Morning Report
Today's economic developments and market movements.
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Key themes: Air strikes from Iran into Israel marked a significant escalation in the Middle East overnight, with Israel’s Prime Minister Benjamin Netanyahu vowing to retaliate.
Markets responded to the news in textbook fashion, selling risk in favour of traditional safe-haven assets. US and other developed market equities retreated and yield curves shift down and flattened.
Crude markets finally reacted to the risk that escalating conflict could disrupt supply, with oil futures jumping overnight and gapping higher at the open this morning.
Share markets: Escalations in the Middle East saw US equities pull back as risk sentiment soured. This was led by the NASDAQ down 1.5%. The S&P 500 was down 0.9% while the Down Jones closed 0.4% lower. The Euro Stoxx 50 was also down 0.9%, while London's FTSE 100 was the only major developed market index to rise, gaining 0.5%.
Japan's Nikkei also rose 1.9% with most of the gains occurring at open.
The ASX 200 closed 0.7% lower yesterday, pulling back from its record high in the previous session which was underpinned by the announcement of significant policy support in China.
Interest rates: Yields curves across the US, UK and Germany were broadly lower and flatter, reflecting the risk off mood and demand for safe haven assets. The bid tone in Europe was helped along by a slightly softer headline reading on the harmonised inflation measure, while a sizeable fall in the ISM manufacturing prices paid index firmed the case for a sustainable return to the inflation target in the US.
The US 2-year yield dropped 4 basis points to 3.60%, while the 10-year yield fell 5 basis points to 3.73%. Markets are still expecting another two 25-basis point rate cuts this year with an almost 70% chance of a larger 50 basis point cut in either of the remaining meetings this year.
The 10-year UK Gilt was down 6 basis points to 3.94% and the 2-year down 3 basis points to 3.95%. The German 10-year Bund yield was down 9 basis points while the 2-year was down 3 basis points to 2.03% and 2.01%, respectively.
Aussie futures mimicked the moves offshore, the 3-year futures yield was down 3 basis points to 3.46%, while the 10-year was down 5 basis points to 3.96%. Markets are still pricing in around a 70% chance of an RBA cut this year.
Foreign exchange: Escalating conflict in the Middle East saw the US dollar well bid as investors flocked to safer assets. The DXY index rose from a low of 100.70 to a high of 101.39 before retracing some of the move to trade around 101.20 at the time of writing. The move pushes the US dollar up above it’s range of the last few weeks, further developments in the Middle East and US non-farm payrolls data this Friday night will dictate the near-term moves.
As we flagged in this publication earlier in the week, the Aussie dollar was at risk of pullbacks should the global risk mood sour, as it did overnight. As expected, the Aussie dollar pulled back below 68 cents falling from a high of 0.6935 to a low of 0.6856 and was trading around 0.6882 at the time of writing. With Chinese markets closed this week for golden week holidays, the Aussie dollar’s fate will rest on the USD leg, though we expect the 0.6850-0.6950 range will likely hold, though downside support could be tested should the risk mood sour further, and US labour force data come in firmer than expected.
The Japanese Yen outperformed, benefitting from its safe-haven characteristics. The USD/JPY finished a little softer at 143.57 after trading between a high of 144.53 and a low of 142.98. The euro and the British pound both sank lower breaking recent ranges to the downside. The euro slipped from a high of 1.1144 to a near 3-week low of 1.1046, while the pound broke its recent uptrend falling from a high of 1.3389 to an almost 2-week low of 1.3237.
Commodities: Crude markets finally came alive to the prospect of disrupted supply from broadening escalations in the Middle East. West Texas Intermediate (WTI) futures gained 2.4% to US$69.83 per barrel and have lifted another 1.5% in early trade this morning. The American Petroleum Institute (API) reported that US crude inventories decreased by 1.5m barrels last week. Meanwhile, OPEC’s crude output fell by 480k barrels per day last month on weaker supply from Libya.
Iron ore prices look to be consolidating their recent ascent on Chinese stimulus. SGX iron ore futures slipped 1.6% yesterday to US$108.04 but remain 20% above the price traded at the start of last week.
Gold popped higher, benefitting from the risk-off mood. Gold rose 1.1% to US$2,663.23 per ounce and is not far shy of its record high. Gold is likely to remain well supported by falling real yields and knife-edge tensions in the Middle East.
Metals also had a decent showing, nickel futures jumped 1.1% yesterday to US$17,711, their highest level since June, while copper rose 1.5% to US$9862.25.
Australia: Retail sales rose 0.7%mth in August to be 3.1% higher than a year ago. The ABS cited a warmer than usual August contributing to the boost but the impact of the Stage 3 tax cuts cannot be ignored. After previous tax cuts, it has taken time for consumers to make large purchases and the bump in August could reflect that.
Building approvals were down 6.1% in August but up 3.6% from last year. The current rolling 12-month pace of dwelling approvals is sitting around 166k, near the lowest since 2013. This is well short of the 240k annualised pace of dwelling construction needed to hit the Federal Government’s 2029 goal of building 1.2 million new homes. Private sector house approvals were up 0.5% in the month to be around 20% above the cycle lows. High density approvals fell 17.5%mth speaking of the broader weakness in multi-density approvals taking the government further away from its goal.
The CoreLogic Home Value Index rose 0.5% in September with annual price growth moderated to 6.7%. Performances continue to diverge across capital city markets, prices slipping in Melbourne, rising slowly in Sydney but still rising strongly in Perth, Adelaide and Brisbane.
Eurozone: Inflation surprised marginally to the downside in September, the CPI declining 0.1%, helping annual inflation slow from 2.2%yr to 1.8%yr. Annual core inflation ticked down in the month from 2.8%yr to 2.7%yr. While service prices declined in the month, annual services inflation remains sticky around 4.0%yr.
Japan: The Q3 Tankan Survey provided encouraging news. The outlook for large nonmanufacturing businesses ticked up to 30pts while for manufacturers it ticked down to 12pts. In the detail, capex intentions ticked down slightly but remain strong at 10.6%, roughly where they were during the 1980s expansion. Output prices remain elevated at 2.8% for the year ahead, 4.1% three years out and 4.9% five years out. This suggests businesses are still wlling to raise prices and that inflation expectations are not drifting lower.
United States: The ISM manufacturing PMI disappointed in September, holding at 47.2, a level well below the historic average. New orders improved in the month but remained weak at 46.1, while the employment index deteriorated further to 43.9, signalling the risk of a material retrenchment of staff across the sector. Pointing to a softening outlook for upstream price pressures, the prices paid index dropped to 48.3 in September, having averaged 54.2 the past six months.
August’s JOLTS survey was mixed. Job openings recovered above 8mn after two months below that level. Still, the current level is materially lower than this time last year, when job openings sat at 9.4mn. The hiring rate ticked down from 3.4% to 3.3%, the same as June. The separation rate meanwhile reversed July’s rise to 3.4%, falling back to 3.1%. The quit rate continued to edge lower to 1.9% as the layoff rate remained benign at 1.0%.
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