Morning Report
Today's economic developments and market movements.
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Key themes: US equity indices were mixed. Tech stocks outperformed, leading the S&P 500 and Nasdaq higher. European markets were also higher.
The US treasury yield curve steepened overnight. The job openings report, and comments from Fed officials that were on the dovish side, saw increasing bets for a 25bps cut when the Fed meets in December. Fed Chair Powell’s remarks on Wednesday could further bolster the case for a rate cut.
The US dollar was slightly lower, while the Aussie ended a touch higher after moving above 0.65 against the Greenback. If today’s Q3 GDP outcome is stronger than the 0.5%qtr the market is expecting, the Aussie is likely to receive support. Following the announcement of martial law in South Korea, the Won hit its lowest level against Greenback since 2009, before paring some losses.
Share markets: US equity indices were mixed, ahead of Fed Chair Powell’s remarks on Wednesday and the jobs report later this week. The likelihood of a rate cut in December is now sitting at around 72% following the constructive job openings report and comments from Fed officials that were on the dovish side.
Investors took a breather following the announcement of martial law in South Korea. This saw Korean-linked exchange traded funds such as the iShares MSCI South Korea ETF fall by more than by 2.5%, with Samsung’s London shares down 3.7%.
Tech stocks outperformed, which saw the S&P 500 Index gain 0.1%, while the tech-heavy Nasdaq added 0.4%. The Dow Jones closed 0.2% lower.
European stocks rose for a fourth consecutive day, with gains in construction related equities leading the market higher. The Euro Stoxx 50 closed 0.7% higher. The DAX was 0.4% higher, while the FTSE 100 finished up 0.6%.
The ASX200 index was 0.6%. Nine of the eleven sectors finished higher, led by financials. Futures are pointing to a soft open this morning.
Interest rates: The US yield curve steepened. The US 2-year bond yield was unchanged at 4.18%. The US 10-year bond yield increased 4 basis point to 4.23%. Money markets are pricing in a 72% chance the Fed cuts by 25bps in December, with 82bpts of cuts priced in by the end of 2025.
Yields were lower across Europe, with 10-year bond yields down 2 basis points to 2.05% in Germany and down 3 basis points to 4.24% in the UK.
The yield curve in Australia shifted higher. The 3-year futures yield increased 3 basis points to 3.94%, while the 10-year futures yield increased 2 basis points to 4.33%. The first full rate cut is expected by May 2025, with around 62bpts of cuts expected over 2025.
Foreign exchange: The US dollar was slightly lower (-0.1%) as the likelihood of a rate cut in December firmed. Strong relative economic performance, coupled with ongoing geopolitical tensions, suggests that the US dollar will continue to be supported.
The Aussie finished slightly higher in a volatile session where the AUD/USD pair touch a high of 0.6505. The AUD/USD pair traded within the range 0.6455 to 0.6505. If today’s Q3 GDP outcome is stronger than the 0.5%qtr the market is expecting, the Aussie is likely to receive support. More generally, potential for ongoing China stimulus and the RBA’s continued hawkish guidance is likely to provide the Aussie with support.
The euro stabilised after yesterday’s fall which was trigger by political events in France. Money markets have priced in 28 basis point of cuts for December. As we have been saying, downside risk remains given political uncertainty in Europe and the bloc’s relative economic under performance.
The Japanese Yen was little changed, with the USD/JPY remaining below 150. Money markets are currently pricing in a 50% of a hike later this month.
Commodities: Oil markets were higher as the US imposed more sanctions on Iranian oil flows and OPEC discussions appearing to be focus on a further three-month delay of staggered production increases. The West Texas Intermediate (WTI) is trading 2.8% higher at US$70.03 per barrel.
Metals increased on news that China had fixed a date for the l Economic Work Conference and reports that Chinese metal importers were halting US scrap imports in anticipation of tariffs being imposed in January.
Iron ore continued its push above the $105, helped by the slightly earlier than usual Central Economic Work Conference which will take place on December 11-12 driving rising hopes for stimulus
Australia: The Australian economy is expected to have grown 0.6% in the September quarter 2024. This would see annual growth come in at 1.2% in Q3. The domestic demand impulse (spending by consumers, businesses, and governments) is expected to have lifted a solid 0.9% in the September quarter.
New public investment grew 5.3% in Q3 – the strongest growth rate since the September quarter 2018, while public consumption lifted 1.4% in the quarter, to be up 4.6%yr. New public demand is expected to contribute around 0.6ppts to GDP growth in Q3, the largest contribution since 2012 outside of a few quarters during the pandemic. As a result, new public demand will climb to 27.8% of GDP in Q3 – a new record high. This quarter was not only about spending.
Part of this spending and borrowing was used to pick up the tab for the electricity rebates and other cost-of-living measures. We estimate that these subsidies in essence boosted household consumption by 0.4ppts in the quarter but will show up in public spending.
Net exports and inventories are still expected to detract around –0.3ppts from growth in the September quarter. The external sector is now expected to contribute around +0.1ppts to growth in the September quarter, on the back of solid growth in goods exports and a fall in goods imports, which was partly offset by a –0.1ppt detraction in the net services balance. Total inventories (private non-farm and public) are expected to detract –0.4ppts from growth in the quarter, driven by private non-farm inventories.
The current account balance improved in the September quarter, with the deficit shrinking by more than $2bn to $14.1bn. That said, revised current account estimates for June and prior quarters meant the starting point was significantly weaker with the new value of –$16.4bn for the June quarter represented the biggest current account deficit in eight years.
United States: The JOLTS job openings rose from 7.4mn to 7.7mn in November partially reversing the 0.5mn decline in October, when hurricanes and the Boeing strike affected hiring. Looking through the monthly volatility, the three-month average was almost unchanged, and down by about 0.3mn since July, indicating that the job openings continues to ease having peaked at 12.2mn in March 2022. So while the monthly changes are hard to interpret due to one-off distortions, in the bigger picture the job openings are consistent with gradually loosening conditions in the labour market.
San Francisco Fed’s President Mary Daly signalled that an interest rate cut remains on the table for policy makers to consider in the next two meetings. Her comments echoed the sentiment expressed by Fed Governor Christopher Waller yesterday, when he said that he is leaning towards supporting a cut. He caveated his statement by indicating that surprises in economic data might alter his position.
New Zealand: The terms of trade increased 2.4% in Q3, following a 2.1% increase in q2. This was stronger than the 1.8%qtr expected by the market. Export prices increased by 0.7%qtr, following a 5.2%qtr in Q2. Import prices declined 1.7%qtr, after a 3.1% rise in Q2.
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