Ahead of the game: 29 July 2024

US indices mixed as ASX 200 ends winning streak

It was a mixed week for US equity indices. While the tech-heavy Nasdaq 100 extended its fall after underwhelming earnings reports from mega-tech names Tesla and Alphabet, the small-cap Russell 2000 managed to post solid gains.

Locally, the ASX 200 snapped its three-week winning streak, falling below 7,900 after the local tech sector followed US tech stocks lower and falls in energy and resource stocks weighed.

• US S&P Composite Purchasing Managers' Index (PMI) increased to 55 in July from 54.8 in June, its strongest growth rate since April 2022
• The advance estimate of US Q2 gross domestic product (GDP) accelerated to 2.8% (consensus 2.0%) from 1.4% in the prior quarter
• US durable goods orders ex transport increased by 0.5% in June from -0.1% prior
• The Euro Area composite PMI for July fell to 50.1 from 50.9 prior
• The UK composite flash PMI for July rose to 52.7 from 52.3 prior
• In China, the People's Bank of China (PBOC) unexpectedly cut its primary policy rate (7-Day OMO) by 10 basis points (bps) to 1.7%, the first such cut in a year
• Crude oil fell -0.46% this week to $78.28 per barrel, paring larger losses after a stronger-than-expected US Q2 GDP release
• Gold dropped 1.50% this week to $2,365 as its pullback from the previous week's $2,483 record high deepened
• Wall Street's gauge of fear, the Volatility Index (VIX), surged to 18.47 from 16.51 prior.

• NZ: Building Permits (Tuesday, 30 July at 11.30am AEST)
• NZ: ANZ Business Confidence (Wednesday, 31 July at 11.00am AEST)
• AU: Q2 CPI (Wednesday, 31 July at 11.30am AEST)
• AU: Retail Sales (Wednesday, 31 July at 11.30am AEST)

• CN: NBS Manufacturing PMI (Wednesday, 31 July at 11.30am AEST)
• JP: BoJ Interest Rate Decision (Wednesday, 31 July AEST)
• CN: Caixin Manufacturing PMI (Thursday, 1 August at 11.45am AEST)

• US: JOLTS Job Openings (Wednesday, 31 July at 12.00am AEST)
• US: CB Consumer Confidence (Wednesday, 31 July at 12.00am AEST)
• US: ADP Employment (Wednesday, 31 July at 10.15pm AEST)
• US: Employment Cost Index (Wednesday, 31 July at 10.30pm AEST)
• US: FOMC Meeting (Thursday, 1 August at 4.00am AEST)
• US: ISM Manufacturing PMI (Friday, 2 August at 12.00am AEST)
• US: Non-Farm Payrolls (Friday, 2 August at 10.30pm AEST)

• EU: Q2 GDP (Tuesday, 30 July at 7.00pm AEST)
• EU: CPI (Wednesday, 31 July at 7.00pm AEST)
• UK: BoE Interest Rate Decision (Thursday, 1 August at 9.00pm AEST)

• AU

Q2 CPI

Wednesday, 31 July at 11.30am AEST

In the first quarter (Q1), headline inflation rose by 1% for an annual rate of 3.6% year-on-year (YoY), down from 4.1% in the prior period but above the 3.4% expected. The Reserve Bank of Australia’s (RBA) preferred measure of inflation, trimmed mean inflation, rose by 1% quarter-on-quarter (QoQ), which saw the annual measure of trimmed mean increase by 4.0% YoY, the softest rise in two years but still well outside the RBA's target of 2-3%.

Michelle Marquardt, Australian Bureau of Statistics (ABS) Head of Prices Statistics, said, "Annually, the consumer price index (CPI) rose 3.6 per cent to the March 2024 quarter. While prices continued to rise for most goods and services, annual CPI inflation was down from 4.1 per cent last quarter and has fallen from the peak of 7.8 per cent in December 2022."

The preliminary expectation for the second quarter (Q2) is for headline inflation to rise by 1% QoQ for an annual rate of 3.8%. The trimmed mean is expected to rise by 1% QoQ, which would see the annual rate of trimmed mean inflation remain at 4.0% YoY.

The Australian interest rate market is pricing in a 4 bp (16%) chance of a 25 bp RBA rate hike in August. If the trimmed mean prints at 1.2% or higher next week, it will increase the chances of another RBA rate hike before year-end. Otherwise, the RBA is expected to stay on hold at 4.35%.

AU trimmed mean annual inflation chart

• JP

Bank of Japan interest rate decision

Wednesday, 31 July AEST

At its previous meeting in June, the Bank of Japan (BoJ) kept short-term rates unchanged in a range of 0-0.1% for the second straight meeting, following a first rate hike in 17 years in March of this year.

The BoJ said it would outline a detailed bond tapering plan at the upcoming meeting. Earlier surveys suggest market participants expect a reduction in monthly government bond purchases from six trillion yen to around three or four trillion yen.

Moreover, speculation is rising that the BoJ might also raise rates next week. The Japanese interest rate market now prices in a 67% chance that the BoJ will raise rates by 10 bps. Nonetheless, whether the next rate rise comes next week or in September or October remains the subject of hot debate.

JP interest rate chart

• US

FOMC meeting

Thursday,1 August at 4.00am AEST

At the June Federal Open Market Committee (FOMC) meeting, the Fed Funds rate remained unchanged at 5.25%-5.50%. The 2024 median dot provided a hawkish surprise, as it was revised up from the March projections to reflect just 25 bps of cuts in 2024 vs. 75 bp previously.

The July FOMC meeting is expected to see the Fed maintain a dovish tone and keep rates unchanged at 5.25%-5.50%. This would be in line with dovish comments from Fed Chair Powell, stemming from cooler inflation data since June. It may signal that a first rate cut is imminent. The US interest rates market is fully priced for a 25 bp rate cut in September, with 66 bps of rate cuts priced before year-end.

US Fed funds rate chart

• UK

BoE interest rate decision

Thursday,1 August at 9.00pm AEST

In June, the Bank of England (BoE) kept rates on hold at 5.25% with a 7-2 vote as Ramsden and Dhingra once again dissented in favour of a 25 bp cut. The forward guidance was mostly unchanged, reiterating that "monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably". It should be noted that the wording of the minutes had a dovish tilt. The policy decision at this meeting was finely balanced as recent upside surprises in services price inflation did not alter the disinflation trajectory.

While softer labour market data support the rates market pricing in 12.5 bp (50%) of a 25 bp rate hike at its meeting next week, sticky inflation suggests that rates need to stay higher for longer. However, the case for a rate cut is building and is expected to be a line-ball decision.

BoE official bank rate chart

• US

Non-farm payrolls

Friday, 2 August at 10.30pm AEST

In June, the US economy added 206,000 jobs, in line with expectations. However, May and June's numbers were revised lower by a combined 111,000 jobs. Providing further evidence of cooling, the unemployment rate increased to 4.1% from 4%, despite an increase in the participation rate to 62.6% from 62.5%. Lastly, average hourly earnings increased by 3.9% YoY in June, the lowest since June 2021.

In the lead-up to next week's non-farm payrolls (NFP) report, initial jobless claims recently hit a 10-month high of 244,000, adding evidence to a cooling in the labour market. For July, the preliminary expectation is for the US economy to add 185,000 jobs and for the unemployment rate to remain stable at 4.1%. The participation rate is expected to rebound to 62.6%, and average hourly earnings are expected to remain at 3.9% YoY.

US unemployment rate chart

• US

Q2 2024 earnings

The US Q2 2024 earnings season continues, with a big week of earnings reports scheduled from companies including tech giants Microsoft previewed here, Meta previewed here, and Apple previewed here.

US earnings dates chart