Morning Report
Today's economic developments and market movements.
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Key Themes: US equities were mixed as investors took a breather following the strong rally driven by the Fed’s 50-basis point cut. European equities were lower, weighed down by auto stocks.
US bond yields were slightly higher across the curve, with the US dollar index also finishing slightly higher. The Aussie was broadly unchanged against the Greenback, consolidating recent gains to remain above 0.6800.
Commodity prices were generally lower, with the price of oil and iron ore both falling. Increased instability in the Middle East could see oil trade higher.
Share markets: US equities were mixed as investors took a breather following the strong rally driven by the Fed’s 50-basis point cut. After flipping between gains and losses as the session drew to a close, the S&P 500 and Nasdaq both ended lower, while the Dow finished slightly higher.
The S&P 500 finished 0.2% lower, to be 1.4% higher through the week. The tech heavy Nasdaq closed 0.4% in the red to finish the week 1.5% higher. The Dow finished 0.1% in the green, to be 1.6% higher over through the week.
European stocks fell, paring some of the previous session’s gains, as autos weighed on the market. Among the autos, Mercedes-Benz Group dropped after the company cut its financial forecast for the year. The German DAX and the Euro Stoxx 50 both finished 1.5% in the red. The FTSE 100 finished 1.2% lower, notwithstanding some resilient consumer spending data.
The Japanese Nikkei was 1.5% higher following Dovish comments from the BoJ Governor after the BoJ announced rates would remain on hold.
The ASX 200 rose for the seventh consecutive session, closing 0.2% higher to be 1.4% higher in weekly terms. Eight of eleven sectors were higher, led by financial stocks. Futures markets are pointing to falls this morning, following the lead from global markets.
Interest rates: US bond yields were slightly higher across the curve. The 2-year treasury yield increased 1 basis point to 3.59%. The 10-year treasury yield increased 3 basis points to 3.74%. Markets have priced in around 74 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.
Australian yield also increased across the curve overnight, with the 3-year futures yield up 3 basis points to 3.45% and the 10-year futures yield also increasing 3 basis point to 3.97%.
Markets have virtually priced in no chance of a move by the RBA Board when it announces its decision tomorrow. Markets have priced in 16 basis of cuts this year, with a full rate cut now priced in by February 2025, followed by three other rate cuts throughout 2025 – this is broadly consistent with Westpac economics rate outlook.
Foreign exchange: The US dollar edged higher on Friday, with the DXY briefly nearing 100.40 before retracing that fall to close just 0.1% higher at 100.72. This week features a stacked calendar for Fedspeak, meaning markets will have a lot to digest with respect to Committee members’ views on the balance of risks and likely pace of policy easing hereafter.
The Aussie dollar consolidated from the week’s gains on Friday. From opening at 0.6814, the AUD/USD traded a range of 0.6826 to 0.6784 before closing just –0.1% lower at 0.6805. Tuesday’s RBA policy decision is likely to deliver more-of-the-same in terms of the Bank’s views on risks, with policy widely expected to remain on hold until next year. The extent to which the subsequent monthly inflation data – due for release on Wednesday – supports the RBA’s rhetoric will be closely watched.
The Japanese Yen weakened following as thhe Bank of Japan kept policy rates on hold and pushed back on market expectations for a near-term rate hike. The USD/JPY jumped from 142.99 to 144.42 after the decision, before closing 0.9% higher at 144.00, back in line with the levels observed earlier in the month.
Both the Euro was little-changed on Friday, consolidating its gains following the Fed’s 50bp rate cut, the EUR/USD finishing broadly flat on the day at 1.1166. The GBP/USD outperformed slightly, rising 0.3% to 1.3323.
Commodities: Commodities were somewhat mixed as last week drew to a close.
West Texas Intermediate oil futures nudging down just –0.2% to US$71.00 per barrel, consolidating its gains over the course of the week. While off its lows of circa $US65 per barrel from early September, prices are still notably below the ranges over the last few months. Markets will be closely monitoring actual supply, impacts from which may be compounded by the flare-up of tensions in the Middle-East.
Iron ore futures generally moved lower, falling –1.1% to US$90.90 per tonne. The broader risk-off tone is being underpinned by a weak outlook for Chinese demand, as evidenced by weakness in new housing construction and a lack of offset from the infrastructure sector, seeing many commentators revise down their medium-term forecast over the course of last week.
Gold’s rally continued to forge ahead into the week’s close, breaking through the historic level of US$2,600 per ounce to finish 1.4% higher at US$2,621.88 per ounce. With the impetus from a larger-than-expected Fed rate cut now mostly come-and-gone, the focus will likely turn to the pace of its multi-month uptrend, with geopolitical risk factors remaining a clear catalyst for further gains.
Australia: There were no significant data releases on Friday.
Japan: The BoJ unanimously decided to leave its policy rate unchanged at 0.25% during its September meeting. This was in line with market expectations, following increases earlier in the year. The BoJ maintained its view that the economy remains on track for a moderate recovery, with consumption on a “moderate increasing trend despite the impact of prices rises and other factors”.
In addition, Governor Ueda’s made dovish comments during his press conference noting that “the upside risk to prices does appear to be easing given the recent yen strength,” and that “there’s some time to confirm certain points when making policy decisions,” reducing the likelihood of a move when the BoJ meets in October.
Consumer prices increased 3.0% over the year to August, a step up from the 2.8% recorded in the previous three months. This was in line with market expectations and the highest rate since October 2023. Base effects related to energy subsidies boosted the year ended number. Growth in the prices of food, housing, furniture & household utensils and clothes accelerated, which was partly offset by deflation in communication and education. Core inflation (excludes food) increased 2.8% over the year to August, up from the 2.7% recorded in July.
United Kingdom: Retail sales volumes increased 1.0% in the month of August, following an upwardly revised 0.7% (from 0.5%) rise in July. This was well above the 0.4% gain the market was expecting. Sales in food stores were up 1.8% in the month of August, with non-food sales up 0.6%. Looking at the average growth rate over three months to smooth out volatility, shows that spending grew by 1.2% in August, a solid resulting supporting activity in Q3. Also, retail sales jumped 2.5% in year ended terms, the largest annual gain since February 2022.
The GfK Consumer Confidence indicator fell to -20.0 in September from -13.0 in August, hitting the lowest level in six months. This was worse than the -13.0 the market was expecting. Expectations for personal finances over the next 12 months dropped 9 points to -3.0 in September, while the 12-month outlook for the economy declined 12 points to -27.0.
Eurozone: The European Commission consumer confidence indicator increased 0.5 points to -12.9 in September, from -13.4 in August. This was better than the -13.2 expected by the market and the highest reading since February 2022, potentially driven by recent ECB rate cuts and the moderation in inflation.
United States: Fed committee member, Christopher Waller, said softer inflation outcomes, rather than labour market concerns, convinced him to support the 50-basis point cut last week, noting “what’s got me a little more concerned is inflation is running softer than I thought”. On the pace of cuts, Waller favours a return to 25-bais point moves but noted “if labour market data worsens, or if the inflation data continues to come in softer than everybody was expecting, then you can see going at a faster pace.”
On the other hand, Fed committee member Bowman said the 50-basis point cut risked signalling the war on inflation was over - “The committee’s larger policy action could be interpreted as a premature declaration of victory on our price stability mandate. I believe that moving at a measured pace toward a more neutral policy stance will ensure further progress in bringing inflation down to our 2% target.”
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