U.S. equities rose in late trading on Friday, boosted by a drop in bond yields as weaker economic data added to concerns of a recession.
The ISM manufacturing PMI report for June was weaker than forecast with a reading of 53, down from 56.1 in May and missing estimates of a more modest decline to 54.9. The report adds weight to the narrative of economic growth cooling, although in a positive sign inflation may have peaked with the report showing a deceleration in both new orders and input prices. Should economic data continue to deteriorate, and inflation show further signs of moving lower, it will give the Federal Reserve flexibility for a dovish pivot which the bond and futures markets are increasingly pricing in. Federal Reserve fund futures are pricing in the likelihood of another +0.75% rate increase in July and suggest the benchmark interest rate will finish the year at 3.32%. Based on these futures, rates are expected to peak at 3.36% in February before implying the Federal Reserve will need to embark on an easing stance as the economy cools with rates decreasing to 2.70% by the end of 2023. The bond markets are also increasing factoring in the probability of rate cuts as the spread between key yields either inverts or continues to flatten with the 10-year yield breaking through the 3% to finish at 2.88% on Friday having reached as high as 3.47% in June.
The S&P500 rose +1.06% reversing initial declines with bad news for economic data increasingly seen as positive for both equities and bonds. All sectors were positive for the session led by utilities +2.48% and consumer discretionary +1.96% while technology lagged +0.25%. The Dow Jones also rose +1.05%, as did the Nasdaq Composite +0.90% and Russell 2000 +1.16% as the VIX fell -7% to 26.70. Ahead for the week, investors will be focused on the ISM non-manufacturing PMI report for June overnight on Wednesday forecast to weaken from 55.9 in May to 54.5 as well as the release of the latest FOMC minutes from June. Thursday will bring the ADP private payroll figures for June, forecast to show an increase of +200k ahead of Friday’s all-important non-farm payroll data. Analysts are forecasting for +270k jobs to be added over June, slower than the +390k in May, with the unemployment rate expected to remain unchanged at 3.6%.
European equities were little changed on Friday as investors await the start of earnings season with Saxo Bank head of equity strategy Peter Garnry saying “we expect more weakness during the second-quarter earnings season as companies are still under pressure from higher energy prices, rising wages, supply chain disruptions, and high logistics costs. The average analyst’s consensus for the Euro Stoxx 600 is for earnings to decline modestly to 6.21 from 6.27 in Q1 before picking up strongly in Q3 with the index trading on a 12-month forward P/E estimate of 11.56, the lowest level since the pandemic. The Euro Stoxx 600 was little changed on Friday down just -0.02% along with the FTSE100 -0.01% while the DAX and CAC rose +0.23% and +0.14% respectively. Data showed core inflation cooled more than forecast for the Eurozone on Friday, rising +3.7% over the 12 months to May compared to 3.8% in April while economists had expected a rise to +3.9%. Headline inflation however rose more than expected to +8.6% from +8.1%, modestly above expectations.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX is expected to open sharply higher this morning with ASX200 futures up +96 points or +1.45% to 6,545. The index declined -0.43% on Friday, reversing initial gains to track U.S. futures lower. Still, stocks that had been beaten down over the past several months outperformed, with Mesoblast rising +11.5% along with ZIP +9.1%, PBH +7.45%, and Sezzle +19.2% with each of these stocks recently having fallen at least 70% over the prior 12 months. Ahead for the week, investors will be focused on the RBA policy decision at 14:30 AEDT on Tuesday with markets pricing in at least a +0.40% increase to the cash rate which currently sits at +0.85%. Traders continue to price in further rate increases to the end of the year to +3.11% although down from expectations of closer to +4% only a fortnight ago.
Oil prices rose on Friday with both WTI and Brent crude up +2.52% and +2.38% respectively to US$108.43 and US$111.63 a barrel. Iron ore futures in Singapore finish -1.05% lower on Friday at US$113.40 having fallen -4.24% over the week. Base metals were also lower for the week with aluminium down -0.49%, along with copper -3.697%, nickel -2.57% and zinc -9.58% while tin and lead rose +8.38% and +1.02% respectively. Gold rose a modest +0.23% on Friday to US$1,811.43 although finished the week -0.85% lower along with silver which declined -1.98% on Friday and -6.09% for the week. Bitcoin rose +3.61% on Friday although is -0.88% weaker over the weekend at US$19,234.
Economic data:
- Australian Home Loans (MoM May) 11:30
- German Balance of Trade (MoM May) 16:00
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.
