Markets were mixed over the week as a slew of global and domestic economic data along with wrap-up of the corporate reporting season resulted in variable asset class returns. At a headline level large cap equities were able to move higher, while bond markets were challenged as yields pushed higher. While markets fully expect that the Fed will begin to cut rates at its Sept FOPMC meeting, the pricing on Treasury securities has peaked in the near term given the rally over the last 3 months.
However, we do expect that Treasury markets can continue to rally over the medium term given the extent of forecast rate cuts that we expect across global central banks. While the A$ took a breather over the week, US$ strength continues to unwind on a global basis. With the commodity markets struggling on the back of the ongoing weakness in China, this is likely to curtail ongoing upward momentum in the A$, although we do have a medium term f’cst of US$0.69 as US cash rates move lower. On the economic front, the benign PCE CPI reading out of the US continues to reflect ongoing moderation in inflationary expectations with the US Fed now pivoting its focus to ensure stability in the jobs market.
Accordingly, the release of labour market data (i.e. payrolls and Un rate) later this week along ISM data on both the manufacturing and service sectors will be the key focus for investors. Domestically, the release of the 2q24 GDP (f’cst +0.2%, 0.9% y/y) is set to reflect a weakening of the domestic economy highlighted by the weak national capex figures. With the July CPI data (3.5%, +0.1% to f’cst) above market estimates, the pressure on the government will only increase heading into the back end of the year as the decline in inflationary pressures seems to have stalled.
While the RBA has reiterated it will want to see inflation move back below its upper target band, we believe its hand may be forced should the data continue to highlight a feeble economic outlook. In China, the ongoing weakness in the PMI figures continues to reflect a contractionary manufacturing environment. With both Government and PBOC policies have minimal positive impact, we expect further support. In Europe, the release of 2q24 GDP (f’cst +0.3%, +0.6% y/y) will also see the ECB continue to cut rates at its next meeting, while the recovery in the UK is set to continue with both the manufacturing and services PMI data set to highlight ongoing expansion supported by further BoE rate cuts.
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