Morning Report
Today's economic developments and market movements.
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Key themes: US equities took a step back after last week’s gains. European markets also finished lower while the picture was mixed in Asia.
US treasures rallied and bond yields fell as investors pared back rate cut expectations. Coupled with ongoing tensions in the Middle East, this saw the US dollar index reach its highest level since August.
Oil was higher on the back of growing tensions in the Middle East. Iron ore and metallurgical coal were broadly unchanged.
Share markets: Global equity markets generally moved lower overnight, with some pockets of strength.
The S&P 500 fell –0.3%, momentum consolidating as traders prepare for this week’s earnings reports from big players such as Tesla and Boeing. The Dow Jones also fell –0.8% while the NASDAQ managed to post a 0.3% gain.
European markets closed firmly in the red, the Euro Stoxx 50 falling –0.9% and Germany’s DAX declining –1.0%, while London’s FTSE 100 fell by –0.5%
Performances were more varied across Asia. Following a solid finish to last week, tech stocks retreated in Hong Kong, seeing the Hang Seng fall –1.6% at the start of the week. That was despite slightly larger-than-expected rate cuts from the PBOC, supporting sentiment Shanghai’s CSI 300, up 0.3%.
Australia bucked the wider global trend of softness, with the ASX 200 rising 0.7% yesterday. Gains were led by materials and energy, with information technology being the only sector to finish in the red. However, futures markets are pointing to somewhat of a pull-back in momentum this morning.
Interest rates: The US yield curve steepened overnight, with the 2-year treasury yield rising 8 basis points to 4.03% and the 10-year treasury yield rising 11 basis points to 4.19%. The 2-10 spread has widened to 16 basis points, broadly in line with observations over late September/early October.
Interest rate expectations for the Fed were broadly unchanged overnight, with markets continuing to price in roughly a 90% chance of a November rate cut and around 40 basis points of cuts priced to year-end.
Australian yields rallied overnight, seeing the curve flatten slightly. The 3-year futures yield moved 7 basis points higher to 3.86%, while the 10-year futures yield increased 9 basis points to 4.37%. Markets continue to pare back their appetite for near-term rate cuts, pricing in only a 18% probability for a rate cut this year, with the first cut fully priced in for April 2025.
Foreign exchange: The US dollar index firmed (+0.5%) to break through the 104 mark and reach its highest intraday level (104.016) since August this year. The US dollar index is trading at just under 104.00. Yield support as investors pare back rate cut expectations is providing the Greenback with a near term boost.
The Aussie depreciated (-0.7%) against the Greenback, sliding to a low of 0.6656. It was trading at 0.6657 at time of writing. The fall was driven by the US leg, with the pair initially moving higher on the back of remarks by the RBA Deputy Governor suggesting that the delay in expected rate cuts priced in by markets was consistent with the RBA’s reaction function. The near-term backdrop remains challenging for the AUD/USD pair: easing commodity prices and ongoing geopolitical tensions pose downside risks.
The euro started the week on the softer side (-0.5%), cutting last week’s recovery rally short and falling back toward the 1.0800 mark. In the near-term yield support is weighing on the euro, while further out lower growth projections and rating agency concerns pose risks for the euro.
The Japanese Yen continued its slide, with the USD/JPY (+0.9%) trading below the key level of 150 per US dollar. The pair is likely to trade at around this mark until the October elections, but a more supportive backdrop could materialise after the election, given BoJ officials note the economy continues to follow their projections.
Commodities: Oil was higher given rising tensions in the Middle East. Further, the head of the IEA warned “that oil prices will be further under pressure because we are entering a period, including next year, of more comfortable markets”. The West Texas Intermediate (WTI) futures increased 1.7% to US$70.38 per barrel.
Industrial metals initially pushed higher in Asia helped by the announced monetary policy easing in China, but reversed direction later in the day as the US dollar appreciated.
Iron ore futures were broadly unchanged trading at around US$100.70 a tonne in Singapore.
Australia: At a fireside chat in Sydney RBA Deputy Governor, Andrew Hauser, reportedly said that the recent changes to market pricing for future rate cuts suggest that “the RBA reaction function is well understood.” Markets have now pushed out the first full rate cut to April 2025.
It was also reported that the Deputy Governor said the RBA was “surprised” by the strong employment growth we saw in September, but it was unclear whether this was a sign the economy was growing more strongly than expected, or if there was something going on.
China: The People’s Bank of China (PBOC) cuts its one-year and five-year loan prime rates by 25 basis points, bringing them to 3.10% and 3.60% respectively. While the consensus forecast settled on a 20-basis point cut as the more likely outcome, the actual decision was in line with 20-25 basis point range telegraphed by authorities.
This is a part of a suite of policy measures – both monetary and fiscal – looking to support a recovery in economic growth and instil confidence in the housing market. The PBOC’s communications suggested that further policy easing may be considered.
United States: The Conference Board’s leading index of economic activity once again highlighted downside risks to the US economy. The index extended its downward trend in September, falling at a six-month annualised pace of 5.2%, the lowest in seven months. With both criteria being met – the annualised six-month growth rate below –4.4% and the diffusion index below 50 – the indicator continues to indicate recession risks in the near-term. The Conference Board therefore expects moderate US GDP growth in the coming quarters.
Lorie Logan, Dallas Fed President, reiterated calls for a measured easing cycle. She said “If the economy evolves as I currently expect, a strategy of gradually lowering the policy rate toward a more normal or neutral level can help manage the risks and achieve our goals. However, any number of shocks could influence what that path to normal will look like, how fast policy should move and where rates should settle.”
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