Todays podcast

• US ISM Manufacturing was soft, but did not have a lasting impact on markets
• Yields pushed higher in a US pre-holiday shortened session, equities rose
• RBA seen as a genuine 50/50, NAB calls a hike in what is a lineball call
• If RBA holds for whatever reason, we see still see them hiking two more times
• Coming up: RBA (close decision), US Markets Closed (Independence Day)

“If I go, there will be trouble; And if I stay it will be double; So come on and let me know”, The Clash, 1981

A quiet night overnight given shortened pre-holiday trade in the US ahead of Independence Day today. Data printed on the weak side, though the initial market reaction was not sustained. The US ISM Manufacturing came in at 46.0 vs. 47.1 expected and 46.9 previously, while the final German Manufacturing PMI was even weaker at 40.6 vs. the 41.7 flash estimate. Yields moved higher with the US 10yr +1.8bps to 3.85%, fully reversing an initial dip lower on the ISM to 3.77%. The 2/10s curve inverted further to -108.5bps with US 2yr yields up 3.9bps to 4.94%. Market pricing for the Fed is little changed with around 21.3bps for July and a cumulative 34bps by November. Equity markets mostly rose, resilient to both the weaker data and higher yields. The S&P500 rose 0.1%, helped along by a 6.9% rise in Tesla after Q2 sales figures beat (466.1k vs. 445.9 expected). Oil traded lower (Brent -0.6%) despite moves by Saudi to extend production cuts and Russia to reduce exports. FX moves were not large with the USD (DXY) +0.1%, EUR +0.0%, GBP -0.1% and USD/Yen +0.3%. The NZD rose 0.4% and the AUD is up 0.1% to 0.6672, with all focus on today’s RBA decision which is seen as a genuine 50/50 (more on that below).

First to the US ISM Manufacturing. The headline index was weak at 46.0 vs 47.1 expected and 46.9 previously. All key components are now in contractionary territory and highlight the defacto recession being seen in the manufacturing sector. Production fell to 46.7 from 51.1, New Orders were 45.6 from 42.6, Employment was 48.1 from 51.4, and Prices Paid was 41.8 from 44.2 previously. In many respects this is not new news given manufacturing has been below 50 for some time, with little sustained market reaction after today’s numbers. Instead, markets are likely to be more sensitive to Thursday’s ISM Services Index. For your scribe, the most interesting aspect was the anecdotes. One firm noted “ Orders and business are steady with a healthy backlog, but new prospective orders seem to be getting pushed back into 2024” and another said “North American demand stabilizing, but European markets showing slowing in the second half of 2023 and 2024” (see June 2023 Manufacturing ISM® Report On Business® for details).

Speaking about Europe, the final-Manufacturing PMIs were revised lower with the wider Eurozone measure at 43.4 from 43.6. Of some concern was the German Manufacturing PMI which was revised lower to 40.6 from 41.0. S&P Global who compile the PMIs noted that the “worsening performance stemmed from a sustained deterioration in new orders across the sector. Firms commented on a range of factors behind the decline, including customer hesitancy and destocking. survey pointed to weaker sales both domestically and abroad”. Interestingly firms had only “ just started to cut their selling prices in June…while input prices have already been falling for several months. The most important reason for this certain serenity observed among companies is likely to be the order backlog, which, although declining, is still significantly higher than the historical average…” (see HCOB Germany Manufacturing PMI for details).

Elsewhere, in oil markets, Saudi Arabia said that it would extend its 1m barrels a day cut in production by a month, through August and it could extend it further. Russia added that it would reduce oil exports by 500,000 barrels per day in August and aim to reduce production by this amount. The announcements only had a temporary positive impact on oil prices before falling back. Brent crude is currently down less than 1% for the day and back below USD75 per barrel, suggesting little concern by traders, with the market seemingly well supplied compared to sluggish demand. In FX, the Chinese yuan has strengthened a little (USD/CNH -0.2%) bouncing off of 2023 lows reached on Friday, after the central bank set a higher than expected fix by 310pips, thus confirming its displeasure with the recent depreciation. It is also worth noting that the PBOC said in its quarterly monetary policy committee meeting on Friday that it will adopt “comprehensive measures and stabilize expectations” about the yuan. Also out yesterday was the Caixin Manufacturing PMI which was 50.5 vs. 50.0 expected and 50.9 previously.

Finally in Australia, there was a lot of housing market data yesterday which was consistent with the stabilisation seen in the housing market most recently , though expectations of further rate rises will hamper borrowing capacity and is likely to challenge the sustainability of the recent rebound. Housing loan commitments rose 4.8% m/m in May (consensus +1.4%), coming after -1.0% in April and +4.7% in March. Dwelling approvals meanwhile surged in May, up 20.6% m/m (consensus 3.0%). The large rise was the result of a 59.4% m/m gain in the volatile attached dwelling approvals category, led by a spike in NSW apartment approvals. Detached approvals did not rise sharply, up only 0.9% m/m. The overall outlook for dwelling construction though is still weighed down by uncertainty and availability of material and labour

Coming up:

• NZ: QSBO Survey: The survey is expected to show a lift in confidence and activity indicators, as per the recent monthly readings of the ANZ survey. The value-add of the release will be the indicators on capacity pressures, expected to show a monetary policy-friendly fall, with businesses indicating they are seeing it much easier to find labour after the surge in net migration.
• AU: RBA Decision: Today’s RBA decision is expected to be a close one with 13 out of 27 analysts expecting a 25bp hike, while markets are only pricing around a 30% chance of a hike. An article yesterday by veteran RBA whisperer Terry McCrann noted “Two options will be on the table at what will almost certainly be Philip Lowe’s third-last meeting as governor of the Reserve Bank on Tuesday morning… This month, with Lowe – supported by his deputy Michele Bullock – likely signalling a preference for a pause, that’s all-but certain what we will get” (see Herald Sun: RBA likely to press pause as Lowe’s reign nears its end ). Read what you want into that. NAB’s view is that the data flow argues to another hike. Core inflationary pressures remain high and sticky, the labour market remains tight with the unemployment rate falling back to 3.6% and job vacancies are still 89% above pre pandemic levels, retail sales suggest a resilient consumer, while productivity remains concerning. Saying that, the decision is likely to be as evenly balanced as it was last month, and it would not be a surprise if the RBA chose to hold fire at this meeting in anticipation of the full quarterly CPI and SoMP forecast update. However, we see little value in waiting. If the RBA held fire, we still think the RBA would raise rates two more times, and it is worth remembering the April pause was followed up with two consecutive rate hikes.
• US: Independence Day Holiday: bond and equity markets are closed.

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