Morning Report

Key themes: A sharp fall US consumer confidence added to evidence that the US economy is losing some momentum. However, an uptick in consumer inflation expectations complicated the picture, prompting suggestions of the risk of stagflation. A flurry of Fed speakers reinforced higher for longer messaging but backed up Jerome Powell in watering down the risk of further rate hikes.

US equities unwound early gains but finished in the green, posting a third consecutive weekly rise.

Treasury yields rose across the curve but remained broadly within the last week’s trading range.

The higher yield structure supported the US dollar which gained against the Yen, the euro, the Pound and the Aussie.

Share markets: US equities started strongly on Friday night but lost ground following the consumer sentiment report which showed expectations soured and inflation expectations rose. The S&P 500 rose 0.2% to close the week up 1.9%, the third consecutive weekly gain. The NASDAQ was flat on Friday but ended the week 1.1% higher.

The ASX 200 rose 0.4% on Friday. Futures traded lower, pointing to a soft start to the week.

Interest rates: US treasury yields rose across the curve, supported by higher consumer inflation expectations and further comments from Fed officials reinforcing higher for longer interest rates. The 2-year yield rose 5 basis points to 4.87%, while the 10-year yield increased 4 basis points to 4.50%. There remains one 25-basis point Fed rate cut fully priced by the end of the year. The implied probability of a second has pulled back to around 60%.

The Aussie 3-year futures yield rose 3 basis points to 3.99%, while the 10-year yield rose 4 basis points to 4.37%. Market pricing for interest rates suggests the RBA will leave rates unchanged for the remainder of 2024, with a very slight risk of a rate hike priced in.

Foreign exchange: The higher rates structure provided the US dollar with a mild tailwind. The DXY rose from a low of 105.14 to a high of 105.40 and is currently trading around 105.30. However, a clear downtrend since mid-April remains in-tact alongside increasing signs economic growth is fatiguing.

The Aussie dollar slipped from a high of 0.6623 to a low of 0.6596 but managed to regain some ground to finish above the 66-cent handle. The euro, Japanese Yen and British Pound all. The USD/JPY tested and failed resistence at the 156 level for a second consecutive session.

Commodities: The West Texas Intermediate (WTI) price of oil fell 1.3% to US$78.26 per barrel. Copper (1.2%) and gold (0.6%) both gained while iron ore (-0.3%) slipped.

Australia: There were no major economic data releases on Friday.

China: The consumer price index (CPI) rose just 0.3% over the year to April suggesting sluggish demand continues to weigh on the economy. However, the slim price increase was slightly stronger than expected and marked an improvement on March’s reading which narrowly skirted deflation.

The producer price index (PPI), which measures prices faced by businesses, recorded an annual fall for a 19th consecutive month, dropping 2.5% over the year to April. The weak PPI is a sign that deflationary risks remain and that the economy likely requires further policy support for the tentative economic recovery to gain additional momentum.

The current account surplus narrowed to US$39.2bn in the March quarter, down from a $56.2bn surplus in the December quarter.

Japan: The current account surplus widened to a record ¥3.4tr in March from ¥2.6tr in February.

United Kingdom: Activity bounced back solidly from a shallow recession at the end of last year. GDP rose 0.6% in the March quarter, beating expectations for a 0.4% quarterly gain and marking the strongest quarter gain in over two years. In annual terms, GDP growth swung form a 0.2% decline to a 0.2% increase.

Business investment and industrial production surprised to the upside, while there was a smaller than expected drag from imports. This helped offset weakness in private consumption, government spending and in construction activity.

United States: Consumer sentiment soured in March falling to its weakest level in six months. The University of Michigan consumer sentiment index fell to 67.4 in May, falling short of expectations of 76.2 and representing a sharp fall on April’s reading of 77.2. Perceptions of both current future economic conditions deteriorated, while both short and long-term inflation expectations ticked up marginally to 3.5% and 3.1%, respectively. The rise in inflation expectations likely reflects stalling disinflation progress and will do little to help cool price pressures.

Several Fed members spoke on Friday, echoing the higher-for-longer messaging from Jerome Powell and reinforcing the expectations that further rate hikes are unlikely to be necessary.

Chicago Fed President Austan Goolsbee said he doesn’t see much evidence inflation I stuck above the Fed’s target but was reluctant to say when rate cuts might be appropriate. Lorie Logan, Dallas Fed Chief, said “it’s just too early to think about cutting rates” while Fed Governor Michelle Bowman said she doesn’t expect it will be appropriate for the Fed to cut interest rates in 2024, pointing to persistent inflation in the first several month of the year.