Morning Report
Today's economic developments and market movements.
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Key Themes: Equities were higher across the board with labour market data suggesting the US Fed could achieve the softest of soft landings. The S&P 500 closed at a fresh record high. Solid gains were also recorded in European markets.
US bond yields were mixed – lower at the shorter end and broadly unchanged on longer dated bonds. The Bank of England and Norway’s Norges Bank kept policy rates unchanged. Bond yields were higher across the curve in the UK, amid Governor Bailey’s guidance that rates can come down only “gradually over time.”
The US dollar was broadly unchanged while the Aussie outperform to be above 0.6800.
Improved risk sentiment saw commodity prices improve, with the price of oil and iron ore finishing higher.
Share markets: The decline in US initial jobless claims, coupled with the Fed’s outsized half a percentage point cut yesterday, supported risk sentiment and laid the foundation for a broad-based rally in equities overnight.
The S&P 500 finished 1.7% higher, closing at a fresh record high. Tech stocks led the market higher with Nvidia up 4% on the day, followed by Intel and Tesla. The tech heavy Nasdaq outperformed, up 2.5%. The Dow Jones finished 1.3% in the green, to also close at a fresh record high.
European stocks rallied, with the German DAX up 1.6%, the Euro Stoxx 500 up 2.2% and the FTSE 100 finishing 0.9% higher despite hawkish comments from the BoE Governor.
The ASX 200 rose for the sixth consecutive session, closing 0.6% higher. Six of eleven sectors were higher, led by materials stocks. Futures markets are pointing to a solid open this morning, following the lead from the US and European markets.
Interest rates: US Treasury yields were lower at the shorter end of the curve. The 2-year treasury yield declined 4bps to 3.58%. The 10-year treasury yield increased 1bp to 3.71%. Markets have priced in around 72 basis points of cuts through to the end of the year, and a total of 200 basis points of cut by the end of 2025.
In the UK, bond yields were higher across the curve after the BoE Governor emphasised that rates could only be reduced “gradually over time.” The 2-year increased by 2bps and the 10-year Gilt yield rose by 4bps.
The Australian yield curve steepened slightly overnight, with the 3-year futures yield unchanged at 3.44% and the 10-year futures yield increasing 2bps to 3.96%.
Foreign exchange: The US dollar broadly unchnaged over the day, as markets digested yesterday’s 50bp rate cut from the Fed. From opening at at around 101, the DXY briefly moved above 101.40 before finishing at 100.61.
The Aussie dollar outperformed over the course of the session. Having briefly touched a low of 0.6740 prior to the release of stronger-than-expected labour market data, the AUD/USD gathered momentum and nearly breached 0.6840 before finishing at 0.6812, or 0.7% higher over the session – marking the highest close since the start of the year.
The GBP/USD continued to march higher as the Bank of England showcased a patient approach to policy easing – deciding to leave rates unchanged – seeing the currency pair briefly pop above 1.33 before finishing at 1.3283. The EUR/USD also continued to track an uptrend, up 0.4% to 1.1160, while the USD/JPY ticked just 0.2% higher to 142.59.
Commodities: Commodities generally moved higher overnight.
Oil had a solid showing, with West Texas Intermediate oil futures moving 1.5% higher to US$71.95 per barrel. This follows recent flare-ups in tensions in the Middle East and earlier data which highlighted weak inventories in the US.
Iron ore futures rose yesterday, once again dipping lower in early trading – this time briefly below US$89/t – before quickly gathering momentum to close at US$93.75/t, up 1.2% on the previous day’s close.
Gold broke its recent run of recent declines with a 1.1% increase to $2587.06 per ounce at the time of close, marking a fresh record high.
Australia: Employment increased by +47.5k in August, notching up another above trend gain in employment. Employment growth has outstripped population growth over the past five months, seeing the employment-to-population ratio rise from 64.0% in March to 64.3% in August. The increase was driven entirely by part-time employment (less than 35hrs/wk), with full-time employment (at least 35hrs/wk) holding mostly flat. While the split between full-time and part-time is often volatile month-to-month, such a result may reflect increased hiring in anticipation of a lift in household demand following recent income tax cuts.
This may also be behind the rise in the underemployment rate – which measures those that are able and willing to work more hours – from 6.3% to 6.5%, given recent reports suggest that actual demand has shown little response to the tax cuts. If this is the case and demand remains subdued, there is a risk that the recent increase in headcount could unwind in the coming months.
As expected, the participation rate held at its current high of 67.1%. This saw the size of the labour force increase by 37k – less than the increase in employment – implying there was a –10.5k fall in the level of unemployment. This drove a 0.08ppt fall in the unemployment rate, from 4.24% in July to 4.16% in August.
Overall, today’s data once again highlights that the labour market remains an important pillar of support in what is otherwise a challenging economic backdrop. This is unlikely to materially change the RBA’s perspective on the state of the labour market, which it currently views as “tight relative to full employment” and as moving into “better balance”.
New Zealand: Economic activity declined 0.2% in the June quarter 2024, following a downwardly revised 0.1% (from 0.2%) expansion in the March quarter. The outcome while weak, was better than the decline of 0.4% expected by the market. On the expenditure measure of GDP, there were gains in household spending, government spending and business investment. Goods exports were the main drag on growth, falling 4.4% in the June quarter after a strong rise in the March quarter. On the production side, retailing, wholesaling and forestry saw the most significant declines, with manufacturing recording a strong 1.9% expansion. On an annual basis, GDP contracted by 0.5% in the June quarter.
United Kingdom: The BOE’s Monetary Policy Committee voted 8-1 to keep rates steady at 5%, following their early-August 5-4 vote to cut by 25bps. Governor Andrew Bailey said “We should be able to reduce rates gradually over time” but that it was “vital that inflation stays low, so we need to be careful not to cut too fast or by too much.” Concerns over wage and services inflation remain, limiting the pace at which policy can be eased. The Monetary Policy Committee also unanimously voted to sustain their Balance Sheet reduction at the same pace through to October 2025.
United States: Initial jobless claims declined 12k to 219k in the week ended 14 September, lower than the 231k recorded in the previous week and lower than the 230k expected by the market. It was the lowest level since May and is another proof point that the deceleration in net employment growth is the result of decelerating job creation not an increase in job shedding. Continuing claims also declined to 1.829m from 1.843m in the previous week.
The US Philadelphia Fed. September Business Outlook firmed to +1.7 from a read of -7.0 in the previous month. This was better than the flat read the market has pencilled in. Employment lifted to 10.7 from -5.7, but the average work week deteriorated from -2.3 to -13.6 and new orders slipped to -1.5 from +14.6. Prices paid rose from 24.0 to 34.0, and prices received from 13.7 to 25.6, both above the 6-month average.
The US leading index was soft again at -0.2% (est. -0.3%, prior -0.6%), pointing to sub-trend growth over the coming six months.
US existing home sales fell 2.5% in August, more than retracing July’s 1.5% gain, and taking the level of sales back near its post-2010 low of a year ago. Supply remains the primary concern for the market.
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