U.S. equities rose on Thursday, boosted by a decline in Treasury yields as recession concerns grow following weaker-than-expected PMI reports.
The S&P500 rose +0.95% on Thursday, lifted by technology +1.44% and health care +3.75% while energy -3.75% and materials -1.40% lagged on weaker commodity prices. The Dow Jones also gained +0.64%, as did the Nasdaq Composite +1.62% and Russell 2000 +1.27% with the VIX edging +0.35% higher to 29.05. Treasury yields declined across the curve, providing support for equities with the 2-year rate down -3.9 basis points to 3.017% as were both the 10 and 30-year rates by -6.4 and -4.5 basis points respectively, flattening the yield curve and signaling increasing concerns about the outlook for economic growth. Growth concerns were validated by weaker PMI reports for June overnight with manufacturing declining to 52.4 from 57 in May, missing estimates of 56 with services also declining more than forecast to 51.6 from 53.5 previously. Both measures are modestly above the key 50 level which is the difference between growth and contraction.
In a second day of testimony before Congress, Fed Chair Jerome Powell said the Fed’s efforts to bring down inflation were “unconditional”. Speaking before the House Financial Services Committee, Powell noted “we have a labour market that is sort of unsustainably hot and we’re very far from our inflation target”. Adding “we really need to restore price stability, get inflation back down to 2 percent, because without that we’re not going to be able to have a sustained period of maximum employment”. The recent move lower in yields adds to a growing chorus of analysts questioning how far the Federal Reserve will be able to hike before reversing coarse as recession concerns begin to outweigh the inflation narrative and a slowdown in growth should help alleviate inflationary pressures. Still, Fed Governor Michelle Bowman overnight said she supports raising rates by +0.75% in July followed by a few more +0.5% increases.
European equities retreated on Thursday after PMI data was lower than expected. Eurozone manufacturing PMI declined to 52 in June from 54.6 in May missing estimates of 53.9 with services also declining to 52.8 compared to estimates of a modest decline to 55.5. It was a similar story in the Eurozone’s two largest economies with PMI reports in both Germany and France also declining more than expected with an initial boost from looser COVID-19 restrictions now wearing off. The Euro Stoxx 600 declined -0.82% along with the DAX -1.76%, CAC -0.56% and FTSE100 -0.97% with benchmarks lower across the region. 10-year government bond yields fell across the region as weaker PMI reports pointed to a slowdown in growth, also raising the question of how far the ECB can lift interest rates. The decline in yields ranged from -8.7 basis points in Sweden to -20.7 in France with the Euro weakening -0.41% to 1.0523 while the Pound edged -0.05% lower to 1.2260.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set for a modestly lower open this morning with ASX200 futures down just -8 points or -0.12% to 6,416. The index rose +0.31% on Thursday as gains in financials +0.73% and health care +1.97% offset weakness in materials which fell -1.51%. Lithium miner Lake Resources slumped -16.7% on Thursday after debuting in the ASX200 earlier this week after managing director Steve Promnitz left, providing no reason and had sold his entire 10.2 million shareholding earlier this week. Lithium miners were also weaker across the board with LTR also down -9.3% along with Allken -3.6% as the bull run in battery metals continues to lose momentum. Major miners were also weaker as demand for Chinese steel slows with Beijing doubling down on its zero COVID-19 policy. FMG dropped -2.1% along with RIO -1.8% and BHP -1.3%. PMI reports showed economic activity was little changed in June, with manufacturing edging higher to 55.8 from 55.7 previously while services declined to 52.6 from 53.2 in May.
Growth concerns weighed on commodities with WTI and Brent crude -1.81% and -1.78% lower at US$104.27 and US$109.75 a barrel, with recent declines in oil helping to ease concerns about persistent high levels of inflation. Still, while we may see demand destruction in the near term, the longer-term issues of undersupply and underinvestment remain suggesting any pickup in demand will see sharp rises once again and therefore inflation. Copper prices which are a bellwether for the economic outlook continued recent weakness being down more than -20% from its March record high of US$10,845 declining -4.3% on Thursday to US$8,397 per tonne in London. Iron ore futures in Singapore rebounded on Thursday, rising +7.41%, and are a further +0.90% higher this morning at US$117.20. Gold retreated -0.81% on Thursday to US$1,822.77 along with silver -2.17% to US$20.95 while Bitcoin rose +4.73% to US$20,795.
Economic data:
- German Ifo Business Climate (MoM Jun) 18:00
- RBA Governor Lowe Speech 21:30
- U.S. Consumer Sentiment (MoM Jun) 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.
