The Overnight Report: Fed Signals Patience

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This story features EUREKA GROUP HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: EGH

Dovish comments from Fed Governor Waller eased concerns around an FOMC September rate hike, sending bond yields lower.

Equities rallied in response.

After a positive session for the Australian market yesterday, led by Financials and Healthcare, ASX200 futures are pointing to another green-on-screen day to round out the first week of September.

Good Morning,

The Australian market rallied 41.7 points or 0.46% to 9020.10 yesterday, led by Financials and Healthcare. Utilities and Reits slipped.

Post another volatile results season in August, Australian companies are now ready to pay out dividends to shareholders.

To stay in touch with which companies are going ex-dividend, check out the FNArena Calendar https://fnarena.com/index.php/financial-news/calendar/

Today’s Big Picture, J.L. Bernstein extract

Waller Cools The Hike Trade

Waller said he would support holding rates steady this month if August inflation keeps improving.

Traders cut the odds of a September hike to roughly even, down from about two in three a day earlier.

He left the door open both ways, saying hot inflation would put a hike back on the table.

The next two data prints settle this, not the speeches.

Oil Is The Reason This Stays Open

WTI held above US$91 and Brent above US$95, a fourth straight day higher.

Kuwait said it was confronting Iranian missiles and drones, with the conflict now in its seventh month.

Energy is the shortest path from that war to American prices.

Waller can stay patient only if crude cooperates.

Services Are Humming, Hiring Is Not

August services activity came in at 55.4, the strongest since February, with new orders at 60.9.

Employment stayed in contraction at 47.8 while prices paid climbed to 72.6.

That is the entire Fed argument in one report.

Demand is fine, costs are not, and nobody is hiring into it.

ANZ Bank, Australian Morning Focus

The S&P500 was up 1.1%. The Euro Stoxx50 ended its session up 0.3%, while the FTSE100 gained 0.7%.

The yield on the UST 10y rose around 0.01bp to 4.77%. WTI lifted 2% to US$91.7/bbl. Gold was stronger at US$4,472.2/oz.

US: The August ISM services index rose 1.3pts to 55.4. New orders rose 3.7pts to 60.9, prices paid rose 2.3pts to 72.6, and the employment component rose 0.4pts to 47.8 but remained below 50.

At face value, strong growth with weak employment gains suggests a significant productivity dividend. Final Q2 nonfarm productivity was released and rose 2.24% y/y.

Unit labour costs rose 1.4% y/y. Unit labour cost growth is below pre-pandemic levels and supportive of disinflation.

US Fed policy: Market pricing for a September FOMC interest rate hike fell back to 50% following comments from Fed Governor Waller that current rate settings could get inflation back to 2.0%.

He noted disinflation in the June and July data and said he was inclined to hold rates steady if the August data show ongoing disinflation.

Chair Warsh has ended forward guidance, but this week Waller, Williams and Barr, all senior members of the FOMC, have indicated a bias towards patience on interest rates if the August inflation data are soft.

The opposite is also true. If inflation comes in stronger, they will support a rate increase. The bones of Waller’s comments were interesting. He said that underlying inflation trends are better than the core PCE y/y data suggest and that the core PCE inflation rate is not the best guide to where inflation is today, noting the 3m saar rate has fallen quickly to 3.05% from 4.76% in February.

August nonfarm payrolls are expected to show a 55k increase in employment, with the unemployment rate steady at 4.1%.

We think that for the market to interpret the data as dovish, a jobs number closer to zero or negative, or a sharp jump in the unemployment rate, is needed.

Dell Results Suggest AI Productivity Boom Is Here, Ed Yardeni & Elias Griepentrog,Yardeni QuickTakes extract

Dell Technologies’ stock price is soaring. The company delivered a major beat across the board for its fiscal 2027 second quarter (ended July 31), driven by massive, accelerating demand for AI infrastructure and strong legacy hardware performance.

Revenues and earnings rose 58% y/y and 203%, respectively. AI server revenue rose 100%, while traditional servers and networking revenues rose 122%. The results confirm that the AI infrastructure buildout remains in full swing.

Strong demand for AI compute capacity points to accelerating AI adoption across the economy, which we think will drive a productivity boom.

We are already seeing signs of this productivity boom in the economic data. The Atlanta Fed’s GDPNow model currently estimates that real GDP is increasing by 4.8% (saar) in Q3, led by a whopping 21.5% increase in AI-supercharged fixed business equipment investment.

Output is booming, while labour input is rising at an anaemic pace, a clear sign of robust productivity growth.

Job growth remains modest relative to the economy’s rate of expansion. ADP reported a gain of just 38,000 jobs in August, following a gain of 46,000 in July.

Small monthly job gains reflect a declining labour force. That means fewer jobs need to be created to maintain a stable unemployment rate, currently at 4.1% and consistent with full employment.

Productivity growth has rebounded since it last bottomed in Q2-2017 at 0.85%, based on the annualised average of its seven-year growth rates. It rose to 2.4% during Q2-2026, slightly exceeding its historical average of 2.3%. We predict that this growth rate will rise to 3.0%-4.0% by the end of the decade.

Fed officials are also taking note of the AI-driven investment boom. Today, New York Fed President John Williams said in a CNBC interview that rising Treasury yields are driven by “a strong US economy and a strong economic outlook fuelled by big investments in AI and data centres and technology in general.”

His comments are consistent with our view that bond yields reflect strong nominal GDP growth.

On monetary policy, Williams said there are “no clear signs right now” whether current policy is sufficient to return inflation to target. Yesterday, Fed Governor Michael Barr said he would support a hike only if inflation fails to moderate further.

In other words, incoming inflation data bears the burden of proof. If progress toward the Fed’s 2% inflation target stalls, a majority of the FOMC is likely to vote to raise the federal funds rate in September.

CPI vs PCED. Inconveniently, core CPI and core PCED inflation rates are telling different stories. The former was 2.5% in July and has been falling toward 2.0% in recent months, while the latter was 3.3% in July and has been heading higher. The -0.9ppt gap between them is now the most negative since the 1980s. The average spread over time is +0.5ppt!

The FOMC meets on September 15-16. August’s CPI will be released on Friday, September 11. The Cleveland Fed’s reliable Inflation Nowcasting model predicts that core CPI will be up 0.2% m/m and 2.4% y/y. August’s PCED comes out September 30, after the FOMC meets. Core PCED is predicted to rise 0.27% m/m and 3.4% y/y, a full percentage point more than core CPI and still above 3.0%!

We presume that Fed officials are aware of this divergence and won’t be lulled into voting against a rate hike by a cool CPI, knowing that the PCED will be hotter.

One source of the divergence is that Computer Software & Accessories has a weight of only 0.027% in the CPI, but 1.20% in the PCED. This component rose a whopping 21.2% y/y during July.

Food Inflation. We are also starting to monitor food inflation closely. It could become a more meaningful source of inflationary pressure in the months ahead.

That’s because grain prices are surging. Wheat and corn prices recently reached their highest levels in more than three years amid Black Sea supply disruptions, adverse weather, and higher fuel and fertiliser costs.

Because these commodities sit at the heart of the food supply chain, the impact is likely to filter through to consumer food prices with a lag.

Commodity Call: copper’s supply squeeze, Soni Kumari & Daniel Hynes extract, ANZ Bank

Copper prices have risen above US$14,000/t as supply tightens on multiple fronts. The squeeze pushed the cash-to-three-month futures spread to a multi-year high of USD400/t before it normalised to around USD100/t. The backwardated market structure, alongside lower treatment and refining charges (TC/RC), points to a tighter refined copper balance.

The latest export ban on copper concentrate by the Democratic Republic of Congo tightened an already constrained market. Copper concentrate production from major producers such as Chile and Peru has disappointed as well, with mining output plunging in June. El Niño-related disruptions to mining and export operations have also weighed on supply.

Overall, we estimated South American production to contract by 3% to 8.5mt in 2026, marking a consecutive year of decline. While we expect previously disrupted mine production to recover in late 2026 and 2027, this rebound remains highly vulnerable to further disruptions and delays.

Tight copper concentrate supply is likely to keep spot TC/RCs under pressure and squeeze refiners’ margins. This concentrate tightness is increasingly feeding through refined copper production. China’s output fell 3% y/y to 1.1mt in June, while monthly production growth has slowed from an average of 9% in 2025 to around 3% in recent months.

Tariff-driven metal flows into the US continue to distort the global copper balance, with the COMEX-LME spread sustaining a strong arbitrage incentive and lifting COMEX inventories to record highs. We acknowledge that no Section 232 tariff will be implemented in the near term, but uncertainty will keep the market dislocated with inventories building in the US.

Even after the market received some clarity around tariffs, we see the movement of stock from the US remaining gradual.

Global copper demand looks resilient, supported by rising investment in grids, AI-related technologies, data centres, electric vehicles and other new-energy infrastructure. Against an undersupplied market backdrop of 1% of annual demand, we expect prices to find a floor near US$13,500/t, with upside towards USD14,500/t by year-end and potential to reach US$15,000/t in early 2027.

Corporate news in Australia:

• Eureka Group Holdings ((EGH)) is acquiring six Ingenia Communities Group ((INA)) assets for $123.8m, funded by an $80.2m equity raising and a new $80m debt facility
• The Goldman Sachs-run sale of PE-backed corporate services group Boardroom is reportedly struggling, with vendors seeking around SGD1.2bn based on pro-forma earnings of circa SGD60m
• Ares Management has hired Macquarie Capital ((MQG)) as it pursues a potential takeover of truck parts distributor MaxiPARTS ((MXI))
• Healthscope lenders are voting on an improved takeover proposal from Calvary and Pacific Equity Partners, as momentum fades behind a competing lender-owned restructuring plan
• Nestle has appointed Houlihan Lokey to sell New Zealand vitamin and supplements brand Go Healthy as part of a broader portfolio rationalisation
• Norwegian software group Volue has walked away from its $550m-plus takeover proposal for Energy One ((EOL)) after the target’s board declined to engage
• CVC Capital Partners has acquired a controlling stake in Queensland-founded insurance repair specialist Ambrose Construct Group, valuing the business at around $700m
• ExxonMobil’s proposed sale of its New Zealand fuel business for up to NZD1bn is progressing, with KKR, Carlyle and Australian private equity firms among prospective bidders
• Firmus has committed US$300m to Subco’s APX East submarine cable, securing up to 150Tbps of Australia-US capacity for 25 years to support its expanding AI factory network
• Team Global Express is seeking to refinance almost $180m of debt and raise a further $100m of funding, with its auditors flagging material uncertainty around the company’s ability to continue as a going concern
• Manuka Resources ((MKR)) is seeking to raise $12m from investors following the restart of gold production at its Cobar operations in NSW
• Moonshot AI has reportedly filed confidentially for a Hong Kong IPO seeking around US$3bn, potentially ranking among the city’s largest recent listings
• Melbourne private credit manager RMBL has emerged among lenders exposed to the $3.3bn collapse of property developer Bathla

On the calendar today:

-NZ 2Q Bldg volume

-NZ Aug ANZ consumer confidence

-EZ July Retail sales

-US Aug Average hourly earnings

-US Aug Non-farm payrolls

-US Aug unemployment

-CA Aug Unemployment

-GE July Factory orders

-AUSSIE BROADBAND LIMITED ((ABB)) ex-div 3.60c (100%)

-AMPOL LIMITED ((ALD)) ex-div 185.00c (100%)

-EAGERS AUTOMOTIVE LIMITED ((APE)) ex-div 25.00c (100%)

-BIG RIVER INDUSTRIES LIMITED ((BRI)) ex-div 2.00c (100%)

-COMMS GROUP LIMITED ((CCG)) ex-div 0.13c (100%)

-EMBARK EARLY EDUCATION LIMITED ((EVO)) ex-div 1.50c (100%)

-GENERATION DEVELOPMENT GROUP LIMITED ((GDG)) ex-div 1.00c (100%)

-HITECH GROUP AUSTRALIA LIMITED ((HIT)) ex-div 4c (100%)

-KINA SECURITIES LIMITED ((KSL)) ex-div 3.83c

-VIVA ENERGY GROUP LIMITED ((VEA)) ex-div 7.73c (100%)

-WHITEFIELD INDUSTRIALS LIMITED ((WHF)) ex-div 5.25c (100%)

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

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