It has been another quiet trading session with little newsflow, and market nerves ahead of tonight’s key US CPI report. US equities are lower and the US Treasuries curve shows further inversion against a backdrop of modestly higher rates. Currency movements have been modest.
After struggling to string a page of words together yesterday, it’s been a rinse, repeat performance with not much to report. Another profit warning from a semi-conductor company, this time Micron Technology, highlighted a rapid falloff in demand as customers reduce their stockpile of unused chips. Orders had rapidly fallen even since the last update a month ago. This dragged the sector lower and other related companies, sending the Nasdaq index over 1%. The S&P500 is currently down 0.5%.
US Treasury yields are higher across the curve, with further curve flattening. The 2-year rate is up 7bps to 3.28% while the 10-year rate is up 4bps to 2.80%, sending the 2s10s spread deeper into negative territory at minus 48bps. This spread has fallen every day in August bar one, signalling a rising probability of economic recession, most likely next year.
Market nerves are evident ahead of the key US CPI report tonight, where the doves will be celebrating headline inflation past the peak and the hawks will likely be lamenting the still-strong underlying inflationary pressure. The data will not answer the question we all want to know – how quickly inflation will fall over the coming year, so the debate about how much more tightening the Fed will need to do and whether a soft or hard landing for the economy can be achieved will rage on.
In economic news, US small business optimism edged up from a 9-year low, effectively remaining at a historically depressed level, with confidence hit by surging inflationary pressure. The number of business owners reporting that inflation is their single biggest problem rose to its highest level since 1979, signalling tighter margins as the average selling prices indicator fell 7 pts to a net 56%.
US productivity and unit labour costs data are effectively a reworking of data series previously released so are never market moving, but they showed that productivity slumped for a second consecutive quarter at an annual rate of 4.6% (think weak GDP but strong employment), and helping drive an annualised 10.8% surge in unit labour costs (think higher wages and poor productivity). The data highlighted the recent abnormal economic conditions, with productivity growth when measured on a year-on-year basis the worst since measured (1947) and, like other inflation indicators, unit labour cost inflation the worst since 1982.
Yesterday, data showed Australian consumer confidence falling further and NAB’s survey showed improving business conditions and business confidence back to around its long-run average. Both series remain well above levels currently seen in NZ but NZD/AUD is slightly higher at 0.9020, recovering the loss seen the previous day. Currency movements overall have been modest. The NZD is close to where it was this time yesterday at 0.6275 and the AUD is slightly weaker at 0.6955. Overnight and daily changes for the key majors are all within plus or minus 0.3%.
The domestic rates markets showed decent falls across the curves, outperforming offshore markets and with some evident flattening pressure. Swap rates were down 5-9bps, with the larger falls at the longer end, while NZGB rates were down 7-9bps. Electronic card transactions data weren’t as weak as expected, falling 0.2% m/m in July after a 0.3% fall in June. After adjusting for strong inflation, these are decent falls in real terms, following the rebound in sales earlier in the year, distorted by the easing in lockdown restrictions. The number transactions data told the real story, down 9.2% y/y, a sign of how weak spending has been in the face of higher inflation, higher interest rates, falling asset prices and depressed levels of confidence.
In the day ahead REINZ data this morning are expected to show more bad news on the local housing market, with slumping sales activity at lower prices. Chinese PPI and CPI inflation data are released but, as noted above, the headline act is the US CPI release tonight. The consensus expects headline inflation of just 0.2% m/m, the lowest in 18-months, helped by lower gasoline and food prices. But a core CPI measure of 0.5% m/m would remain too high for comfort. A stronger result would increase the chance of another 75bps hike next month and boost the USD, while a very weak result would increase the chance of a shift down to 50bps and a weaker USD on the day. After the release, FOMC members Evans and Kashkari will be talking and they will be able to feed in the figures on their comments about the outlook for monetary policy.
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