David Bassanese
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Due to travel commitments, this is an abbreviated edition of Bites without charts.
Global week in review
Global equity markets inched ahead last week, with the S&P 500 rising 0.3% to a new record high. After initially rising on public debt concerns, US bond yields eventually fell as more evidence emerged of a slowing in the US labour market. US 10-year bond yields fell 0.15% to 4.08%, with markets now not only sure the Fed will cut rates by 0.25% this month but also attaching a 10% probability of a 0.5% rate cut.
Last week began with tremors in global bond markets, as a sudden apparent upsurge in investors’ concerns with the public debt outlook – and maybe the independence of the US Federal Reserve – led to higher bond yields and associated weakness in equity markets. Political instability in France, which also has a worrying budget deficit, added to the bond market gyrations.
All these concerns were quickly forgotten as the week progressed, however, with growing evidence of a weakening in the US labour market. Job openings and then private ADP payrolls both came in weaker than expected, with the icing on the cake being Friday’s official payrolls data, which revealed a modest 22k employment gain in August (markets were expecting +75k). Revised data also showed employment actually fell by 13k in June although it bounced back 79k in July. Despite the weak employment growth, the unemployment rate only edged slightly higher to 4.3% from 4.2% – reflecting weaker growth in labour supply.
All up, it seems increasingly clear that the tariff mayhem over recent months has now led to a freeze on hiring plans by many US businesses. A slowdown in immigration is adding to the drop off in jobs growth. At the same time, persistently firm inflation is eating into household real incomes and slowing consumer spending. All this need not imply a recession, but it is a timely reminder that Trump’s tariff uncertainty and crackdown on illegal immigration is finally having consequences in terms of both demand and supply in the economy.
So far at least, however, Wall Street is taking the evidence of economic weakening as a case of “bad news is good news” – in that it at least means the Fed is even more likely to cut interest rates this month. Markets may also be hoping that the Trump “TACO” trade could come back into play, with the President less likely to keep wielding his tariff stick around if it looks to be hurting the economy.
Global week ahead: US CPI
Pressure on US markets could intensify this week with the release of the August Consumer Price Index on Thursday (US time). Core prices are again expected to rise 0.3%, which would push up the annual rate from 3.1% to 3.2%. The Producer Price Index is released a day earlier and is also expected to rise 0.3%. Firm inflation – and especially any upward surprise – following last week’s news of a slowing labour market could add to market chatter around short-run “stagflation” risks in the US economy.
The European Central Bank also meets on Thursday. With rates already down to 2%, core inflation a little above the 2% target and the economy holding up okay, the ECB seems in little rush to cut rates again anytime soon – although it will likely retain an easing policy bias.
Australian week in review
The key highlight last week was the modestly stronger-than-expected Q2 GDP report. The economy grew 0.6% in the June quarter, helped by a surprisingly solid 0.9% gain in consumer spending. The ABS itself suggested consumer spending could have been boosted by increased tourism “driven by people taking time off from work due to the proximity of the Easter and ANZAC Day public holiday.” As such, some of the welcome strength in consumer spending might just be a seasonal quirk, with potential payback in the September quarter.
Renewed weakness in housing construction and ongoing weakness in business investment was less pleasing. Long strong public demand has moderated this year, with the slack so far only being taken up by a potentially temporary lift in consumer spending.
Either way, the better-than-expected GDP result likely reduced the pressure on the RBA to cut interest rates this month, especially after last week’s strong bounce back in monthly trimmed mean annual inflation from 2.1% to 2.7%. My base case remains the RBA will wait until November to cut rates again and only provided the Q2 CPI shows a further easing in annual trimmed mean inflation from 2.7% to 2.6% or less.
Australian week ahead
There’s only second tier data due out this week with the National Australia Bank business survey tomorrow and the Westpac-Melbourne Institute measure of consumer confidence on Wednesday. Both reports are likely to suggest further modest gains in business and consumer sentiment respectively, given last week’s better than expected GDP report and ongoing hopes of lower interest rates in coming months.
Have a great week!
