Oil rises amid escalation of conflict in the Middle East. Inflationary pressures in Australia are easing

Tuesday’s US economic news was stronger than expected, hawking Fed policy and weighing on stocks. The S&P CoreLogic composite-20 US home price index for May rose 6.81% y/y, stronger than expectations of +6.60% y/y. The US June JOLTS open job openings fell by 46,000 to 8.184 million, showing a stronger labor market than expectations of 8.000 million.

The US Federal Reserve will hold its monetary policy meeting today. The Fed is expected to keep the federal funds rate at a 23-year high of 5.25-5.50% for the 8th consecutive meeting in July 2024. However, policymakers will likely signal a possible rate cut in September amid signs of cooling inflation and a strong but slowing labor market. Annualized core inflation fell to 3% in June, the lowest level since June 2023, and core inflation hit a more than three-year low of 3.3%.

Microsoft (MSFT) shares fell 2.7% after the disappointing news. The US tech major said Tuesday it will spend more money on artificial intelligence infrastructure even as growth in its cloud business slows, which is another sign that the return on big technology investments may take longer than Wall Street had hoped.

Airbus (AIR) reported strong results for the first half of 2024 on Tuesday. The company delivered 323 commercial airplanes, up from a year earlier, and boosted revenue to 28.8 billion euros. The company also reported an order book of 8,585 commercial aircraft at the end of June 2024. “The main success was achieved in Airbus’ commercial segment.

WTI crude prices rose to $76.2 a barrel on Wednesday, recovering from a more than 1% drop in the previous session, as rising tensions in the Middle East posed risks to oil supplies. Hamas leader Ismail Haniyeh was killed in Tehran early Wednesday after Israel said it had killed a top Hezbollah commander in an airstrike in Beirut on Tuesday in response to an attack on the Golan Heights over the weekend. At the same time, a drawdown in US inventories is driving prices higher. API data showed US crude inventories fell by 4.5 million barrels in the week ending July 26, marking the fifth week of inventory declines and the biggest drop in a month.

Asian markets were mostly down yesterday. Japan’s Nikkei 225 (JP225) was up 0.15%, China’s FTSE China A50 (CHA50) decreased by 0.93%, Hong Kong’s Hang Seng (HK50) lost 1.37% and Australia’s ASX 200 (AU200) was negative 0.46%. Hong Kong stocks rose by 1.5% in early trading on Wednesday amid widespread gains across all sectors. Traders perked up after Beijing said it would step up fiscal policy measures and deepen tax reforms to spur economic recovery.

The Bank of Japan (BoJ) raised its key short-term interest rate at its July 2024 meeting to 0.25% from the previous range of 0 to 0.1% set in March. The central bank added that it will reduce monthly bond purchases to JPY3 trillion in January-March 2026 from the current pace of JPY6 trillion to conduct a more normalized monetary policy. Starting in August, the BOJ will offer to buy JPY400 billion worth of 5 and 10-year JGBs in each transaction, reversing the current offer range of JPY400-550 billion. The changes are part of the central bank’s plan to shrink its nearly $5 trillion balance sheet and gradually withdraw from the bond market. In its quarterly forecast, the BOJ predicted core inflation in fiscal 2024 will be around 2.5%, down from its April forecast of 2.8%.

The ASX 200 Index (AU200) jumped 1.75% to close at 8,092 on Wednesday, hitting a new all-time high as softer-than-expected domestic inflation data refuted bets on another rate hike by the Reserve Bank of Australia. The data showed that Australia’s core inflation slowed more than expected in the second quarter annually and quarterly to 3.9% and 0.8%, respectively. Markets now believe that the probability of an RBA rate cut in November is around 50%, much earlier than previous forecasts that suggested a move by April next year.