Markets cautious on US debt downgrade and soft data

Headlines

* Dollar shaky after Fitch downgrade of US to AA+ from AAA

* BoJ’s Ueda: Took steps to prepare for future economic changes

* Weak manufacturing survey and US data slow stock rally

* Gold muted amid US credit rating downgrade and recent USD strength

FX: USD is very modestly up for a fifth straight day amid mild risk-off conditions. Fitch’s downgrade and soft data Stateside failed to derail the recent bullish momentum. The rise in US Treasury yields is also helping. The 2-year yield has tracked sideways above the 50-day SMA at 4.85%.  But the 10-year yield has moved up above the key psychological 4% level. The 30-year yield printed fresh year-to-date highs.

EUR is struggling below 1.10 and a previous swing high from February at 1.1032. Final manufacturing PMI for July was left unchanged at a very soft 42.7. June unemployment held at 6.4% and an all-time low. Tight labour markets underpin elevated wage growth which the ECB will be wary of.

GBP has dipped below 1.2848 support again. Cable is now trading on long-term trendline support from the March low. The latest UK data tilts risks to a smaller 25bp rate hike by the BoE on Thursday.

USD/JPY is weaker today on some yen strength amid the muted risk mood. That comes after three strong days of gains in the major. Yesterday saw it rise as much as 1.1% on the BoJ’s surprise fixed-rate operation. We also had dovish comments from BoJ Deputy Governor Uchida.

AUD has plunged over 2.1% in two days after the RBA delivered its second rate pause and amid risk aversion. The aussie has slid to four-week trough and support levels around 0.66. USD/CAD looks to be breaking higher after building a base above 1.32. The 1.3250/62 area had capped gains through the second half of last month.

Stocks: US equities closed modestly lower on the first day of August. The benchmark S&P 500 lost 0.27% to 4576. The blue-chip index was dragged lower by consumer discretionary and utility stocks. The tech-laden Nasdaq dropped 0.25% to 15,718. The Dow printed a fresh 17-month cycle high at 35,679 before closing just below.  Impressive gains were seen in Caterpillar after its results.

 Asian stocks were lower following the muted Wall Street handover.  Chinese stocks losses were cushioned by further support and jawboning from Chinese agencies. The Nikkei 225 underperformed and dipped below 33,000.

US equity futures are solidly in the red as investors digest the US rating downgrade. European equity futures are pointing to a lower open (-0.7%). The Euro Stoxx 50 closed down 0.9% yesterday.

Gold is trying to hold onto support just above $1940. The 50-day SMA sit at $1951. Recovery attempts are being thwarted by the resurgent dollar and Treasury yields.

Event Takeaway – RBA pause again points the way

It’s worth revisiting the RBA’s pause decision yesterday. Keeping rates unchanged at 4.1% surprised analysts. But not so much markets who only saw a 20% chance of another hike. The economy is growing below trend and a tight labour market is showing signs of cooling. There is also uncertainty about the pass through of 400bps of rate hikes on the economy.

The RBA kept the chance of more tightening on the table. But rates may now have peaked with an extended pause now the likely base case. As with other major central banks, guidance is being replaced with a data dependent stance. Money markets imply there is an even chance of one final rate rise in the fourth quarter. Rate cuts are priced for the second half of 2024.

Chart of the Day – Dow powers ahead

We highlighted the performance of the Dow in our July recap report. The index enjoyed an incredible 13 consecutive days of gains last month. It smashed through previous strong long-term resistance at 34,281. We are now into a fourth straight week of higher prices. Yesterday saw a close above the mid-April top at 35,492. The February high at 35,824 and the year-to-date peak is at 36,952.

Caterpillar was the main driver yesterday. It rose 8.9% after stellar earnings. EPS leapt 75%, sales grew 22% and the outlook was strong. The company is thriving amid a $1 trillion Federal windfall supporting infrastructure projects. Watch out for more company results with Apple and Amgen, plus Amazon later this week.