Markets Overview

  • ASX SPI 200 futures down 1.5% to 7,770.00
  • Dow Average down 1.5% to 39,737.26
  • Aussie up 0.3% to 0.6520 per US$
  • US 10-year yield fell 18.6bps to 3.7904%
  • Australia 3-year bond yield fell 5.7 bps to 3.68%
  • Australia 10-year bond yield fell 3.6 bps to 4.05%
  • Gold spot down 0.1% to $2,443.24
  • Brent futures down 3.4% to $76.81/bbl

Economic Events

  • 09:00: (AU) July Judo Bank Australia PMI Servic, prior 50.8
  • 09:00: (AU) July Judo Bank Australia PMI Compos, prior 50.2
  • 11:00: (AU) July Melbourne Institute Inflation, prior 0.3%
  • 11:00: (AU) July Melbourne Institute Inflation, prior 3.2%

Asian markets are poised for losses on Monday as fears of a deeper economic slowdown unnerve traders also bracing for more volatility from rising tensions in the Middle East.

US futures dropped in early trading amid reports Iran may strike Israel to avenge assassinations of Hezbollah and Hamas officials. Saudi Arabian and Israeli stocks slumped more than 2% on Sunday, outpacing Friday’s losses on Wall Street spurred by economic worries. Equity futures indicate Australian, Japanese and Hong Kong shares are set to drop. Oil edged higher.

A worsening conflict in the Middle East is adding more tumult to markets as investors brace for a turbulent second half of the year. A gauge of bond market volatility has climbed, while the VIX Index – Wall Street’s fear gauge – jumped to the highest in almost 18 months after a weak US jobs report ratcheted fears of a recession, as focus increases on an already chaotic US election race.

“In the next few months global and Australian shares look vulnerable to further falls, suggesting that it’s too early to buy the dip,” said Shane Oliver, chief economist and head of investment strategy at AMP Ltd. in Sydney. “A correction is underway.”

US nonfarm payrolls rose by 114,000 in July — one of the weakest prints since the pandemic — and job growth was revised lower in the prior two months. The jobless rate unexpectedly climbed for a fourth month to 4.3%, above the Federal Reserve’s year-end forecast, triggering a closely watched recession indicator.

Meantime, US Treasuries climbed Friday, with policy sensitive two-year yields falling to the lowest since May 2023 as worries mount the Fed’s decision to hold rates at a two-decade high is risking a deeper economic slowdown. Traders are projecting the Fed will cut rates by more than a full percentage point in 2024, with an increased chance of an outsized 50-basis point cut in September, according to data compiled by Bloomberg.

Other News

Australia is poised to stay near the back of the global easing cycle as local inflation — while cooling — remains elevated requiring the Reserve Bank to keep its key interest rate at a 12-year high.

The RBA will hold its cash rate at 4.35% for a sixth straight meeting on Tuesday, economists predict. The board’s decision will be released at 2:30 p.m. in Sydney together with the bank’s quarterly update of economic forecasts, followed an hour later by Governor Michele Bullock’s press conference.

Australia’s policy decision follows a highly-anticipated meeting by the Federal Reserve last week, when Chair Jerome Powell signaled the US is on course to begin easing in September. The Bank of England also last week cut rates for the first time since early 2020 and signaled further reductions ahead.

Bullock is unlikely to draw from that playbook, however, with economists expecting the RBA will again debate hiking rates, before agreeing to stand pat.

“The RBA can’t afford to jettison the hawkish bias,” said Josh Williamson, economist at Citigroup Inc. “The RBA needs to deliver a hawkish on-hold message, stating that while further progress on inflation has been made, it is too early to consider unwinding tight policy.”

Bullock has retained maximum policy optionality this year, saying she needs to be confident that price growth is moving sustainably back to the central bank’s 2%-3% target and as a result the board isn’t ruling anything in or out.

Data last week showed Australia’s core inflation unexpectedly decelerated in the quarter-ended June, prompting money markets to swing to pricing an 88% chance of a rate cut in December, according to meeting-dated OIS contracts, and fully price one for February.

The yield on Australia’s policy-sensitive three-year bond hit the lowest level since April on Friday, in response to the CPI and dovish shift at global central banks. The Australian dollar also slid against the greenback.

Still, at 3.9% core inflation remains well above the RBA’s target and economists don’t expect the bank’s latest forecasts to deviate significantly — outside lower headline prices to reflect government energy subsidies — from its current track of bringing CPI back to the band in late-2025.

The slowdown in price pressures has bolstered confidence among economists, including former RBA Assistant Governor Luci Ellis, that rate cuts could start earlier. But they reckon the bank will continue to talk tough in the near-term until it’s confident in the trajectory of prices.

“The board is not in a hurry to cut given lingering inflation risks,” said Ellis, who is now Westpac Banking Corp.’s chief economist. “It is plausible that the board will retain the ‘not ruling anything in or out’ language in its post-meeting communication. We also anticipate that rates will decline only gradually.”

The RBA has taken an unorthodox approach this cycle by hiking less than global counterparts — its key rate is 1 percentage point below that of the US — as it tries to hold onto post-Covid job gains. Unemployment has remained surprisingly low — at 4.1% — though that has been aided by strong government hiring at the state and national levels.

The RBA’s lower cash rate may explain why inflation has proved sticky, and it’s probably premature to say price pressures have been defeated Down Under. Core CPI at 3.9% is still well short of the bank’s 2-3% target, which the RBA only expects to reach late next year. A failure to meet that forecast would damage its inflation-fighting credentials.

A key uncertainty, economists say, is how households respond to income tax cuts and energy rebates that kicked in last month. Indeed, with government spending set to strengthen ahead of a likely 2025 election, the RBA will be reluctant to signal too early that the next move is down.

Policymakers will also keep a close eye on immigration, which has been a key support to the economy and partly to blame for some of the inflation pressures.

Latest data showed annual net migration still held near its record pace at 547,000 people in the final quarter of 2023, though the trend appears to be slowing with a drop in temporary and student visas.

“UBS have long expected strong migration led population growth, in addition to fiscal spending, to lift consumer demand, asset prices and inflation,” said Nicolas Guesnon, economist at UBS AG. “However, if fiscal policy is tighter than expected, or population growth slows below the government projects, then the RBA would have scope to ease earlier.”

(Bloomberg)