U.S. equities pared larger losses although still closed lower on Wednesday after the release of the latest Federal Reserve policy minutes showed the central bank saw risks from tightening more than necessary.
The minutes from the July meeting noted officials judged it would be appropriate to decelerate the pace of rate hikes while evaluating the effects of their tightening actions. “As the stance of monetary policy tightened further, it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation”. Managing partner of Harris Financial Group Jamie Cox noted, “Given how quickly some data have shifted to suggest inflation has peaked and is falling, I would expect the pace of rates to step down from here. 50 basis points is likely the ceiling for September”.
The S&P500 pared losses of as much as -1.21% before finishing -0.72% lower weighed by technology -0.72% and communications -1.85% while energy was the only positive sector +0.81% lifted by higher oil prices. The Dow Jones also weakened -0.50%, as did the Nasdaq Composite -1.25% and Russell 2000 -1.64% with the VIX rising +1.07% to 19.90. Treasury yields were higher with the minutes of the Federal Reserve suggesting a pause rather than a pivot to cut rates was more likely, the 2-year yield rose +2.5 basis points to 3.283% as did the 10 and 30-year rates by +9.6 and +6.1 basis points respectively. Elsewhere in economic data, retail sales for the month of July were unchanged, modestly below estimates for a +0.1% gain while a core measure that excludes autos and gas rose +0.7% suggesting consumer spending remains robust although declining on real terms when adjusted for inflation.
European equities were also lower with yields climbing after higher-than-expected U.K. inflation data. U.K. headline inflation climbed to 40 years highs, up +10.1% over the 12 months to July, more than the +9.8% forecast with core prices also higher than expected at +6.2% compared to +5.9%. Elsewhere, the second estimate of Eurozone GDP for Q2 weakened to +0.6% from +0.7% previously of the quarter. The Euro Stoxx 600 closed -0.91% lower along with the DAX -2.04%, CAC -0.97%, and FTSE100 -0.27%. 10-year government bond yields across Europe were higher, rising +16.2 basis points in the U.K. to +18 basis points in Italy, while the Euro edged +0.06% higher to 1.0177 and the Pound weakened -0.38% to 1.2050. In focus today is employment data for July expected to show the pace of jobs moderated in July to +25k from +88.4k previously with the unemployment rate expected to remain unchanged at +3.5%.
*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 lower this morning with ASX200 futures down -12 points or -0.17% to 7,020. The index rose +0.31% on Wednesday lifted by gains in materials +0.48, consumer discretionary +1.40% and consumer staples +1.73%. Shares in pallet maker Brambles climbed +5.1% after reporting a +13.5% rise in profit to US$593.3 million and raised its final dividend to US$0.12 from US$0.105 with a rise in material costs being passed through as price increases to customers according to CEO Graham Chipchase. Shares in liquefied gas giant Santos declined -2.40% despite posting results that showed interim net profit more than tripled to US$1.17 billion following higher oil and gas prices, lifting its interim dividend to US$0.076 compared to US$0.055 in the same period a year earlier. The Australian dollar is -1.24% weaker overnight at 0.6935 after wage growth for the 12 months to Q2 was weaker than expected, rising +2.6% compared to estimates of +2.7% and up +0.7% over the quarter versus +0.8% forecast, while the Westpac leading index for July declined -0.2% matching a similar decline from June.
Oil prices rose overnight with both WTI and Brent crude +1.72% and +1.33% higher at US$88.03 and US$93.57 a barrel after a larger than expected draw in U.S. oil inventories by -7.056m barrels compared to -275k forecast with gasoline stockpiles also declining by -4.642m barrels compared to -1.096m estimated. Iron ore futures in Singapore declined -3.77% on Wednesday although have bounced modestly by +0.34% this morning to US$102 while copper prices were -1.02% lower. Gold declined -0.74% to US$1,762.59 an oz along with silver -1.70% to US$19.81 and Bitcoin -2.47% to US$23,391.
Economic data:
- Australian Employment (MoM Jul) 11:30
- Eurozone Inflation Final (Mom Jul) 19:00
- U.S. Initial Jobless Claims (13th Aug) 22:30
- U.S. Leading Index (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.
