Breakfast briefing: America turns economically brittle on Trump corrosion

US new home sales unexpectedly jumped 20% in August, though the data's reliability is questioned given conflicting mortgage application trends. Concurrently, Australian inflation pressures persist, delaying RBA rate cut expectations, and copper prices rose on supply disruptions. However, significant market concern centers on deteriorating US lending standards following two financial firm collapses and the looming federal government shutdown, which could severely unnerve markets, as evidenced by rising US bond yields, a weakening NZD, and mixed global equity performance.

Analysis

Market sentiment is turning negative, anchored by accumulating risks in the United States. The primary concerns are a looming federal government shutdown, which is explicitly noted as a potential trigger for severe market disruption, and a deterioration in credit quality, evidenced by the collapse of two financial firms, Tricolor and First Brands, in a manner described as a 'reprise of the GFC sub-prime mistakes'. This backdrop of vulnerability is amplified by a -0.4% dip in the S&P500 and a +3 bps rise in the 10-year Treasury yield to 4.15%. While August US new home sales surprised with a +20% jump, the report itself questions the data's reliability, attributing the surge to heavy discounting and noting a contradictory lack of new purchase mortgage applications. Elsewhere, inflationary pressures persist, with Australia's August CPI hitting a one-year high of 3.0%, causing markets to push back expectations for RBA rate cuts and supporting the Australian dollar. In commodities, copper prices have jumped on supply disruptions from mine closures in Indonesia and Peru, and oil prices have also risen, whereas gold has fallen sharply by US$48. The New Zealand dollar has weakened significantly, hitting its lowest level since mid-April against the USD, reflecting broad-based US dollar strength and a cautious outlook.

Key Decisions for Investors

• Given the collapse of two financial firms and rising concerns over credit standards, investors should heighten scrutiny of exposure to US consumer and corporate debt, particularly in the automotive sector.
• With a US federal government shutdown looming, it is prudent to consider reducing exposure to US equities or implementing hedges, as a failure by the US to meet its obligations is cited as a key risk for unnerving financial markets.
• Evaluate tactical positions reflecting current market divergences, such as the bullish, supply-driven momentum in copper and oil, alongside potential continued strength in the Australian dollar due to sticky inflation delaying central bank rate cuts.
• Be skeptical of anomalous headline data, like the +20% surge in US home sales, and instead focus on underlying trends and corroborating indicators to gauge the true health of the economy.