U.S. Equities Flat On Mixed Economic Data, USD Weaker Ahead Of FOMC, Focus On Australian Inflation Data, ASX SPI200 Futures Up 12 Points

U.S. equity markets closed flat on Tuesday as earnings from some major names were lacklustre, the benchmark S&P500 index up +0.03% gaining less than a point, the Nasdaq100 managed to gain +0.13% to be at the highest levels since December 2015 while the U.S. dollar index drifted lower, down -0.12% ahead of the FOMC decision on Wednesday. Twitter Inc. fell as much as 10% in after-hours trading as forecasts ahead for the third quarter of US$590-610m were short of analyst expectations of US$681m. McDonald Corp. declined 4.47% during normal trading hours even as earnings per share excluding one-time expenses topped analyst estimates of US$1.39 with actual of US$1.45, the disappointment came from same-store sales growth of 3.1% against forecasts of 3.6%.

Apple Inc. gained 6.87% in after-hours trading as IPhone sales topped estimates of a decline to 39.9m with actual unit sales of 40.4m, revenue fell 15% to US$42.4b however this was higher than the estimated US$42.1b and finally earnings per share exceeding forecasts of US$1.39 with an actual of US$1.42. Finally Caterpillar Inc. gained +5.16% during regular trading as cost cutting offset weaker revenue with earnings per share excluding one-time items of US$1.09 surpassing estimates of US$0.96.

Looking to U.S. data the Markit services PMI (MoM Jul) missed expectations of a gain to 52.0 with a reading of 50.9 while the composite PMI (MoM Jul) expanded slightly from 51.2 in June to 51.5. The S&P/Case-Shiller 20 Composite (YoY May) which measure residential property prices across 20 major U.S. cities expanded less than expected increasing 5.24%, down from 5.44% in June and below consensus of 5.52%. New home sales (MoM Jun) beat estimates of a 1.60% with actual growth of 3.50% and consumer confidence was also higher than expected (MoM Jul) at 97.3 against estimates of 96.

Market participants will be focused on the statement accompanying the FOMC interest rate decision on Wednesday despite wide expectations of no change in the key rate. The market has slowly been raising the probability of a rate hike by the end of 2016 although Fed Fund futures still price this as less than 50%. Analysts will be focusing intently on each word of the statement to try to ascertain any suggestion of a hike later this year as there will be no accompanying press conference by Fed Chair Janet Yellen.

Over in Europe equity markets were broadly higher led by gains in the DAX30 & Euro Stoxx 600 up +0.49% & +0.10% respectively as the Euro declined -0.09%. The British Pound was relatively flat, down -0.02%, the FTSE100 gained +0.21% while the FTSE250 closed -0.13% weaker.

Commodity prices were fairly mixed on Tuesday, both WTI & Brent crude oil down -0.49% & -0.29% respectively as was natural gas -1.27% while copper & iron ore gained +0.41% & +2.15%. Spot gold & silver both benefited for the modestly weaker USD, gaining +0.37% & +0.46%.

Domestically the ASX200 finished +0.07% higher on Wednesday and the market looks set to open higher with ASX SPI200 futures up 12 points in overnight trading. Key data out locally will be CPI figures (QoQ & YoY Q2) with the mean forecast for a gain of +0.4% following the shock -0.2% reading in the first quarter. This data will be important for determining whether the RBA is likely to lower rates at its August 2nd meeting or not, with suggestions a reading lower than 0.4% likely to lead to a cut in the cash rate.

On top of any low inflation reading the RBA certainly has the scope to cut rates later this year with wage growth quarter on quarter steadily declining and relatively disappointing unemployment data with the majority of jobs contributing to the lower 5.8% unemployment rate coming from part-time work. One of the prior concerns for the RBA lowering rates was the booming housing prices, particularly in Sydney & Melbourne and over the past year we have seen tougher macro-prudential regulation by APRA on lending by the banks strengthening lending standards which should provide further comfort to the RBA.

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Data releases:

·         Chinese Industrial Profits (YoY Jun) 11:30am AEST

·         Australian CPI (QoQ & YoY Q2) 11:30am AEST

·         German Gfk Consumer Confidence Survey 4:00pm AEST

·         U.K. GDP (YoY & QOQ Q2) 6:30pm AEST

·         U.S. Durable Goods Orders (MoM Jun) 10:30pm AEST

·         U.S. Pending Home Sales (YoY Jun) 12:00am AEST

·         U.S. Crude Oil Inventories (Jul 22nd) 12:030am AEST

·         FOMC Rate Decision (Jul) 4:00am AEST

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This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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