Morning Report
Today's economic developments and market movements.
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Key themes: Higher yields and a firmer US dollar resumed on Friday ahead of a slew of key economic data this week and as the US election heads into its final full week of campaigning.
Inflation, labour market and GDP data in the US and Europe will take centre stage, while September quarter domestic inflation data on Wednesday will be crucial for local markets.
Key for most markets will be whether US data can sustain recent strength and reinforce the soft/no landing narrative.
Japan faces some near-term political instability after the ruling Liberal Democratic Party coalition failing to win a majority in parliament for the first time since 2009.
Share markets: The S&P 500 was flat on Friday but finished the week down 1.0%, ending a string of six consecutive weeks in the green. The NASDAQ was firmer, rising 0.6% on Friday to be up 0.2% on the week and extending its string of weekly gains to seven.
The Euro Stoxx 50 eked out a 0.2% gain but was 0.9% lower over the week. In the UK, the FTSE closed down 0.3% on Friday and was 1.3% lower over the week.
The ASX 200 was up 0.1% on Friday but this was not enough to offset earlier losses, leaving the local bourse 0.9% lower over the week.
Interest rates: US yields were modestly higher on Friday. The 2-and-10-year yields were both up 3 basis points to 4.10% and 4.24%, respectively and remain around the top their recent 3-month range.
The implied odds of a November Fed rate cut have pushed out to around 97%, while the chances of a follow-up cut in December have also firmed a little to around 63%.
Aussie bond futures also sold off a touch. The 3-year futures yield is 4 basis points higher at 3.93%, while the 10-year is 5 basis poitns higher at 4.47%. Market’s have futher discounter the chance of an RBA rate cut this year, with the implied odds ritting at 21%. The first cut is fully priced for May 2025, with an earlier April move around 97% priced in.
Foreign exchange: The US dollar continued to consolidate above 104, trading a range of 103.94 to 104.34 before closing at 104.26. Key US GDP, labour market and inflation data this week will be crucial to sustaining the current US dollar upside and keeping the soft/no landing narrative in tact.
The Aussie dollar looks to be forming a tentative base around 0.6600-0.6615. However, key US and domestic data this week has plenty of potential to break key levels both on the upside and downside. Locally, inflation data is likely to show some welcomed progress, which could present a hurdle fo the Aussie subject to developments offshore.
The Euro traded a 1.0839-1.0793 range on Friday but has opened slightly lower in early trade this morning. Local activity, inflation and labour market data this will be important for the Euro, however, absent any upside strength, the US dollar leg will likely be the bigger determinant of price action this week.
The sell-off in the Yen resumed on Friday and has gained some traction at the open this morning following reports Japan’s Liberal Democratic Party and its coalition partner are set to lose their majority following Sunday’s general election. Near-term political uncertainty is likely to weigh on the Yen, leaving it vulnerable to move lower and reigniting caution around potential intervention risks.
Commodities: Crude advanced Friday as traders focussed on the risks of escalation in the Middle East. West Texas Intermediate (WTI) futures closed up 2.3% Friday at US$71.78
Over the weekend, Israel attacked military targets in Iran though Iranian media downplayed the impact of strikes and signalled a measured response.
The US and Israel confirmed they would hold talks in Doha over the weekend. Egypt proposed a two-day cease-fire allowing for the exchange of prisoners and hostages. Bloomberg reported that Russian fuel exports are on course to hit the lowest in at least 8 years amid a sharp drop-in refining activity amid seasonal maintenance and low refining profits.
Metals were mixed despite the strong US dollar and high US yields. Copper closed up 1.0% at US$9,509 while aluminium rose 0.8% to US$2,670. Zinc fell a hefty 2.4% to US$3,099 after the sharp spike earlier in the week took it to a fresh 20 month high.
Iron ore rose modestly Friday, helped by hopes of more fiscal stimulus in China. Futures rose 1.8% to US$103.40. China Iron Ore Steel Association (CISA) called for supply restraint after the recent rally noting ‘there hasn’t been any notable change in orders for steel products’. CISA reported that steel inventory rose 5% into mid-October from the beginning of the month to be 2% above average levels for this time of year.
Australia: There were no major economic data releases on Friday.
Eurozone: Germany’s IFO business climate index edged higher in October to 86.5 as firms current assessment and expectations both improved.
European Central Bank (ECB) measures of inflation expectations drifted lower in September, providing policymakers with further confidence inflation is on a sustainable path lower. 1-year ahead expectations dropped to 2.4% from 2.7% in August, the lowest level since September 2021. 3-year ahead expectations fell to 2.1% from 2.3%, reaching their lowest level since February 2022.
Japan: Japan faces some near-term political instability after the decision by Prime Minister Shigeru Ishiba to call a snap election backfired with the ruling Liberal Democratic Party coalition failing to win a majority in parliament for the first time since 2009.
New Zealand: Consumer confidence slipped 4.1% in October to 91.2. This ended a string of three consecutive months of improving sentiment.
United Kingdom: The GfK consumer confidence index was little changed at -21 in October, a touch above the 5-year average of -25.
United States: US durable goods orders fell 0.8% in September, largely as expected. August was revised down to -0.8% from a flat reading. Core orders (non-defence ex air) showed some resilience, gaining 0.5% in September after a 0.3% rise in August.
University of Michigan consumer sentiment was revised up in the final release for October, from 68.9 to 70.5, leaving the index a touch above September’s 70.1.
1-year inflation expectations eased from 2.9% to 2.7% while the 5-10-year measure remained unchanged at 3.0%. Both inflation expectations measures are historically consistent with inflation at target.
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