Morning Report
Today's economic developments and market movements.
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Key themes: Markets were quiet overnight ahead of US non-farm payrolls data tonight and inflation data early next week, which will help determine whether the Fed cuts in December.
The US yield curve twist flattened overnight with longer tenors rallying 1-2 basis points and the short-end selling off a touch. US equities halted their recent rally.
The US dollar set lower, dropping out the bottom of its recent range and through 106. The Aussie dollar underperformed on the broad rally versus the Greenback.
OPEC+ agreed to delay a planned increase in crude production for a third time and will increase production more gradually than previously planned. Crude markets barely reacted to the announcement.
Share markets: US equities struggled to gain traction, initially climbing to fresh highs before loosing steam to trade a little lower on the day. The S&P 500 and the NASDAQ are currently trading down 0.1%.
There was a decent bid tone in European equities. The Euro Stoxx 50 rose 0.7%, the German Dax hit another fresh record following a 0.6% gain and the UK’s FTSE 100 lifted 0.2%.
The ASX 200 posted a 0.2% gain yesterday in what was a mixed Asian session. ASX futures are down around 0.1% on yesterday’s close. Maror bourses pulled back in China, while Japanese equities were firmer.
Interest rates: The US yield curve twist flattened overnight with longer tenors rallying 1-2 basis points and the short-end selling off a touch. Expectations for the Fed’s December meeting look to be well anchored around a 70-80% chance of a cut but jobs data tonight and inflation data early next week will tease things out further.
European fixed income markets underperformed, particularly at the short end with 2-year yields up 4-6 basis points across the UK, France and Germany. 10-year yields were up 3-5 basis points in the UK and Germany, but weree around 1 basis point lower in France on some optimism that a new budget can be struck shortly. A December rate cut from the European Central Bank (ECB) remains fully priced in, while the Bank of England is expected to remain on hold for its final meeting of the year.
Aussie bond futures sold off a few basis points overnight. The 3-year futures yield is currently up 2 basis points at 3.83%, while the 10-year is up 1 basis point at 4.26%. RBA rate cut expectations were pulled forward following Wednesday’s weak national accounts data. A cut in February is currently 50% priced in while April is almost fully priced in.
Foreign exchange: The US dollar slipped against every G-10 major, taking the DXY back below 106 to an intra-day low of 105.69, only slightly below where it’s currently trading. Where forward rate pricing lands over the next fews days of data will be key for the US dollar, particularly given how far expectations have been pared over recent months.
The Aussie dollar underformed the broader move, only just managing to regain a foothold toward the bottom of the 0.6435-0.6550 range it’s held since mid-November. The RBA’s commentary at next week’s meeting will either contest or reinforce recent momentum upping the odds the RBA kicks off the cutting cycle earlier in 2025. Given their focus on supply capacity, productivity and labour market tightness, we lean towards the former, which could give the Aussie some grounds to outperform through the start of next week, particularly if US data is benign. But this will need to weighed against any announcements out of China’s Central Economic Work Conference on Wednesday and Thursday next week.
The euro put in a solid performance over the past 24-hours lifting to a high of 1.0589, towards the top of its broad 1.04-1.06 range tradned since mid-November. The euro is likely to remain sensitive to any tariff jawboning from President-elect Trump over the next month or so but working the other direction, economic weakness in the region looks to be substantially built into the price, giving some scope for strength on any upside surprises. However, over a longer horizon, political and fiscal developments in the region are likely to play an increasing part in price action.
The Japanese Yen held recent ranges, the USD/JPY trading from a high of 150.78 to a low of 149.66. With the odds of a December hike from the Bank of Japan currently sitting just shy of 70%, the December meeting and data in the lead up are likely to present significant event risk for the Yen.
Commodities: Despite OPEC+ agreeing to a later and slower output increase than was generally expected, crude remained stuck in very familiar ranges. West Texas Intermediate (WTI) futures are trading flat at US$68.53.
OPEC announced that the increase in production will now start at the beginning of Q2, with production increases of about 120k barrels per day starting in April through to September. That is versus an increase of circa 180k barrels per day starting in January. In addition, the 300k barrels per day increase for the UAE has also been postponed until April and will be phased in over 18 months. Finally, OPEC published required monthly production levels for all members through to September 2026, giving the market much greater clarity over output from the cartel through next year and beyond.
Metals were generally lower, though copper remained closely tethered around US$9,000. Aluminium slipped 0.3% to US$2,638, while nickel fell by a larger 1.1% below US$16,000, closing at US$15,925.
Iron ore prices ended a four-day rally with the focus shifting to ongoing issues in the construction industry in China. Country Garden reported that sales had dropped by 52% year-on-year in November, widening from a 31% drop in October according to Bloomberg calculations. That’s despite China unleashing massive stimulus and property market easings. Iron ore futures are down 1.5% at US$102.85. The slide in prices from above $105 also comes after both Vale and Rio held investor conferences in New York earlier in the week emphasising rising supply next year.
Australia: The experimental household spending indicator rose 0.8% in October in nominal terms. This representaed a solid rebound on the 0.2% fall recorded in September. The result adds to some early signs of firmer spending over the start of the December quarter. However, it will be difficult to get a read on the underlying pulse of spending momentum until late in the quarter given the push-pull of seasonal discounting.
Goods exports rose 3.6% in October while imports edged up just 0.1% in the month. The goods trade surplus widened to $6.0bn from $4.5bn previously.
Eurozone: Retail sales disappointed in October falling 0.5% in the month to reverse September’s 0.5% gain. Over the year, sales growth is a modest 1.9% despite a historically strong labour market and gradually easing monetary policy settings.
United States: The trade deficit narrowed to $73.8bn in October from $83.8bn in September, broadly as expected. In the month, exports fell 1.6% and imports declined 4.0%.
Initial jobless claims edged higher last week from 215k to 224k, but remained historically low.
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