Markets Overview

  • ASX SPI 200 futures up 0.4% to 7,190.00
  • Dow Average up 0.8% to 34,407.60
  • Aussie up 0.7% to 0.6663 per US$
  • U.S. 10-year yield little changed at 3.8367%
  • Australia 3-year bond yield rose 12 bps to 4.05%
  • Australia 10-year bond yield rose 12 bps to 4.02%
  • Gold spot up 0.6% to $1,919.35
  • Brent futures up 1.2% to $75.41/bbl

Economic Events

  • 09:00: (AU) June Judo Bank Australia PMI Mfg, prior 48.6
  • 11:00: (AU) June Melbourne Institute Inflation, prior 5.9%
  • 11:00: (AU) June Melbourne Institute Inflation, prior 0.9%
  • 11:30: (AU) May Owner-Occupier Loan Value MoM, prior -3.8%
  • 11:30: (AU) May Investor Loan Value MoM, prior -0.9%
  • 11:30: (AU) May Home Loans Value MoM, est. 1.4%, prior -2.9%
  • 11:30: (AU) May Building Approvals MoM, est. 3.0%, prior -8.1%
  • 11:30: (AU) May Private Sector Houses MoM, prior -3.8%
  • 11:30: (AU) June ANZ-Indeed Job Advertisements , prior 0.1%

The rally in tech megacaps gained further traction, with the Nasdaq 100 notching its best ever first-half of a year and Apple Inc. hitting the $3 trillion milestone.

Traders decided to look at the glass half full as data showed inflation is moderating, even if that comes at the expense of growth. Stocks extended this year’s surge, with tech consolidating its leadership amid the ascent of artificial intelligence. Big banks saw their first monthly gain since January after passing the Federal Reserve’s stress test. In late hours, JPMorgan Chase & Co., Wells Fargo & Co., Morgan Stanley and Goldman Sachs Group Inc. announced higher dividends.

Nearly $5 trillion has been added to the value of companies in the Nasdaq 100 since the start of the year, with the tech-heavy gauge defying bubble warnings and jumping almost 40%. The advance in the most-influential group in the S&P 500 helped push the index up 16% in 2023. Gains have been even more pronounced when narrowed down to the megacap space — which has soared 74%.

The “Big Seven” — including Apple, Microsoft Corp., Alphabet Inc., Inc., Meta Platforms Inc., Nvidia Corp. and Tesla Inc. — boosted profits by 14% a year during the decade through 2022. While their combined earnings slumped more than 20% last year, they’re expected to recover swiftly.

The Nasdaq 100 rose over 1.5% Friday, while the S&P 500 hit the highest since April 2022. The US equity benchmark posted its best first half since 2019. Nvidia, which has almost tripled this year, was up about 3.5%.

If history is any guide, the Nasdaq 100’s strength this year augurs well for the rest of 2023.

Years that start with rallies in the index of at least 10% average returns of about 14% over the second half of the year, though that shrinks to an 8.3% gain when the first-half gain tops 20%, according to an analysis of data compiled by Bloomberg.

The market’s fascination with the power of generative AI has trumped every major issue that could potentially drag down sentiment this year: recession fears, elevated levels of inflation, prospects for more Fed hikes, geopolitical risks, the debt-ceiling debate and the collapse of a few regional banks.

While the rally in AI has drawn comparisons with the dot-com bubble of 2000, when the market was driven by a similarly narrow breadth of tech stocks before a crash, BlackRock’s Tony DeSpirito said earnings growth is coming.

Still, after such a strong advance, there’s growing concern about valuations, and that has recently spurred a surge in bearish bets against the largest tech companies. Short interest as a percentage of shares available to trade is near 12-month highs for Microsoft, Tesla and Amazon, according to data compiled by S3 Partners.

Other News

Australia’s interest rate meeting is dividing economists and money markets on whether the Reserve Bank will stand pat to assess the impact of previous tightening or raise again to forestall upside risks to prices.

Economists are almost evenly split, with Commonwealth Bank of Australia among 14 expecting the RBA to maintain the cash rate at 4.1% on Tuesday, while 13 including Goldman Sachs Group Inc. and three other major banks forecast another quarter-point increase.

Traders are pricing a 60% chance of a pause following back-to-back hikes the RBA had described in minutes as “finely balanced” calls.

The RBA meeting comes days after the Federal Reserve’s Jerome Powell, European Central Bank’s Christine Lagarde and Bank of England’s Andrew Bailey said they still have ways to go in tamping down inflation. The US and UK have boosted rates more than Australia, while the ECB moved about as much despite a later start.

“The debate will likely be over zero or 25 basis points as the RBA deliberates on just how restrictive rates need to be,” said Su-Lin Ong, chief economist for Australia at Royal Bank of Canada. “The case for both can be made but at the margin, we think the prudent move is another 25-basis-point hike in July.”

Boosting the case for a hike, retail sales data last week surpassed expectations, highlighting households’ resilience while core inflation remains above 6%, double the top of the RBA’s 2%-3% target.

Economists also cited a renewed hawkish tilt from the RBA. Deputy Governor Michele Bullock warned last month that unemployment needs to rise to around 4.5% for inflation to return to target. The RBA also flagged the risk of price pressures becoming entrenched from a tight labor market at a time when housing shortage is driving prices higher.

“Capacity constraints in the housing sector imply ongoing inflation in rents and new-dwelling purchases,” said Josh Williamson, Citigroup Inc’s chief economist for Australia, who expects a hike. “The RBA would be wary of sending the wrong signal by pausing at a time when house prices are still rebounding.”

But other economists point to the RBA minutes, released weeks after each monthly meeting, as an important guide. For example, the April and May minutes were decidedly hawkish, and were followed by rate increases. In contrast, last month’s minutes were more dovish, prompting currency and bond yields to fall after their release.

The quarterly inflation report — the most comprehensive catalog of prices — comes out July 26 while the RBA staff will also deliver updated forecasts in weeks. They will provide new information for the board to consider at its August meeting and may encourage a hold on Tuesday.

JPMorgan Chase & Co.’s Tom Kennedy is among those who pushed back their forecast for the “next and final rate hike” to August from July. May inflation showed the smallest increase since April 2022.

Other data also point to an easing in economic momentum. Household consumption has slowed, business confidence is weakening and the probability of a recession over the next 12 months is now at 50% — the highest level since the pandemic. Economists recently trimmed their estimates for growth in the A$2.3 trillion ($1.5 trillion) economy.

“It seems that the approach of waiting for additional data before raising rates further may now be the most prudent,” said Benjamin Picton, senior macro strategist at Rabobank, citing weakening forward indicators. “We believe that Lowe will continue to aim for the soft landing.”