Morning Report
Today's economic developments and market movements.
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Key themes: There was a risk on tone overnight with the ECB cutting rates for the second time and benign producer price data coming out of the US.
US and European equities recorded sizable gains.
US government bond yields were little changed, while European yields were higher amid more hawkish than expected comments from ECB President Lagarde.
The risk on tone saw the Aussie outperform, while the US dollar index was lower.
Improved risk sentiment also saw commodity prices improve.
Share markets: The S&P 500 gained for a fourth consecutive session, rising 0.8%. Momentum in tech stocks is seeing the NASDAQ outperform, up another 1.0% gain overnight. The Dow Jones also finished 0.6% higher.
European markets also rallied off the back of the ECB’s well-telegraphed 25bp rate cut, as evinced by the Euro Stoxx 50 lifting 1.1% and the German DAX rising 1.0%. The FTSE 100 also rose 0.6% in London.
The Asian session took the cue from a bullish global trend. Tokyo’s Nikkei was a stand-out, up 3.4% yesterday after having declined for the past six sessions. Stocks in India and Hong Kong finished 1.9% and 0.8% higher respectively.
The ASX 200 rose by a solid 1.1% higher yesterday. All sectors finished in the green, with gains led by information technology and energy. Futures markets are pointing to another solid open this morning.
Interest rates: The front-end of the treasury curve was little-changed overnight, with the 2-year treasury yield holding flat at 3.64%. Meanwhile, the 10-year treasury yield rose 2 basis points to 3.67%.
Firmer-than-expected core inflation in yesterday’s US CPI print has all but ruled out a 50 basis point move to kick-off the rate cutting cycle; however, markets have priced in around 111 basis points of cuts through to the end of the year, implying at least one 50 basis point cut at either the November or December meeting.
Bunds were sold-off following the ECB’s 25 basis point rate, sending the 2-year and 10-year yields up 7 basis points and 4 basis points respectively. Similarly in the UK, the 2-year and 10-year Gilt yields rose 3 basis points and 2 basis points respectively.
The Australian yield curve flattened slightly overnight, with the 3-year futures yield rising 1 basis point to 3.51% and the 10-year futures yield falling 1 basis point to 3.88%.
Foreign exchange: The US dollar sold off on the back of improved sentiment and the slight uptick in pricing for a 50 bp cut when the Fed meets next week. The DXY index reached a high of 101.84 before sliding to a low of 101.22, where it is currently trading. The focus is now firmly of the Fed’s meeting next week.
The EUR/USD pair rose 0.5% to 1.1076 after the ECB lowered interest rates. Comments from ECB President Lagarde, including “a declining path is not predetermined”, were more hawkish than expected, supporting the Euro.
The Aussie outperformed up 0.7% against the Greenback and 0.6% against the Euro. Encouraging rebounds across commodities and equities provided support. After reaching a low of 0.6270, the AUD/USD pair increased to 0.6725. Chinese activity data to be released this weekend poses a risk for the Aussie.
The Yen made gains against the US dollar, with the USD/JPY down 0.4% to 141.43.
Commodities: Commodities were generally higher.
Oil rose for a second straight session as Hurricane Francine hit crude production and gas processing in the Gulf of Mexico. The Bureau of Safety and Environmental Enforcement said that Francine had forced the shut in of 670kb in the Gulf of Mexico, equivalent to more than a third of the regions output. The October WTI contract is up 2.5% to US$68.97.
Iron ore markets rose 2.2% to US$94.65 per tonne, helped by signs of restocking ahead of the Mid-Autumn Festival holiday with Chinese markets closed on Monday and Tuesday.
Metals jumped helped by the ECB rate cut and expectations that other central banks will join the cutting cycle.
Australia: The Melbourne Institute’s consumer survey showed c over the next 12 months eased to 4.4% in September, from the 4.5% expected in August. Inflation expectations are also down from the 4.6% expected a year ago.
Japan: Producer (or wholesale) prices increased 2.5% over the year to August, a step down from the 3.0%yr increase in July and below the 2.8%yr expected by the market. On a monthly basis, producer prices fell by 0.2%, the first decline in almost one year, softer than the flat read expected by the market.
New Zealand: Retail spending increased 0.2% in August. Consumers spending on durables, apparel and fuel increased. On the other hand, spending on discretionary items such as hospitality and motor vehicles excluding fuel declined. On an annual basis, Retail spending fell 2.9% in August after declining 4.9% in July. We expect spending will pick up over the coming year as financial pressures ease and the full impact of stimulus measures flow through the economy.
Eurozone: The European Central Bank (ECB) cut its deposit rate by 25 bps to 3.5% at their September meeting. The press conference made clear that the Council will remain data dependent.
That said, after a modest lift in inflation to 2.5%yr, it is expected to decelerate to 2.2%yr in 2025 and 1.9%yr in 2026, with disinflation continuing to broaden over the period. The ECB’s growth view has been revised “slightly downward” as the recovery is “facing some headwinds”, by 0.1% each year, but still shows the economy coming back to trend growth, from 0.8%yr in 2024, to 1.3%yr in 2025 and 1.5%yr in 2026. Returning to trend after being below it for a number of years is unlikely to create meaningful inflation risks. Over the forecast period however, the Council will remain watchful on services inflation and wage growth, with core inflation forecasts nudged slightly higher.
United States: Producer (or wholesale) prices increased 0.2% in August after July’s 0.1% gain was revised down to a flat read. The outcome for the moth was slightly above the 0.1% expected by the market. Core producer gained 0.3% in August, but the July outcome was revised down by 0.2ppts to -0.2%. Annual headline producer price inflation therefore slowed from 2.1%yr to 1.7%yr, while core PPI inflation was broadly unchanged at 2.4%yr.
US weekly initial jobless claims were close to estimates and little changed last week at 230k with continuing claims slightly higher at 1.85m from 1.845m last week.
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