It was a difficult week for equity markets as the global growth outlook soured. While the US Fed maintained cash rates at 5.50%, the weaker than forecast economic data all but confirmed that the Fed will begin to cut cash rates at its Sept FOMC meeting. With ISM data (Manufacturing, New Orders and Employment) all firmly in contractionary mode, while jobless and payroll numbers were also weaker than f’cst that resulted in the Un rate increasing 20bps above estimates to 4.3%, the impact on equity markets was significant, with the US S&P500 Index down -2.1% while the Russell 2000 Index (sml/midcap) was down -5.6%. The US NASDAQ (-3.7%) along with declines across other major European markets saw global equities significantly lower.
In Japan, the move by the BoJ to increase the cash rate to 0.25% (+0.15%) saw the Nikkei off -6.7%, while in the UK, the BoE cut its cash rates to 5.0% (-0.25%). Overall, the global market sell off resulted in the global (volatility) VIX Index rising to 23.4 pts (up 43% w/w) over the week, reflecting the changing narrative across global markets. Domestically, the local equity market was lower, but the weaker than f’cst (q/q) CPI data (3.8% y/y) saw bond yields move lower across the curve and ensured that the RBA will not be increasing cash rates at its August meeting. We continue to expect the RBA will be reducing the cash rate through the 4q24 reflective of a moderating growth outlook.
While the sell in growth assets impeded equity markets, bond markets rallied on the back of lower yields with both domestic and global markets higher, with US 10yr bonds finishing the week below 4.0% for the first time since early Feb. While the sell off in equity markets is likely to see volatility remain high for a period, the framework around lower rates through the 2h24 in our view will set the base for higher equity and other sensitive interest rate markets over time should the growth outlook not deteriorate further.
In Australia, the domestic reporting season kicks off with forward company guidance set to provide an important signal as to the strength of the economy, while in the US the release of ISM data will be the main focus along with the release of Chinese PMI, export and CPI data (f’cst +0.3% y/y), which is likely to point to the potential for further policy easing by the PBOC.
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