Ahead of the game: July 31, 2023

A thirteenth consecutive session of gains for the Dow Jones after the Fed, as expected, raised rates by 25bp to 5.25%-5.50%, to the highest level in two decades.

The Fed retained its tightening bias in the accompanying statement and noted its data dependency. However, in the Fed Chairs' press conference, dovish tones suggest the Fed's rate hiking cycle is largely complete.

Locally the ASX 200 surged following Australia’s Q2 2023 inflation report, which saw headline inflation fall to 6.0% YoY from 7% last month. The RBA's preferred measure of core inflation, the Trimmed Mean, fell to 5.9% YoY from 6.6%, below the RBA’s forecast of 6%. The odds of a 25bp at next week's RBA Boards Meeting also fell from 44% to 10%.

Next week, the key events will be interest rate meetings for the Reserve Bank of Australia and the Bank of England. In Europe, we get the latest GDP and inflation figures. It's another big week in the US, with a jobs report, ISM, and Q2 2023 earnings flowing from companies, including Caterpillar, Pfizer, AMD, and Amazon.

• In Australia, headline inflation fell to 6.0% YoY from 7% last month
• The Dow Jones gained for a thirteenth straight session for its best run since 1987
• Following its earnings report, the share price of Microsoft fell. In contrast, investors cheered earnings reports from Meta, Intel, and Google owner Alphabet
• The promise of further policy support from Chinese authorities supported commodity prices, including copper and iron ore
• Crude oil gained 3.8% to close above $80 for the first time in three months
• Gold fell back below $1950 as yields and the US dollar surged following stronger US GDP
• Bitcoin fell 2.71% to $29,000
• The measure of fear on Wall Street, the Volatility (VIX) index, gained 5.96% to 14.4

• AU: Building Approvals (Tuesday, August 1, 11:30 am AEST)
• AU: RBA Interest Rate Decision (Tuesday, August 1, 2:30 pm AEST)
• NZ: Employment Report (Wednesday, August 2, 8:45 am AEST)
• AU: RBA Statement of Monetary Policy (Friday, August 4, 11:30 am AEST)
  

• CN: NBS PMIs (Monday, July 31, 11:30 am AEST)
• CN: Caixin Manufacturing PMI (Tuesday, August 1, 11:45 am AEST)
• JP: BoJ Policy Meeting Minutes (Wednesday, August 2, 9:50 am AEST)
• CN: Caixin Services PMI (Thursday, August 3, 11:45 am AEST)
  

• US: ISM Manufacturing PMI (Wednesday, August 2, 12:00 am AEST)
• US: Jolts Job Openings (Wednesday, August 2, 12:00 am AEST)
• US: ISM Services PMI (Friday, August 4, 12:00 am AEST)
• US: Non-Farm Payrolls (Friday, August 4, 10:30 pm AEST)
  

• EA: GDP Q2 Flash (Monday, July 31, 7:00 pm AEST)
• EA: Inflation (Monday, July 31, 7:00 pm AEST)
• UK: Bank of England Interest Rate meeting (Thursday, August 3, 9:00 pm AEST)
  

• Australia

RBA interest rate decision

Tuesday, August 1 at 2.30 pm AEST

The Reserve Bank Board of Australia is scheduled to meet Tuesday, the 1st of August, at 2.30 pm AEST.

The backdrop

At its Board Meeting in July, the Reserve Bank of Australia kept its official cash rate on hold at 4.10%. The RBA's decision to keep rates on hold was largely expected by the rates market (80% priced). In contrast, about two-thirds of the forecasting community predicted a rate hike.

The RBA's reasons for staying on hold echoed partly why it paused its rate hiking cycle in April - to assess the impact of a cumulative 400bp or rate hikes over the past fourteen months.

RBA cash rate chart

What can be expected?

The RBA meeting minutes for the July Board meeting put the focus firmly on the incoming data head of the RBA's August Board meeting.

"At the August meeting, the Board would have the benefit of additional data on inflation, the global economy, the labour market and household spending, as well as an updated set of staff forecasts and a revised assessment of the risks."

Following downside surprises this week in inflation (6%YoY vs 6.2% expected) and retail sales (-0.8% vs 0.0% expected), we think it will be enough to see the RBA look past a still strong labour market and keeps its cash rate on hold at 4.10% at next week’s board meeting.

• UK

Bank of England Interest Rate meeting

Thursday, August 3 at 9 pm AEST

At its meeting in June, the BoE raised the bank rate by 50bps to 4.50% for its thirteenth consecutive rate increase. The decision to raise rates by a larger-than-expected 50bp was in response to another upside surprise in inflation as headline inflation in May rose by 8.7%, above consensus expectations of 8.4%.

"Twelve-month CPI inflation fell from 10.1% in March to 8.7% in April and remained at that rate in May. This is 0.3 percentage points higher than expected in the May Report. Services CPI inflation rose to 7.4% in May, 0.5 percentage points stronger than expected at the time of the May Report, while core goods price inflation has also been much stronger than projected."

Inflation numbers for June (released two weeks ago) finally provided a downside surprise of 7.9% YoY vs 8.2% expected. Earlier this week, the composite flash PMI fell by 2.1pts to 50.7, below consensus expectations of 52.3. The decline in the Composite index was broad-based across sectors but skewed towards services which fell to 51.5 vs 53 expected.

A 25bp rate hike to 5.25% is fully priced for next week, and there is a non-insignificant chance (30%) of a larger 50bp rate hike priced. The rates market sees the BoE's terminal rate reaching 5.75% before year-end.

Official bank rate chart

• China

NBS PMIs

Monday, 31st July at 11.30 am AEST

China's official PMI readings have been lackluster, with the manufacturing sector falling into contraction territory since April this year. Reopening momentum for its non-manufacturing sector has also been tapering off quickly, coming in below expectations for the past three months.

With China's economic surprise index at its lowest level since May 2020, the expectation is for the manufacturing PMI to stay subdued at 49.2 versus the previous 49.0. This will likely add to the calls for authorities to provide more policy support. While China's leadership has reaffirmed their pledge to support the economy lately, few details have been announced on specific measures.

China PMI chart

• US

Non-farm payrolls

Friday, August 4 at 10.30 pm AEST

At this week's FOMC meeting, Fed Chair Jerome Powell noted that reducing inflation is still likely to require some softening of the labour market. However, he does not foresee a significant downturn resulting in high job losses.

With that, a more lukewarm job figure next week may likely make the case for the Fed to transition into a prolonged rate pause over coming meetings while also providing some validation for the ‘Goldilocks’ economy that many are seeking.

Current expectations are for the US labor market to show further cooling next week, potentially adding 184,000 jobs in July, compared to the previous month’s 209,000. The unemployment rate is expected to be held steady at 3.6%, while wage growth is expected to ease slightly to 0.3% month-on-month compared to 0.4% in June.

Non-farm payrolls chart

• US

US Q2 2023 earnings

The US earnings season will continue with notable releases from Caterpillar, Advanced Micro Devices, Starbucks, Apple, and Amazonin the upcoming week. Amid low expectations, the US earnings season has been better than feared thus far. Out of the 36% of S&P 500 companies that have released results, 79% have beaten earnings estimates, compared to the 10-year average outperformance of 73%.

Refinitiv estimates suggest that expectations remain priced for an end to the ‘earnings recession’ for the S&P 500 in the current reporting season, leaving companies’ forward guidance on close watch for some much-needed validation. Key highlights will revolve around earnings from Apple and Amazon, which have rallied close to 50% year-to-date.

Economics calendar

All times shown in AEST (UTC+10) unless otherwise stated