Morning Report
Today's economic developments and market movements.
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Key themes: Markets reacted to Donald Trump’s selection of Scott Bessent for Treasury Secretary. The Hedge Fund managers is viewed as Wall St. friendly and could temper some of the policy tail risks from a Trump Presidency.
US equities rallied with the S&P 500 and the Dow Jones both touching fresh record highs.
US treasury yields were lower across the curve, led by the long-end with the 2-10-year curve now sitting flat.
The US dollar reversed course after its brief run higher on Friday but remains comfortably within recent ranges.
Crude markets plunged on hopes of an imminent Israeli Hezbollah ceasefire and news that President elect Trumps pick for Treasury secretary will push for a 3m barrel per day rise in US crude production.
Share markets: US equities opened higher overnight as the announcement Scott Bessent has been selected as Treasury Secretary for the Trump Administration soothed markets. The hedge fund boss is viewed as an ally to Wall St. and likely trims some of the tail risks associated with potential Trump policy.
The S&P 500 rose to a fresh record high, but failed to hold onto gains, finishing the session up 0.2%. The Dow Jones hit a record high after jupming 1.0% while the NASDAQ gained 0.3% and is just 1.6% off its record high from earlier in the month.
European equities also traded firmer but were at no risk of taking out fresh records, instead holding recent ranges. The Euro Stoxx 50 gained 0.2%, while the UK’s FTSE and the German Dax were both up 0.4%.
The ASX 200 closed at a record high yesterday, up 0.3% on the day but a little off its intra-day peak. Japanese equities also gained in Asian trade yesterday, the Nikkei jumping 1.3% and holding recent ranges. Major benchmarks were both lower in China, the Heng Sang fell 0.4%, while the CSI 100 shed 0.5%. The Heng Sang has now retraced around two thirds of its rally following stimulus announements early in September.
Interest rates: US treasuries rallied across the curve following the US Treasury Secretary announcement. The rally was led by the long end with 10-year yields down 14 basis points at 4.26% and 2-year yields down 11 basis points to 4.26%, leaving the 2-10-year curve flat for the first time in two months.
Rate expectations swung in favour of cuts with the odds of a Fed cut in December lifting from below 40% to around 55% but there remains around 75 basis points of cuts expected by the middle of next year.
Fixed income markets were quieter in Europe in a broad flattening move. 2-year yields were up around 2-3 basis points in the region while 10-year yields were down 3-6 basis points. Markets are fully pricing a European Central Bank rate cut in December, while the Bank of England is currently expected to be on hold until March 2025.
Aussie bond futures retained their strong correlation with US moves, rallying solidly overnight after decent gains in physical trade yesterday. The 3-and-10-year futures yields are both down 8 basis points at 3.96% and 4.41%, respectively.
Markets are pricing in a 97% chance the RBA will commence its rate cut cycle in May next year and currently have just 50 basis points of cuts priced into the curve for 2025.
Foreign exchange: The US dollar reversed course following its breakout on Friday slipping against nine of the G-10 currencies. The DXY traded from a high of 107.25 to a low of 106.58 and is currently sitting around 106.89, near the top of the range over the last fortnight excluding Friday’s brief foray into the high 107s. WIth the US bond sell-off now checked and some of the policy tail risks trimmed following the Bessent nomination, a further upside break in the US dollar is looking more challenged, however, downside risks should be capped by a more cautious Fed, likely leaving the US dollar range bound near-term.
Yesterday’s Aussie dollar rally was short lived, with the AUD/USD quickly unwinding yesterday’s run to 0.6550 to around 0.6503, despite the softer US dollar overnight. A staunchly on hold RBA leave the Aussie well supported as does the recent stability in iron ore prices and recovery in global risk sentiment. However, any upside will be dictated by broader US dollar demand as the ebbs and flows of US policy continue into the New Year and the Fed’s policy path firms following the minutes and inflation data this week.
The euro outperformed in a fresh twist of fate. The EUR/USD rose from a low of 1.0429 to a high of 1.0530 but is currently trading back below the 1.05 level. That said, political instability, budget repair and flare-ups in the Russia-Ukraine conflict leave the euro vulnerable to further weakness on US dollar strength. The Japanese Yen was a little firmer but held recent ranges with the USD/JPY trading 153.55-154.72.
Commodities: Crude markets plunged on hopes of an imminent Israeli Hezbollah ceasefire and news that President elect Trumps pick for Treasury secretary will push for a 3m barrel per day rise in US crude production. West Texas Intermediate futures are down 3.1% at US$69.05.
The plunge took prices from close to 6-week highs back to the middle of the recent range. However, a US State Department spokesperson did warn that “there are still steps that we need to see taken” on a ceasefire and that while “I do believe we are close, that doesn’t mean were going to get there”.
Metals were better bid with the weaker US$ and hopes for an Israeli Hezbollah ceasefire lifting sentiment. Copper is up 0.8% to US$8,958 while aluminium is up 0.9% at $2,647.
Finally note that iron ore markets continued marking time above $100 with the futures up 2.0% at US$102.75. There was little fresh news with the market very focussed on upcoming meetings in December including the Politburo meeting due early in the month and the Central Economic Work Conference mid-December.
Australia: There were no major economic data releases yesterday.
China: The People’s Bank of China held the interest rate on the one-year medium-term lending facility steady at 2%, as widely expected. Note China is gradually reducing the use of the medium-term lending facility following announced monetary policy reform in June, instead focusing on seven-day repo agreements as a key anchor for policy.
Eurozone: Germany’s IFO Business Climate index eased in October to 85.7 - the bottom of its recent range. Firms’ assessment of the current business conditions declined to a new 4-year low, but expectations remained little changed at the level broadly matching the average this year.
New Zealand: Retail sales volumes (i.e. excluding inflation) fell 0.1% in the Setpember quarter, a touch firmer than the consensus expectation for a 0.5% quarterly fall. Retail sales volumes have fallen in 10 of the past 11 quarters underscoring current softness in the NZ consumer. The Reserve Bank of New Zealand (RBNZ) has so far cut rates by 75 basis points and is expected to follow up with another 50 basis point cut this week. However, this is yet to translate into a meaningful improvement in consumer confidence or consumer spending.
The trade deficit narrowed slightly in October to $1.5bn from $2.2bn in September. Exports jumped to their highest level in three months, while imports were also firmer but increased at a slower pace.
United States: Ahead of the release of the Fed meeting minutes early tomorrow morning, Chicago Fed President Austan Goolsbee said he foresees the central bank continuing to lower rates toward a neutral stance. Goolsbee said “barring some convincing evidence of overheating, I don’t see the case for not continuing to have the fed funds rate decline”. Goolsbee is not a current voting member on the FOMC.
The Chicago Fed’s National Activity Index suggested that growth in the US remained below trend for a fifth consecutive month, despite official measures of activity remaining robust. The headline index declined to -0.4 in October, the lowest level since the start of the year.
The Dallas Fed Manufacturing Activity Index maintained its upward trend in place since July. The index of general business conditions was up in November, reaching its highest level in about 2 ½ years at -2.7.
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