Morning Report
Today's economic developments and market movements.
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Key themes: US equities eked out small gains ahead of non-farm payrolls later this week. European and Asian shares were mixed as investors continue to assess the prosect of further escalation in the Middle East.
The stronger than expected ADP jobs numbers saw US bond yields increase across the curve. Yields were also higher in Europe and Asia.
The US dollar was higher as the Yen fell sharply and yields retraced some of yesterday’s falls. The Aussie was unchanged against the Greenback.
Oil continued its climb to be above US$70 per barrel.
Share markets: Following yesterday’s sell off, US equities eked out small gains ahead of non-farm payrolls later this week. The payroll read will be an important input as the Fed deliberates on the size of its next move in November.
The S&P 500 ended the day little changed while the Nasdaq and the Dow Jones both closed 0.1% higher.
European stocks were also generally higher, retracing some of yesterday’s falls. The Euro Stoxx 50 and the FTSE 100 both closed 0.2% higher. The DAX finished 0.3% in the red, weighed down by weaker than expected manufacturing PMIs for September.
In Asian, the Nikkei declined 2.2% following yesterday’s gain. The Hang Seng closed a massive 6.2% higher as investors piled into developers after China unveiled a raft of measures to boost its economy.
The ASX200 index fell for the second consecutive session, down 0.1% led by consumer discretionary stocks. Eight of eleven sectors were lower. Energy stocks were 2.4% higher amid an increasing oil price. Futures are pointing to a soft open this morning.
Interest rates: US bond yields were higher across the curve on the stronger than expected ADP jobs report, which reduce the likelihood of downside risks when non-farm payrolls are released on Friday.
The US 2-year bond yield increased 4 basis points to 3.64%. The 10-year treasury yield increased 5 basis point to 3.78%. Longer dated bond yields were also slightly higher across Europe and Asia.
Interest-rate markets are pricing in around 70 basis points of cuts by the US Fed over the remainder of 2024 and 188 basis points by the end of 2025.
The 10-year Gilt increased 6 basis points to 3.03%, with the 2-year also up 6 basis points to 4.02%. The German 10-year Bund yield rose 6 basis point to 2.09% and the 2-year yield increased 2 basis point to 2.04%.
Australian yields were also higher. The 3-year government bond yield (futures) increased 3 basis point to 3.47%, while the 10-year government bond yield (futures) increased 4 basis point to 3.99%.
Markets are pricing 18 basis of cuts by the end of 2024. The first full rate cut is expected by February, with around 114 basis points of cuts expected over 2025.
Foreign exchange: The US dollar index firmed (+0.4%) to 101.62 as the Yen lost ground and yields retraced some of yesterday’s falls. The US dollar went sideways in early trade before falls in the Yen saw the DXY appreciate. More generally, geopolitical tensions are likely to weigh on risk sentiment in the immediate future, reducing the risk that the DXY trades around the mid-2023 lows of 99.55-60.
The Yen dropped as Japan’s Prime Minister Shigeru Ishiba commented the economy was not ready for further interest-rate hikes. This saw the USD/JPY pair increase by 2.0% to 146.45
The Aussie was unchanged in a volatile session where the AUD/USD pair flipped between gains and losses. The pair hit a high of 0.6916, before falling to the session low of 0.6883. Some of the tailwinds supporting the pair are coming back a little (including yield support) and the Aussie remains susceptible to risk off sentiment driven by further escalation in the Middle East.
The China stimulus is a positive for a commodity currency like the Aussie, but further upside likely hinges on how consumers and the property sector responds to the measures.
On the crosses where yield support remains firmly in the Aussie’s favour, such as the AUD/EUR (+0.2%) AUD/NZD (0.3%), we saw further gains overnight.
Commodities: Oil continued its increase following escalating tensions in the Middle East. This was despite reports suggesting that OPEC+ will maintain its plan to start gradually reviving oil production this year, despite signs of an impending surplus. The price of oil increased a further 1.6% to US$70.98 per barrel.
Iron ore continues to benefit from the significant policy intervention announced last week. Iron ore futures were a touch higher (+0.1%) to US$108.85/t.
Australia: There were no significant data releases yesterday.
Eurozone: The unemployment rate held steady at 6.4% in August, in line with the median market expectation. The number of unemployed individuals declined 94k after an 89k fall in July. The youth unemployment rate, reflecting those under 25 years, eased to 14.1%.
United States: US ADP private sector employment rose 143k in September, the most in three months, following an upwardly revised 103k jobs (from 99k) added in August. This was well above the 125k jobs expected by the market. September’s print is consistent with the average pace reported since August 2023. The service-producing sector added 101k jobs, while the goods-producing (mainly construction) sector added 42K jobs.
Pay gains for job-changers continued to moderate to 6.6%yr from 7.3%yr in the previous month. Pay increases for job-stayers were broadly unchanged.
Fed committee moment Barkin noted progress on inflation and confidence in the economy, but remained cautious on the risks. On inflation, “it remains difficult to say that the inflation battle has yet been won”. Meanwhile, in the labour market, “the hiring rate has dropped down to 2013 levels”, but “employers... also aren’t firing” with cautious employers instead “allowing head count to drift downward, but largely through attrition”.
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