Morning Report
Today's economic developments and market movements.
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Key themes: The Fed’s increasing confidence on inflation progress and shifting focus to the labour market saw risks around tonight’s inflation release subside. Assuaging fears of growth risks and a faster easing cycle saw the US dollar firm and Treasury yields shift higher.
The possibility of further stimulus in China did little to calm Chinese equities and commodity markets after earlier optimism of possible stimulus wrong-footed traders.
G10 currencies finished lower against the US dollar.
Share markets: Most major indices edged higher in the day. The Dow Jones led the way closing 1.0% higher, while the S&P 500 closed 0.7% higher hitting a record high of 5797. The NASDAQ finished 0.6% higher.
The ASX 200 ticked up slightly by 0.1% yesterday after a tumultuous session. After a strong open, stocks were unable to maintain the strength falling sharply around midday before making up some of the losses later in the day.
In part, this reflects weakness seen in markets in China and Hong Kong. China’s CSI 300 fell 7.1%. Further fiscal measures to be announced this Saturday could cushion some of the declines after stimulus measures saw the index climb from late September. However, pessimism around the economy will make it difficult for short term increases to be sustained. Hong Kong’s Hang Seng closed 1.4% lower.
In Europe, the Euro Stoxx 50 and London’s FTSE 100 closed up 0.7%.
Interest rates: US Treasury yields were higher across the curve. The 2-year and 10-year bond yields rose 6 basis points to 4.02% and 4.07%, respectively. Swaps pricing for rate cuts pulled back slightly. There is now only a 76% chance of a November rate cut.
In Europe, the 2-year bund yield rose 3 basis points to 2.26% while the 10-year was up 1 basis point to 2.26%.
Aussie bond futures yields were 3-basis points higher in the 3-year tenor at 3.73% and 2-basis points higher at the 10-year tenor at 4.22%. The implied odds of an RBA rate cut this year have been trimmed to around 42%.
Foreign exchange: The US dollar rallied through the day with the DXY trading around 102.93 this morning after opening at 102.48 only slightly above the day’s low of 102.46.
The Aussie dollar saw another sizeable fall against the US dollar dropping to a low of 0.6708 from a intra-day high of 0.6762. The session high came around the same time as an announcement that the Chinese Ministry of Finance will hold a briefing this Saturday, potentially announcing further fiscal measures.
The Japanese yen was the second weakest G10 currency, second only to the New Zealand dollar, the USD/JPY hitting a high of 149.36 and trading only slightly lower at the time of writing.
Commodities: Commodities were lower across the board continuing declines seen through the week.
West Texas Intermediate (WTI) crude futures fell 0.5% to US$73.24 per barrel but risks remain skewed to the upside given the geopolitical backdrop.
Iron ore slipped a little yesterday but has regained some ground in early trade this morning. Futures in Singapore edged down 0.1% to US$105.85 well above September’s low of US$90.
Metals were down with the London Metals Exchange falling 2.3% driven by a 1.9% decline in copper and 1.5% decline in nickel.
Gold finished lower for a sixth consecutive day as expectations for aggressive rate cuts subsided. Gold was down 0.6% to US$2607.38.
Australia: The RBA’s Assistant Govenor Kent gave a speech reviewing the use of the Term Funding Facility during COVID. Overall, the RBA felt that the TFF met their objectives of lowering funding costs and providing credit to the economy. They would also use the TFF again but could make changes such as using a variable rather than fixed rate to make the policy more flexible.
New Zealand: The RBNZ cut rates by 50 basis points to 4.75% in line with expectations. The move was driven by an assessment that the economy has excess capacity which should facilitate lower price and wage-setting behaviours. “Subdued” economic activity and employment conditions which continue to “soften” were credited to the still-restrictive monetary policy stance. Westpac expects another 50 basis point cut come November and for the policy rate to fall to a low of 3.75%.
United States: The US Fed released it minutes for the September meeting with both a 25 and 50-basis point cut on the table. The Committee felt they had greater confidence in the inflation’s path towards the 2% target. The labour market was perceived to be close to the long-run maximum employment, and less tight than prior to the pandemic, and risks of further unwanted deterioration had increased. The Committee opted for the larger cut as risks around inflation had ‘diminished’, while downside risks to the labour market had increased. The case for a 25 basis point cut was deemed consistent with a gradual path to easing as well as providing a degree of predictability. Despite the outsized move, the Committee emphasised it was not a reflection of a less favourable assessment of the economy or a signal that easing will be rapid.
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