U.S. equities rose on Thursday as GDP contracted for a second consecutive quarter, with traders pricing in fewer rate increases.
The economy contracted -0.9% over the second quarter, missing estimates of a +0.4% advance and meeting the technical definition that many consider a recession. Recessions historically have significantly reduced inflation and we may now be entering a period of “bad news is good news” whereby the Federal Reserve needs to pivot and begin to ease monetary policy. Analysts at Wells Fargo & Co noted “Based on the available data, we believe broad activity is not yet consistent with a contraction that is typically thought of as recession…however it is undeniable that the economy is cooling,”.
The S&P500 rose +1.21% boosted by technology +1.43% and consumer discretionary +1.67% while communications -0.73% was the only negative sector. The Dow Jones also rose +1.03%, as did the Nasdaq Composite +1.08% and Russell 2000 +0.87% with the VIX retreating -4.36% to 21.98. Treasury yields fell following the GDP data with the 2-year yield dropping -13.2 basis points to 2.866% along with the 10 and 30-year yields by -11.6 and –5.1 basis points respectively. In focus tonight in PCE inflation data for June, expected to show core prices rose +4.7% over the 12-month period with headline prices expected to rise +6.8%.
European equities were also boosted by expectations the Federal Reserve will slow the pace of rate increases while weaker consumer confidence also raised concerns of an economic slowdown in Europe. The Euro Stoxx 600 rose +1.09% along with the DAX +0.88% and CAC +1.30% while the FTSE100 was -0.04% lower. Confidence in the Eurozone economy fell to the weakest level in 1.5 years weighed by concerns of energy shortages. The final reading of consumer confidence for July remained at -27 having declined from -23.8 previously, while economic sentiment fell more than expected to 99 from 103.5 previously, missing estimates for a more modest decline to 102. 10-year bond yields were also lower across the region on expectations central banks will soon need to change to an easing footing, with yields declining between -14.9 basis points in Italy to -8.9 in the U.K. In focus tonight is inflation data for July expected to show prices rose +8.7% over the 12 months and declined -0.1% over the month while core prices are expected to rose +3.9% from +3.7% over the year.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set to open higher once again with ASX200 futures up +68 points or +1.0% to 6,859. The index rose +0.97% on Thursday boosted by materials +2.44% and financials +0.79% in broad-based buying with 75% of stocks rising. Shares in Zip Co and Sezzle surged 22.6% and 44.7% on Thursday in the absence of any news, with Sezzle exiting a trading halt from Wednesday where the company said it had no idea why its share were rallying in response to the market operator. Macquarie shares rose +3% after its first quarter-2023 trading update putting the investment bank ahead of the same period in 2022, although the bank noted present conditions were softening. In economic data, the ANZ business confidence survey for July was -56.7 a slight improvement from the -62.6 in May while retail sales rose less than expected, up +0.2% over the month compared to estimates of a +0.5% gain.
Oil prices were mixed overnight with WTI crude down just -0.05% to US$97.21 while Brent crude rose +0.96% to US$107.64. Iron ore futures in Singapore rose +5.61% on Thursday although are -0.79% softer this morning at US$117.71 while copper futures in the U.S. gained +1.88%. Gold was -1.25% higher at US$1,755 as it is supported by lower real yields and weaker USD, silver also gained +4.84% to US$20.01 along with Bitcoin +5.48% to US$24,033.
Economic data:
- German Unemployment (MoM Jul) 17:55
- German GDP (QoQ Q2) 18:00
- Eurozone Inflation (YoY Jul) 19:00
- Eurozone GDP (QoQ Q2) 19:00
- U.S. PCE Inflation (YoY Jun) 22:30
- University of Michigan Consumer Sentiment (MoM Jul) 00:00
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
