade at 70.2 US cents this morning.
Commodities: Oil prices were little changed. A drop in crude output from the Gulf of Mexico due to weather disruptions was offset by an International Energy Agency (IEA) report that rising US oil output and soft global demand will result in a supply overhang in the next nine months. Gold prices edged higher, supported by expectations of easier monetary policy and the weaker US dollar.
Australia: No major data on Friday to report.
China: Chinese trade data continued to reflect weak momentum in the global economy. The annual pace of exports fell back into decline, down 1.3% in the year to June after a 1.1% annual gain in May. Imports were down 7.3% in the year to June, after a 8.5% annual decline in May. While exports were close to expectations of -1.4%, imports were below the consensus estimate of -7.3%. The weakness of imports adds to evidence that domestic demand is struggling to gain traction.
Japan: Industrial production was revised downwards from 2.3% to 2.0% in the final estimate for May. Falling confidence and the uncertain global environment point to downside risks to the outlook for Japanese manufacturing.
Europe: Industrial production grew 0.9% in May following a 0.4% decline in April. It was the first increase in four months, however it still points to weakness in manufacturing activity in the June quarter. Weak PMI surveys suggest that there remain downside risks to manufacturing activity in the near-term.
New Zealand: The BusinessNZ manufacturing PMI edged up from a 1½-year low of 50.4 in May to 51.3 in June, maintaining just above a level signalling expansion.
United States: Producer price inflation was a bit stronger than expected, at 0.1% in June, and 1.7% in the year (versus expectations of 0.0% in the month and 1.6%). The annual rate however, still edged down from 1.8% in May, and was the weakest in 2½ years. When excluding food and energy, core producer price inflation was steady at an annual rate of 2.3%, also exceeding expectations. Despite the stronger-than-expected result, it points to inflation pressures remaining well contained, and limited impact from tariffs on inflation.
Chicago Federal Reserve President Evans added weight to case for the Federal Reserve to lower official interest rates. Evans indicated that inflation expectations were “anchored a little bit below a level consistent with our two percent objective” and that he would “need a couple of rate cuts… in order to get the inflation outlook up”. Evans tends hold a dovish monetary policy stance, and is currently a voter on the FOMC’s rate setting committee this year.
Today’s key data and events:
NZ Performance Services Index Jun prev 53.6 (8.30am)
NZ Net Migration May prev 4870 (8.45am)
UK Rightmove House Prices Jul prev 0.3% (9.01am)
CH New Home Prices Jun prev 0.71% (11:30am)
CH Industrial Production Jun y/y exp 5.2% prev 5.0% (12pm)
CH Retail Sales Jun y/y exp 8.5% prev 8.6% (12.00pm)
CH GDP Q2 y/y exp 6.2% prev 6.4% (12.00pm)
US NY Empire Manufacturing Jul exp 2.0 prev -8.6 (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