Morning Report
Today's economic developments and market movements.
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Key themes: Equities were broadly down across the US and Europe with tech stocks leading the falls.
Treasury yields slipped across the curve, led by the long end. Expectations firmed slightly for a November rate cut from the Fed and an ECB rate cut tomorrow night.
The US dollar was little changed, holding above 103. The Aussie dollar continued to tread water just above 67 cents but is trading soggy at the bottom of its recent range.
Crude crashed lower after the Washington Post report confirmed that Israel will target military targets and not nuclear or oil infrastructure. While the news was released early in the Asian session, the sell-off continued through London and New York trading.
Share markets: There was a sea of red across key global equity markets overnight, led by tech and energy stocks. European chipmaker ASML reported lower than expected sales and warned of further weakness. There was also speculation a new Trump administration could limit US exports from the tech sector.
The S&P 500 was down 0.8%, while the NASDAQ and the Dow Jones fell 1.0% and 0.8%, respectively.
Both the Hang Seng (-3.7%) and the CSI 300 (-2.7%) were lower yesterday as investors continue to digest announced stimulus measures and the possibility of further fiscal support.
The ASX 200 rose 0.8% to a fresh record high, but futures were down around 0.4% overnight.
Interest rates: Treasury yields were broadly lower overnight, led by the long-end of the curve. The 2-year yield was down 1 basis points to 3.95%, while the 10-year yield dropped 7 basis points to 4.03%. The odds of a November rate cut have bumped back up to around a 90% chance, though there remains around 40 basis points to cuts priced in by year-end.
Aussie bond futures followed the lead offshore. The 3-year futures yield fell 4 basis points to 3.72%, while the 10-year yield was down 5 basis points to 4.21%. The implied odds of an RBA rate cut this year remain around 40%.
Foreign exchange: The US dollar was little changed, holding comfortably above the 103 level. A lack of top-tier economic data this week is giving little fresh information to investors to gauge the likely tempo of rate cuts. Instead, spatters of Fedspeak from officials is providing some guidance, though this is largely reinforcing the gradual easing narrative already built into the price.
The Aussie dollar continued to tread water just above 67 cents, trading a range of 0.6698 to 0.6733 and currently sitting towards the bottom end of that range. Fatiguing expectations for significant fiscal stimulus out of China is keeping the Aussie dollar pretty soggy, as is the broader risk backdrop and more gradual easing cycle in the US.
The euro closed below 1.0900 for the first time since July, after falling from a high of 1.0917 to a low of 1.0882. Expectations for a cut at the ECB’s meeting tomorrow night have firmed, now sitting at around a 97% probability. The meeting still presents some two-way risk for the euro. If the ECB delivers on expectations for a cut, the guidance from members will be crucial, while a decision to hold should provide some meaningful upside given current expectations.
The Japanese Yen was a little firmer and is yet to take out the 150 level. The USD/JPY traded from a high of 149.84 to a low of 148.85. Japanese inflation data on Friday will be important for the Yen given a lack of data offshore. Expectations are for inflation to tick down, supporting the slow removal of policy support.
Commodities: Crude markets crashed lower after the Washington Post report confirmed that Israel will target military targets and not nuclear or oil infrastructure. While the news was released early in the Asian session, the sell-off continued through London and New York trading and with West Texas Intermediate (WTI) futures down a hefty 4.4% at US$70.58 . WTI briefly traded below $70 for the first time in two weeks.
OPEC cut its demand forecasts for the third consecutive month and China confirmed that crude imports fell 7.4% in September. The International Energy Agency (IEA) added to the pressure on prices, noting that “for now, supply keeps flowing, and in the absence of a major disruption, the market is faced with a sizeable surplus in the new year”, adding that “Chinese oil demand is particularly weak” with consumption down 500k barrels per day in August compared with last year. The IEA is forecasting a surplus of 1m barrels per day next year, and it could be considerably larger if OPEC proceeds with plans to return barrels from December.
Metals also slumped to 3-week lows with copper down 1.4% on fresh concerns about Trump tariffs and the outlook for China. Aluminium was down a lesser 0.9% at US$2,571 with Alcoa due to report later today. The continued rise in alumina and bauxite prices is expected to help the aluminium producer after supply disruption in China, India and Australia.
Iron ore prices weakened as the market prepared for quarterly reporting from BHP, Rio and Vale. Futures were up 1.5% at US$105.95 . Rio will report at 8:30am Sydney time while BHP will report tomorrow morning also at 8:30am. Iron ore flows from Australia and Brazil have been strong with Port Hedland reporting a record for the month of September and shipments from Brazil were the second highest on record. Like last quarter, markets are expecting positive volume reporting from the iron ore majors.
Australia: There were no major economic data releases.
Eurozone: Industrial output rose 1.8% in August, the strongest increase in eighteen months. Details revealed that production of capital goods led the way, while consumer goods and energy production were also higher compared to the prior month.
However, it is worth highlighting that the increase in August followed a 0.5% drop in the total production in July, and on a three-month basis, output growth remained negative at -0.2%.
Economic challenges in the euro area were also illustrated by the ZEW survey of financial sector analysts. Although the economic expectations for the six months ahead improved somewhat from the previous month – the headline index rose by almost 11 points to 20.1 – its trend continued to point downwards, with the three-month average falling to the lowest level this year. And the index of the current economic situation was little changed at only -40.8. In five years before the pandemic this index averaged 4.3.
United Kingdom: August labour market figures painted a more positive picture for the UK economy. They showed that on the 3-month basis employment jumped by 373k, which was the biggest increase on record.
Meanwhile, the headline three-month unemployment rate inched lower for a third consecutive month to 4%, a, eight-month low and 0.4ppt below the level expected by the Bank of England for Q3.
Admittedly, UK labour market statistics derived from the Labour Force Survey continue to suffer from reliability issues, so the monthly changes should be interpreted with a higher degree of caution.
Separate average weekly earnings data showed that annual wage growth eased to 3.8%, down by 0.3ppt in a month and full 2ppt since the end of last year.
Growth of private sector regular wages (excluding bonuses), an indicator closely watched by the BoE, was also down, falling to 4.8%, the lowest level since April 2022. Overall, the suggesting that despite the gain in employment, signals from the labour market are consistent with further monetary policy easing next month.
United States: The Fed’s Mary Daly said the central bank must stay vigilant as inflation and the labor market cool, but expressed optimism about keeping the current economic expansion on track.
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