Morning Report
Today's economic developments and market movements.
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Key themes: US equities bounced back on Friday thanks to Amazon and Intel’s solid outlooks. The rally faded throughout the day as the possible fallout from this week’s US presidential elections took centre stage.
Bond yields initially declined following the weaker than expected jobs report, before bouncing back. The ten-year yield is now at its highest level since July. Bond yields were also generally higher across Europe.
The US dollar index finished higher and mirrored changes in US bond yields. The Aussie was lower against the Greenback on Friday, but has received some support today, lifting to 0.66 in early trade.
Market jitters from last week are likely to intensify as we head into a massive week - one of the closet US presidential elections ever, coupled with central bank meetings in the US, UK and domestically are all significant risk events.
Share markets: US equities bounced back on Friday thanks to Amazon and Intel’s solid earnings reports. The rally lost puff as the day wore on and US bond yields increased. Despite the bounce back, equities finished the week lower.
The Dow Jones finished 0.7% in the green to be down 0.2% over the week. The broad-based S&P 500 gained 0.4% but was 1.4% lower in weekly terms. And the tech-rich Nasdaq advanced 0.8% to be 1.5% lower over the week.
The US election and the Fed’s November rates meeting will drive price action this week. Investors are preparing for the a volatile week ahead, which has seen an increasing flow of capital flowing into ETFs that protect against stock volatility with VIX index-based derivatives.
European stocks followed the US lead to also bounce back on Friday. The Euro Stoxx 50 closed 1.0% higher, the DAX gained 0.9% and the FTSE 100 closed 0.8% higher.
In Asia, the picture was mixed with the Nikkei down 2.6% and the Hang Seng up 0.9%.
The ASX200 index declined for the third consecutive session, falling 0.5% to be 1.1% lower in weekly terms. Ten of the eleven sectors finished in the red, led by financials stocks. Futures are pointing to a solid open this morning.
Interest rates: Bond markets were volatile in a sign of what’s likely to come this week. The weaker than expected nonfarm jobs report initially led to a sharp fall in yields across the curve. As the day wore on, implications of this week’s US presidential elections took centre stage. This saw yields increase and retrace the falls recorded in early trade.
The US 2-year bond yield increased 4 basis points to 4.21%, while the 10-year bond yield increased 1 basis points to 4.38% - the highest yield since July.
Following the nonfarm jobs report, markets have virtually fully proved in a rate cut this week. The chances of a rate cut in December are sitting at around 80%, with the market pricing in around 120 basis points of cuts by the end of 2025.
Bond yields were also higher generally across Europe. The Glit market showed signs of stabilising after a volatile week. The 10-year Gilt was flat at 4.45%, with the 2-year Glit down 1 basis point to 4.43%.
Australian yields were higher. The 3-year futures yield was 4 basis points lower at 4.08%, while the 10-year futures yield was 8 basis point higher at 4.63%. Markets are pricing virtually no chance of a move when the RBA Board meets this week. The first full rate cut is now expected by May 2025, with around 50 basis points of cuts expected over 2025.
Foreign exchange: Moves in the US dollar index mirrored the changes in US bond yields – sharp falls following the jobs report, followed by a bounce back, which saw the DXY up 0.4%. The DXY traded within a narrow range, falling to a low of 103.679 before bouncing to a high of 104.349. The outcome of the Fed’s November meeting (plus any forward guidance) and the presidential race will drive moves this week.
The Aussie depreciated (-0.4%) against the Greenback, reaching a high of 0.6591 before sliding to a low of 0.6554. In early trade today, the Aussie has shot up to be trading at 0.6609. The near-term backdrop remains challenging for the AUD/USD pair: US resilience and the US election, and ongoing geopolitical tensions pose downside risks. The outcome of the RBA Board meeting also posies risks.
The British pound stabilised on Friday (+0.2%) after falling sharply in the two previous sessions, as investors assessed the “expansionary” UK budget. Markets have prices in an 80% chance of a rate cut when the BoE meets this week.
The Japanese Yen was lower, with the USD/JPY (+0.6%) trading at around 153 per US dollar. Since Friday, the Yen has appreciated with the pair falling 0.5% to trade at around 152.23.
Commodities: Oil reversed the gains seen in early London trade after weaker than expected US employment data added to concerns about softening demand. That was despite news that Iran was planning to attack Isreal from Iraq, and that OPEC was planning to again postpone a production increase. The West Texas Intermediate (WTI) futures is trading at US$69.49 per barrel.
Industrial metals were generally higher with the focus on the US presidential election, the Fed meeting and a key gathering of China’s leadership. The rise in China PMIs last week helped sentiment through the week.
Iron ore futures were lower trading at around US$102.30 a tonne in Singapore, with higher inventory weighing on sentiment.
Australia: The household spending indicator showed that spending fell 0.1% in September, following a 0.2% rise in August and a flat outcome in July. Spending is up just 0.2%qtr since the introduction of tax cuts, continuing to post gains in services and non-discretionary industries. The purchases of goods declined (in yearly terms) for the first time since the pandemic.
The total value of housing finance approvals declined 0.3% in September, with annual growth slowing to 18.9%yr. A 1% fall in the value of investor loan approvals drove the decline. This fall was centred on WA where a very strong surge over the last year may be starting to peak. Owner occupier lending was flat rather than weak, with first home buyer loans pulling back. The pause in recent months may be an early sign that the upturn is starting to moderate although we will need a few more months of data to be sure.
Producer prices increased 0.9% in the September quarter, to be 3.9% higher in annual terms. The annual outcome was a step down from the 4.8%yr recorded in the June quarter, as base effects from last year’s minimum and award wage increase fell out of the annual calculations. Property operators and residential building construction continue to drive the increases in producer prices. The ABS noted that property operator prices rose driven by higher fees linked to increased rents, and building construction prices rose as the labour market remains tight. Petrol prices decline by almost 10%qtr, partly offsetting some of these gains.
Eurozone: Headline inflation increased 2.0% over the year to October, from the 1.6%ye recorded in September. This was a stronger than the 1.8%yr expected by the market. Energy, food, alcohol and tobacco inflation accelerated over the month. The core rate was stable at 2.7%yr.
The unemployment rate held steady at a historically-low 6.3% after the August outcome was revised down from 6.4%. Taken together with this week’s constructive Q3 GDP results, these outcomes warrant the ECB continuing with their modest, data-dependent easing cycle towards neutral.
China: The Caixin Manufacturing PMI rose to 50.3 index points in October, from 49.3 points in September. The move to expansionary territory in the month was consistent with the official manufacturing PMI and suggests that stimulus measures have stated to support activity. Output grew at the fastest pace in four months, driven by a rise in new orders and buying levels.
New Zealand: The number of building approvals rose 2.6% in September, after falling by 5.3% in August. Recent data suggests that approvals have stabilised after falling sharply over the past year. As lower interest rates and tax cuts continue to support incomes, activity in the construction sector should also improve.
United States: Hurricanes and an industrial dispute made it harder to get an underlying read on the state of the labour market. Jobs gains were the lowest since December 2020 and well below recent averages, suggesting that the labour market continues to soften, despite the volatility driven by these one-off events.
Nonfarm payrolls rose 12k in October, well below the 223k jobs added in September and the gain of 100k expected by the market. While the Bureau of Labor Statistics said that employment in some industries was affected by the severe hurricanes, the net impacts were not quantified.
Average hourly earnings for all employees on private nonfarm payrolls ticked up to 0.4% in October, from the 0.3%mth recorded in September. This was slightly above the 0.3%mth expected by the market. In annual terms, average hourly earnings continue to show signs of moderation (4.0%yr in October 2024 compared with 4.3%yr in October 2023).
The unemployment rate remained at 4.1% in line with market expectations, while the labour force participation rate eased by 0.1ppts to 62.6%.
Construction spending rose 0.1% in September, slightly above the flat outcome expected by the market. Private residential construction increased 0.2%mth, with construction of private single-family homes increased 0.4%mth from a fall of 1.3% in August. Next month’s read is likely to be impacted by the hurricanes. However, going forward lower interest rates should see construction activity pickup.
Manufacturing activity shrank in October for a seventh consecutive month to the lowest reading since July 2023, dragged down by a drop in production. The ISM Manufacturing PMI declined to 46.5 index points in October, from 47.2 points in September. This was softer than the 47.8 points expected by the market. The employment sub index also disappointed, bouncing back by less than the market was expecting (44.4 in October v 45.0 expected by the market).
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