Morning Report
Today's economic developments and market movements.
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Key Themes: The Aussie soared following the pledge by Chinese authorities to turn on the fiscal taps in a big way, which is reported to include cash handouts to get the consumer firing again.
Commodities bounced, with iron ore back above US$100 per tonne. Coal, gold and copper also recorded gains.
US equities were higher led by tech stocks. Futures are pointing to further gains amid the Chinese announcement following market close. Asian markets also rallied hard on the back of the announcement.
US bond yields were higher at the shorter end of the curve, amid revisions to GDP data that showed the economy had performed better than previously estimated.
The Swiss National Bank delivered its third successive 25bp cut.
Share markets: US equities were higher led by tech stocks. Micron, the largest US maker of computer memory chips, surged 15% on the back of strong sales and profit forecasts, which set the tone for the sector and market more broadly.
The S&P 500 Index climbed 0.4% to set a fresh closing record. The technology-heavy Nasdaq was 0.6% higher, while the Dow Jones also closed 0.6% higher.
US futures are pointing to further gains amid the Chinese announcement following market close.
European markets also closed firmly in the green following the pledge from the Chinese authorities. The Euro Stoxx 50 closed 2.4% higher, the DAX was 1.7% higher and the FTSE 100 was up 0.2%.
There was a big rally is Asian markets. China’s CSI 300 closed 4.2% higher. The Hang Seng climbed 4.6%, while Japan’s Nikkei gained 4.2%.
The ASX200 index closed 1.0% higher, led by materials stocks on the back of the brighter outlook for China. The gain was broad based with ten of eleven sectors finishing higher. Futures are pointing to a positive open this morning.
Interest rates: US bond yields were higher at the shorter end of the curve. The US 2-year bond yield increased 7 basis points to 3.63%. The 10-year treasury yield increased 1 basis point to 3.80%. Longer dated bond yields were also slightly higher across Europe and Asia.
Interest-rate markets are pricing in around 78 basis points of cuts by the US Fed over the remainder of 2024 and 190 basis points by the end of 2025. This is around 10 basis points lower than expected at the start of the week, given the positive revisions to US GDP data.
Australian yields were also slightly higher. The 3-year government bond yield (futures) increased 2 basis point to 3.44%, while the 10-year government bond yield (futures) increased 1 basis point to 3.97%.
Markets are pricing 18 basis of cuts by the end of 2024. The first full rate cut is expected by February, with around 120 basis points of cuts expected over 2025.
Foreign exchange: The US dollar index ended the session lower (down 0.3%). After trading within a narrow range – 100.83 to 100.95, the US dollar declined to 100.48 following the Chinese announcement which supported risk sentiment in a big way. The Pound and Euro both appreciated against the Greenback. US Personal Consumption Expenditure inflation data to be released tonight will help provide a gauge on inflationary risks and further hints on the pace of future rate cuts.
The Aussie soared, increasing 1.1% against the Greenback. The AUD/USD pair breached the 0.6900 mark and is currently trading at just under 0.6900. The brighter short term outlook for China and commodity prices, coupled with yield differentials will provide the Aussie with a firmer footing.
Commodities: Commodities were the big winners from the announced fiscal package.
Iron ore futures were up 2.1% to US$100.65/t. With the stimulus aimed at supporting the property sector, iron ore prices were always going to get a tailwind. Coking coal also jumped 1.2%.
Oil declined 2.1% with West Texas Intermediate oil futures moving to US$67.67 per barrel. This fall comes on the back of reports suggesting Saudi Arabia is preparing to drop its unofficial $100 per barrel oil price target in a bid to regain market share, even if it means lower prices.
Gold increased 0.6% to $2672.38 per ounce, marking a fresh record high.
Australia: Job vacancies continued to decline in the second half of the year, falling –18.1k (–5.2%) between May and August. Both the private (–4.9%) and public (–7.5%) sectors saw declines, with the public sector experiencing its sharpest quarterly drop since the onset of the pandemic. Consistent with the gradual easing in labour market conditions, vacancies have now edged lower for nine consecutive quarters and are –30.3% lower than their peak in May 2022. Despite this decline, they remain significantly higher than their pre-COVID 10-year average of around 180k.
Today’s data release, coupled with last week’s labour force survey, is unlikely to materially alter the RBA’s assessment on labour market conditions: “that the labour market is still tight relative to full employment” and conditions are only gradually softening.
The financial sector remains resilient and well placed to deal with the “modest economic cycle.” In its quarterly assessment of the financial system, the RBA finds that financial risk associated with household are contained, with less than 1% of all owner-occupier housing loan balances in arrears and even fewer with negative equity. The share of borrowers at risk of falling behind on their loan going forward remains less than 2% of all variable-rate owner-occupier borrowers, with a small subset of these borrowers with negative equity.
When it comes to businesses, the conclusions are consistent with Westpac Economics Quarterly business snapshot – aggregate conditions have largely stabilised but there are pockets of stress emerging, particularly in the SME space. The RBA also finds that business balance sheets remain strong compared to pre-pandemic conditions.
When it comes to risks, the RBA notes that overseas stress could spill over to the domestic commercial real estate market. However, this is a risk with no evidence of a withdrawal of foreign lending and investment from the Australian market.
China: Two days after the PBoC surprise monetary stimulus package, the Politburo signalled policymakers will use a broad array of measures to deal with the economy’s challenges.
It pledged to take “stronger counter-cyclical actions” on the fiscal front, called for steps to “halt the declines” in the housing market and “efforts to boost the equity market”, and indicated stabilizing employment was a priority.
The pledge to make real estate “stop declining” appears to apply to both investment activity and prices, in response to consumers’ mounting concerns over their wealth and the uncertain timing and quality of completed dwellings. Western media including Reuters and Bloomberg subsequently reported that the Ministry of Finance was readying 2 trillion yuan of special sovereign bond financing for late-2024 to fund stimulus targeting consumption (including through cash handouts) and to alleviate pressure on local governments.
The language used in the Politburo communications and subsequent official media was direct and forceful, emphasising the determination of authorities to put their plan into action without delay. While late in the year, the combined weight of the monetary and fiscal measures announced and mooted is highly likely to lead to the 5.0% growth target for 2024 being achieved and should also see a similar outcome in 2025. Success thereafter will be determined by how the private sector, particularly the consumer, responds.
United States: GDP was unrevised in the third estimate at 3.0% annualised. Personal consumption edged down to 2.8% annualised from 2.9%, which was offset by upward revisions to private inventories and federal government spending.
Annual revisions for GDP were also released overnight. From Q2 2020 through 2023, GDP is now estimated to have averaged 5.5% annualised, up from 5.1% in the initial estimates, with two-thirds of the revision reportedly the result of stronger consumption. For 2022 and 2023 respectively, growth is now estimated at 2.5% (from 1.9%) and 2.9% (from 2.5%). As has happened several times in this cycle, Gross Domestic Income was revised up materially for 2023 and the first half of 2024. In Q2 2024 alone, annualised GDI growth has been revised up 2ppts to 3.4%. And in 2023, growth is now estimated at 1.7% versus 0.4%. These revisions have resulted in the household savings rate being lifted from 3.3% to 5.2%. All told, these revisions show the underlying strength of the US economy, the consumer in particular, but also the importance of the supply side for inflation.
Initial jobless claims fell to 218k from 222k - a four-month low in the week ended Sept. 21, remaining muted despite a recent slowdown in hiring. There continues to be no evidence of aggregate job shedding in the US.
US pending home sales disappointed expectations in August, rising 0.6% in the month following July’s 5.5% decline to be 4.3% lower over the year. Home sales have been highly volatile over the past year, and this is likely to remain the case near term as supply constrains activity.
Durable goods orders were unchanged in August after a 9.9% surge in July. Investment in the US remains caught between a need for capacity and uncertainty over the economic and policy outlook, both monetary and fiscal.
A number of FOMC members spoke overnight. However, their remarks were brief and offered no new insights into the current and expected outlook for policy.
Eurozone: The GfK Consumer Climate indicator for Germany edged higher to -21.2 in October from -21.9 in September. This was better than the -21.5 expected by the market. The stabilisation was driven by an increase in income expectations and the propensity to spend. Despite the tick up, the indicator remains deeply entrenched in negative territory.
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