Ahead of the Game – July 03, 2023

US equity markets rebounded this week, supported by stronger-than-expected economic data, which eased fears about a looming slowdown.

With two full trading sessions left to go, the Nasdaq is up 4.81% in June and 13.34% for the June quarter, building on a 20.5% gain in the March quarter. The S&P500 is up 4.18% in June and 6.99% for the June quarter. The perennial underachiever, the Dow Jones, is up 3.68% for the month and 2.55% for the quarter.

With just one full session left to go, the local bourse, the ASX200, is up 1.46% in June but flat for the June quarter. Elevated inflation, the prospect of more RBA interest rate hikes and slowing growth remain as headwinds for the ASX200 as the second half of 2023 gets underway.

Next week, the key events will be the RBA’s interest rate meeting, the release of the FOMC meeting minutes from June, and a highly anticipated non-farm payrolls report in the US.

The week that was - highlights

• In Australia, the Monthly CPI indicator eased to 5.6% YoY in May from 6.8% in April.
• Defying expectations of a modest rise of 0.1% MoM, Australian retail sales rose by 0.7% in May.
• Fed Chair Powell said that rate hikes at consecutive meetings are not off the table.
• The Bank of Japan Governor expressed a lack of confidence that the BoJ’s inflation target would be met in 2024.
• ECB President Lagarde reiterated that a rate hike in July is likely. However, beyond that, the ECB is data dependent.
• The AUD/USD fell back to .6600c after the larger-than-expected deceleration in headline inflation.
• The Federal Reserve published the results of its annual bank stress test. All 23 giant banks passed with flying colours. Smaller banks avoid the test entirely.
• Gold fell 0.75% this week to $1905, weighed on by hawkish comments from Fed Chair Powell.
• Bitcoin is on track for a 10.75% gain in June and a second successive quarter of positive returns.
• The measure of fear on Wall Street, the Volatility (VIX) index, rose marginally to 13.55 (+0.89%).

KEY DATES FOR THE WEEK AHEAD

For the week ahead, the key events are:

Australia + NZ

• AU – Building Approvals (Monday, July 03 at 11.30 am)
• AU – RBA interest rate meeting (Tuesday, July 04 at 2.30 pm)
• AU – Trade Balance (Thursday, July 06 at 11.30 am)

China + Japan

• JP - Tankan Index (Monday, July 03 at 9.50 am)
• CH –Caixin Manufacturing PMI (Monday, July 03 at 11.45 am)
• CH –Caixin Services PMI (Wednesday, July 05 at 11.45 am)

US

• US – ISM Manufacturing PMI (Tuesday, July 04 at 12.00 am)
• US – Factory Orders (Thursday, July 06 at 12.00 am)
• US – FOMC Meeting minutes (Thursday, July 06 at 4.00 am)
• US – JOLTS Job Openings (Friday, July 07 at 12.00 am)
• US – ISM Service PMI (Friday, July 07 at 12.00 am)
• US – Non-Farm Payrolls (Friday, July 07 at 10.30 pm)

EU + UK

• GE– Factory Orders (Thursday, July 06 at 4.00 pm)
• EA- Retail Sales (Thursday, July 06 at 7.00 pm)
• GE– Industrial Production (Friday, July 07 at 4.00 pm)

Australia

RBA interest rate meeting preview (Tuesday, July 04 at 2.30 pm)

The Reserve Bank Board of Australia is scheduled to meet next Tuesday, the 4th of July, at 2.30 pm in what is expected to be another line ball decision.

At its meeting in June, the RBA surprised the market by raising the cash rate by 25bp from 3.85% to 4.10%. Choosing to focus on elevated inflation, rising unit labour costs, wages, and poor productivity.

“While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas. Unit labour costs are also rising briskly, with productivity growth remaining subdued.”

At the June meeting, the RBA retained its tightening bias and noted that a further tightening of “monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve."

In June, employment and retail sales data were stronger than expected. However, the monthly CPI indicator missed expectations (5.6% vs the 6.1% exp), and the minutes from the RBA’s recent board meeting were less hawkish than feared.

Given the RBA’s ongoing concerns around inflation, wage growth, subdued productivity and with central banks sounding more hawkish this month, we think the RBA will elect to raise rates by 25bp to 4.35% when it meets next week.

The probability of an RBA rate hike on Tuesday sits at 35% but is almost fully priced for August. Whether the RBA’s next rate hike comes in July or August won’t materially affect the course of markets apart from in the very short term.

Market pricing of the RBA’s terminal peak rate rose stands at ~4.55%, reflecting an expectation of two more rate hikes before year-end, taking the RBA’s official cash rate to 4.60%.

US

FOMC Meeting Minutes (Thursday, July 06 at 4.00 am)

At the meeting, the FOMC maintained the target range for the federal funds rate at 5 to 5.25% after ten consecutive rate hikes. The Feds updated dot plots showed borrowing rates were expected to rise to 5.6% before year-end compared with 5.1% in the previous round of projections.

The economic data since the June meeting has been hotter than expected and will likely see the Fed act on its tightening bias as early as next month by raising the cash rate by 25bp to 5.25-5.50%

US

Non-Farm Payrolls (Friday, July 07 at 10.30 pm)

The June payrolls report is the US data calendar's highlight next week. Over the past year, the US job report has outperformed consensus expectations on 11 out of 12 occasions, with a notable reacceleration viewed over the past two months.

Following last month’s increase of 339k, the market is looking for a 200k increase in June, which would keep the unemployment rate unchanged at 3.7%. The participation rate is expected to remain unchanged at 62.6%. Average hourly earnings are expected to rise by 0.3% m/m, which would see the annual rate fall to 4.2% from 4.3%.

Another set of better-than-expected readings may reinforce hopes of a soft landing but will also pressure the Fed to hike rates further. The rates market is 84% (20.5bp) priced for a 25bp rate hike at the next FOMC meeting. Market pricing of the terminal Fed rate is ~5.40%, reflecting a 50% probability of a second rate hike before year-end.