Market volatility was elevated last week due to the escalation in the Middle East.
A surprisingly strong US labour report then caused a spike in bond yields and the US dollar. Australian retail sales were also boosted by warmer August weather, with the result that fewer rate cuts are now anticipated for the remainder of the year in both the US and Australia.
Chinese shares continued to soar despite the EU approving tariffs on EV imports.
The latest FOMC And RBA minutes and the NAB Business and Westpac Consumer Confidence surveys will be published this week. US CPI figures will be released on Thursday, and the quarterly earnings season begins.
Yields spiked, and the US dollar rose on Friday after an unexpectedly strong US labour report. US stock markets rose on the news, but index performance was mixed over a volatile week due to news from the Middle East.
Israel intensified attacks on Hezbollah, and Iran retaliated with ballistic missiles, with further exchanges still likely. The Brent crude price finished the week +8.4% higher after President Biden said that the US was discussing an appropriate response with the Israelis, including a possible strike on Iranian oil facilities. Illustrating the increase in demand for safe havens, gold only slipped -0.2% against the greenback, despite a +2.1% rise in the US dollar index.
According to the BLS, the September establishment survey indicated that +254k new jobs were added to the American economy, with the prior two months also being revised higher by +72k. The unemployment rate dropped from 4.2% to 4.1%, and the broader underemployment rate fell from 7.9% to 7.7%. The participation rate remained steady at 62.7%.
The payroll additions exceeded the average monthly gain of +203k over the preceding 12 months and even the highest estimate among Wall Street economists of +220k. Seasonal adjustments were likely a factor, as September or October often see an above-trend increase around the start of the new academic year. In this month’s report, more than half of the gains came from Education & Health (+81k) and Leisure & Hospitality (+78k), but other sectors were also less weak than in recent months, lifting the total.
There is room for some scepticism around the magnitude of the gains. But on the whole, the employment data was relatively strong throughout the week. The ADP private payrolls (+143k) were above estimates, and the number of JOLTS job openings rose more than anticipated.
ISM Services survey included a surprisingly sharp increase in new orders (59.4), suggesting that the resurgence in services might be sustained despite a downturn in manufacturing. However, that will need to be confirmed as both the ISM figures and payroll data could quickly change course. The JOLTS hires and quits remain low by pre-pandemic standards, and the Challenger job cut announcements remain elevated compared to last year.
Nevertheless, the data will relieve the Democrats ahead of the November election as voters perceive the party to be weaker than Republicans on economic issues. There will be one more labour report released before the presidential poll, and the Federal Reserve will also see the following report before the November interest rate decision.
On Monday, Fed. Chair Jerome Powell outlined his base case for two more quarter-point cuts before the end of 2024. The market had expected one move to be a larger -0.5% cut, leading to a total of -0.75% in reductions before Christmas. However, market forecasts have moved to match Chair Powell’s base case after the jobs report, resulting in a +22 bps surge in the 2yr Treasury yield on Friday.
This Thursday’s September US Core CPI is expected to have remained at +3.2% yoy, while the headline figure is expected to drop from +2.5% to +2.3%, according to Bloomberg.
The market is also pricing a less-than-even chance of a cut in the Australian overnight cash rate before Christmas after a surprisingly strong retail sales report last week.
August saw retail turnover increase by +0.7%, compared to estimates of a +0.4% rise. ABS head of business statistics, Robert Ewing, said: “Retail spending was boosted this month by warmer-than-usual weather for this time of year. This year was the warmest August on record since 1910, which saw more spending on items typically purchased in spring. This included summer clothing, liquor, outdoor dining, hardware, gardening items, camping goods and outdoor equipment. The lift in turnover from the warmer weather was also boosted by higher discretionary spending as consumers took advantage of Father’s Day sales events during the month”.
Officials in Japan suggested that there might not be any more rate hikes in the near term. After a meeting between the governor of the Bank of Japan and the country’s newly-appointed prime minister, Shigeru Ishiba, who said, “I do not believe that we are in an environment that would require us to raise interest rates further”, Governor Ueda added that he "[…] told the prime minister that we are supporting the economy with loose monetary conditions. But I said we will adjust the degree of monetary support cautiously, as we can afford to spend time scrutinising (economic) developments”.
The MSCI China index rose another +11.5% in US dollars last week. Monday’s official and Caixin PMI figures remained close to 50 as it is likely too soon to see any effects of the government stimulus package.
Last week, the EU decided, as expected, to implement tariffs on a range of Chinese electric vehicles starting in November. According to Bloomberg, “The regulation approved by member states will impose rates of 17% on BYD Co. and 18.8% on Zhejiang Geely Holding Group Co. It will levy 35.3% on SAIC Motor Corp. and also on companies that did not cooperate with the European Commission’s anti-subsidy investigation. As an exporter from China, Tesla Inc. will be subject to a 7.8% tariff. Other companies that cooperated with the European Commission’s anti-subsidy investigation will be subject to a 20.7% rate”.
In company news, the REA Group share price rose +6.6% last week after the company withdrew its proposed takeover of UK platform Rightmove.
Several Australian states will enjoy a public holiday today, and China will be closed for the final day of the national holiday week.
Later this week, besides US CPI data, the latest FOMC and RBA minutes will be released while the RBNZ, RBI and Bank of Korea are all expected to cut interest rates. The NAB Business and Westpac Consumer Confidence surveys are also due out tomorrow before the US earnings season begins with the major financials reporting.
Significant Upcoming Data:
| Monday | Tuesday | Wednesday | Thursday | Friday |
Australia | Labour Day (NSW, SA, Queensland); Melbourne Inst. Infl.
| RBA Minutes; NAB Business Surveys; Westpac Cons. Conf.; ANZ Indeed Job Ads.
|
| Consumer Infl. Exp. |
|
US | Cons. Credit | Trade; NFIB Small Bus. Opt.; Monthly Budget Statement
| FOMC Minutes; WSale Trade & Inventories; MBA Mortgage Apps
| CPI; Real Ave. Earnings; Weekly Jobless Claims
| PPI; UMich Sentiment |
Europe | EZ Ret. Sales & Sentix Inv. Conf.; German Factory Orders; Norwegian & Danish Ind. Prod.; Swedish Budget Balance & Prospera Infl. Exp.; UK S&P Global, REC UK & KPMG Jobs Report; Finnish Trade; Austrian WSale Price Index
| German Ind. Prod.; French Trade & Curr. Acc.; Swedish & Dutch CPI; UK BRC Sales; Dutch Cons. Spending; Belgian Budget Balance
| German Trade; Danish Curr. Acc.; Norwegian PPI; Irish Ind. Prod. & New Vehicle Licenses; Swiss Real Estate Index Family Homes
| Danish, Norwegian & Irish CPI; Italian, Finnish & Austrian Ind. Prod.; Dutch Manuf. Prod. & Ind. Sales; Italian Istat Cons. Report; Swedish GDP Indic., Household Cons. & Ind. & Serv. Prod. & Ind. Orders; UK RICS House Prices
| German CPI; German & Finnish Curr. Acc.; UK & Dutch Trade; UK Monthly GDP; Ind. & Constr. Output & Index of Serv.; Swiss SECO Cons. Conf.; Norwegian House Price Index
|
Japan | Leading & Coinc. Index; | Labour & Real Cash Earnings; Household Spending; Trade; Curr. Acc.
| Machine Tool Orders | PPI; Tokyo Ave. Office Vacancies | M2 & M3 Money Stock |
China | National Holiday |
| [M0/M1/M2 Money Supply] |
| [CPI & PPI; FDI] |
Disclaimer
The contents of this communication is prepared by Brerona Capital Asset Management Pty Ltd (A.C.N. 627 650 293; AFSL 520526). The information contained in this communication is general in nature and does not take into consideration any investors personal objectives, goals, needs and financial situation. You should not rely on the information contained in this document to make any investment decisions without first consulting an investment professional such as your financial adviser. Any unauthorised use of this document is prohibited. This document (including any attachments) is intended only for the addressee, it may contain information of a privileged and confidential nature. If you are not the addressee of this communication, you must not copy, reproduce, disseminate or use this email and its contents. If this communication has been received in error by you, please inform us immediately and securely delete. Sharing, transmitting, copying, disseminating all or part of the contents of this document may result in a breach of the Federal Privacy Legislation and or copyright and trademark infringement of Brerona Capital Asset Management Pty Ltd and its related entities.