Morning Report
Today's economic developments and market movements.
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Key themes: Israel and Hezbollah reached a cease-fire deal early this morning. The announcement soothed some geopolitical worries as Trump vowed in a social media post yesterday to immediately impose an extra 10% tariff on all Chinese imports and 25% levies on all products from Mexico and Canada.
US equities extended their rally. The S&P 500 and the Dow Jones both finished at record highs.
Traders shortened the odds of a December Fed rate cut following minutes from the latest meeting which supported gradual easing.
The US dollar was firmer against every G-10 peer save the the Japanese Yen, while the Aussie dollar underperformed touching a fresh 3-month low.
Crude markets finished lower with the focus on cease fire negotiations in the Middle East and suggestions that OPEC was beginning talks to again roll production cuts into 2025.
Share markets: US equities extended their rally. The S&P 500 and the Dow Jones both finished at record highs after gaining 0.6% and 0.3%, respectively. The NASDAQ jumped 0.6% overnight.
European equities finished in the red. The Euro Stoxx 50 closed 0.8% lower, while the UK’s FTSE 100 and the German Dax shed 0.4% and 0.6%, respectively.
The ASX 200 slipped 0.7% yesterday after reaching a record high in the prior session. Futures are up around 0.5% from yesterday’s close. The slide in the ASX was part of a broad based sell-off across Asian markets yesterday with Japan’s Nikkei down 0.9% and the CSI 300 slipping 0.2% in China.
Interest rates: The Fed’s November minutes supported treasuries a little with 2-and-10-year yields around 3-4 basis points off the day’s highs. The 2-10-year curve steepened around 4 basis points with 2-year yields down 2 basis points to 4.25% and 10-year yields up 2 basis points to 4.29%.
Traders shortened the odds of a Fed rate cut at its December meeting, the implied probability of a cut now sitting around 63%. There remains around 75 basis points of rate cuts priced into the curve by the end of 2025.
Aussie bond futures are a little firmer this morning with 3-and-10-year yields both down 3 basis points at 3.97% and 4.44%, respectively. RBA rate cut pricing was pulled forward marginally with a cut now fully priced for May next year.
Foreign exchange: The US dollar was firmer against every G-10 peer save the the Japanese Yen. The DXY Index briefly touched a high of 107.50 before round-tripping to finish the day around 106. 97 via an intra-day low of 106.49. The US dollar has now taken two meaningful runs above 107 in the past 3 sessions but has so far failed to sustain the moves, quickly ducking back inside the 106-107 range.
The Aussie dollar underperformed in a volatile session. The AUD/USD sank to a 3-month low of 0.6434 in Asian trade yesterday in response to Donald Trump’s social media post promising to immediately impose traiffs on China, Mexico and Canada. The Aussie dollar unwound the move throughout the session before again grinding lower during New York trade overnight to be sitting around 0.6462 at the time of writing. The 0.6430-40 level stands as important near-term support for the Aussie, a push below this level leaves the door open to retesting 2024 lows around 0.6350.
The Japanese Yen outperformed, supported by gradually firming expectations that the Bank of Japan (BoJ) may hike rates again in December. The USD/JPY traded from a high of 154.49 to a low of 152.99 with a modest downtrend beginning to take shape.
The euro spent time either side of 1.05 riding the gyrations of US dollar swings but finished the day below the key level around 1.0482. The euro remains the equal worst G-10 performer since the US election result.
Commodities: Crude markets finished lower in a choppy session with the focus on cease fire negotiations in the Middle East and stories suggesting that OPEC was beginning talks to again roll production cuts “for several months” into 2025. West Texas Intermediate futures are down 0.4% at US$68.65 per barrel.
The Israeli PM Netanyahu confirmed that he was bringing a proposed ceasefire to a security cabinet vote on Tuesday night. Press confirmed the cabinet had approved the agreement and Biden confirmed that a ceasefire would commence at 4am local time and last for 60 days.
The Saudi energy minister Prince Abdulaziz bin Salman met with the Russian deputy PM Novak and Iraqi PM Mohammed Shia Al-Sudani in Baghdad to “discuss oil market stability”. Wires suggested that “key OPEC+ nations have begun discussions to delay the oil production restart planned for January, potentially for several months”. A delay is widely expected, potentially into the second quarter.
Metals closed lower with the threat of trade wars and the strong US dollar weighing on prices. Copper is last down 0.5% at US$8,915 while aluminium fell 1.6% to US$2,609.
Iron ore markets again marked time above $100 with the increase in Chinese steel production supporting prices. Futures are flat at US$102.70. According to China Iron and Steel Association (CISA) data, Chinese steel production remains well above average rates for this time of year, with production over the last 3 weeks up 9.5% versus the average for the same period in the last 3 years.
Australia: There were no major economic data releases yesterday.
United States: The November FOMC meeting minutes made clear members confidence in disinflation’s persistence and breadth, noting that “incoming data generally remained consistent with inflation returning sustainably to 2 percent” and “in both the core goods and nonhousing services categories, prices were now increasing at rates close to those seen during earlier periods of price stability”.
On the labour market, “participants generally anticipated that with an appropriate recalibration of the Committee’s monetary policy stance over time, the labor market would remain solid”, though “some still saw elevated risks” to the downside. In “discussing the outlook for monetary policy, participants anticipated that if the data came in about as expected, with inflation continuing to move down sustainably to 2 percent and the economy remaining near maximum employment, it would likely be appropriate to move gradually toward a more neutral stance of policy over time”, underscoring a preference for a measured and data-dependent easing cycle.
Minneapolis Fed President Neel Kashkari said that an interest rate cut remains on the table for the FOMC to consider in the next policy meeting in mid-December. He noted that the resilience of the economy and the labour markets suggests that the neutral interest rate might be higher than it was in the past. But his comments also suggested that he is not particularly concerned about the outlook for inflation, given that services inflation remains on a downward trend and shelter inflation is likely to start easing soon.
US Conference Board Consumer confidence increased further this month reaching 111.7, the highest level since mid-2023. Consumers were more positive about the current situation in the labour market, leading to increase in the overall present situation index. Future expectations also improved marginally,.
Adding to the mixed results from regional Fed surveys in recent days, the Richmond Fed’s Fifth District Survey of Manufacturing Activity reported that output growth in the sector remained weak in November. Indices for shipments and new orders were down from October levels, but the survey reported a sharper improvement in employment in this sector. That left the headline index at -14, unchanged on the month and well below the long-term average.
US new home sales surprised sharply to the downside in October reporting the steepest monthly decline in over a decade at -17.3%. This reversed increases over the last few months and left the level of sales at 610k, a level last seen a year ago. The weakness is likely linked to the effects of hurricanes around late September-early October, as most affected southern states reported the biggest drop.
FHFA and S&P Corelogic reported that house prices are growing at around a 4% annual pace, down from 6-7% seen at the start of this year.
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