U.S equities finished lower on Tuesday while Treasury yields climbed with Federal Reserve officials signalling the central bank is still intent on raising rates until inflation is tamed.
San Francisco Fed President Mary Daly said on Tuesday that the Fed is “nowhere near” done with its efforts to tamp down on inflation, Chicago Fed President Charles Evans said he expects the pace of rate hikes will start to slow later in the year. Elsewhere, Cleveland Fed President Loretta Mester said she wants to see “very compelling evidence” that month-on-month price increases are moderating before being confident the Federal Reserve has successfully curbed inflation. The 2-year Treasury yield climbed +18.5 basis points to 3.055% with the 10 and 30-year rates also +17.3 and +9.3 basis points higher at 2.746% and +3.008% respectively. Adding to signs of an imminent recession, the spread between the 3-month and 10-month yields has narrowed to just 0.22% from as high as 2.26% in May, and historically an inversion of this key spread has signalled a recession is imminent.
The S&P500 finished -0.67% lower with all sectors negative led by declines in real estate -1.30% and materials -1.01% with 76% of stocks lower for the session. The Dow Jones also retreated -1.23% lower along with the Nasdaq Composite -0.16% and Russell 2000 -0.05% with the VIX rising +4.77% to 23.93. In a sign that the job market is cooling, adding to concerns of a recession, U.S. job openings for June fell to a nine-month low decreasing to 10.7m from an upward revised 11.3m in May which is the largest decline since April 2020. Geopolitical tensions also weighed on sentiment as U.S. House Speaker Nancy Pelosi’s trip to Taiwan prompted China to announce missile testing, even as she said her trip did not alter longstanding U.S. policy in the region.
European equities were also lower with U.S.-China tensions along with hawkish central bank policy and the ongoing energy crisis weighing on sentiment. The Euro Stoxx 600 retreated -0.32% along with the DAX -0.23%, CAC -0.42% and FTSE100 -0.06%. 10-year government bond yields were mostly higher across the region, rising +10.6 basis points in Spain and +10.3 basis points in Portugal with the Euro little changed at 1.0165 and the Pound edged +0.04% higher to 1.2175. There was little in the way of economic data to guide markets on Tuesday, while Wednesday will bring the release of the final services PMI data for July expected to confirm a slowdown over the month, and Eurozone retail sales are expected to decline -1.7 for the 12 months to June from +0.2% previously.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX is set to open modestly lower this morning with ASX200 futures down -13 points or -0.19% to 6,894. The index reversed initial gains to edge +0.07% higher on Tuesday after the Reserve Bank raised interest rates by +0.5% as widely forecast, while hinting decisions would become more data-dependent. The central bank statement removed the reference to the “withdrawal of extraordinary monetary support” noting “today’s increase is a further step in the normalisation of monetary conditions” and future policy decisions were “not on a pre-set path”. Inflation projections were also revised higher, expected to now peak at +7.75% by the end of the year from +5.9% previously, before returning to the 2-3% range in 2024 with weaker economic growth and higher unemployment also forecast. The Australian dollar weakened -1.47% on Tuesday to 0.6920 while the 10-year bond yield was -8 basis points lower at 2.976%.
Oil prices reversed initial gains to trade lower with both WTI and Brent crude -0.13% and -0.30% lower respectively at US$93.77 and US$99.73. Iron ore futures in Singapore edged -0.07% lower on Tuesday and are a further -0.89% weaker this morning at US$113.65 with copper futures also -1.98% lower. Gold fell -0.66% to US$1,760 an oz weighed by a rise in real U.S. yields with silver also -1.89% lower at US$19.98 along with Bitcoin -0.43% to US$23,029.
Economic data:
- New Zealand Unemployment (QoQ Q2) 08:45
- Australian Services PMI Final (MoM Jul) 09:00
- Eurozone Services PMI Final (MoM Ju) 18:00
- Eurozone Retail Sales (YoY Jun) 19:00
- U.S. ISM Non-manufacturing PMI (MoM Jul) 00:00
- Fed Harker Speech 00:30
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.
