Morning Report
Today's economic developments and market movements.
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Key themes: Nonfarm payrolls suggested that the labour market was gradually softening, giving the Fed the green light to continue easing. The ensuing risk on response was tempered following the release of solid US sentiment data and hawkish comments from Fed speakers.
Key US equity indices were mixed, with a rally in tech stocks seeing the S&P 500 record a fresh record high. European markets were also generally higher.
The US yield curve shifted lower, with the policy sensitive two-year yield retracting some of the fall following comments from Fed officials.
The US dollar whipsawed to end the session slightly higher. The Aussie declined 1.0% to its lowest intraday level since August. A dovish shift by the RBA Board when it meets this week could see the Aussie come under increased selling pressure.
Share markets: US equites were mixed, with a late rally after a volatile session seeing the S&P 500 set a fresh record high. The benign labour force report increased bets that the US would achieve a soft (or no) landing supporting stocks, particularly consumer discretionary stocks. This reaction was somewhat tempered following hawkish comments from Fed officials and the solid sentiment data. There was also a rally in tech stocks, including Meta and Alphabet, as TikTok’s Chinese parent company faces a ban in the US if it fails to meet a deadline to sell the app.
The S&P 500 rose 0.2% to be 1.0% higher over the week. The tech-heavy Nasdaq gained 0.9% to be a solid 3.3% higher in weekly terms. The Dow Jones lagged the other indices falling 0.3% on Friday to be 0.6% lower over the week.
European stocks were also mixed after six sessions of gains, as investors waited to see the US jobs report and assess what it meant for future rate moves. The Euro Stoxx 50 closed 0.5% higher while the FTSE 100 declined 0.5%. The DAX was little changed, up 0.1% on the day.
The ASX200 index slipped 0.6% on Friday to finish the week 0.2% in the red. Nine of the eleven sectors finished lower, led by materials. Futures are pointing to a soft open this morning.
Interest rates: The benign jobs report increased bets that the Fed will cut when it meets this week. It also saw the US yield curve shift lower. The policy sensitive 2-year bond yield was four basis points lower at 4.10%, after falling as much as 7 basis points during the session. The US 10-year bond yield declined 2 basis points to 4.15%. Money markets are pricing in an 85% chance the Fed will cut by 25bps on 18 December, higher than the 65% chance priced in a week ago. There are 80bpts of cuts priced in by the end of 2025.
Aussie yields were broadly unchanged. The 3-year futures yield declined 1 basis points to 3.80%, while the 10-year futures yield was unchanged at 4.23%. The first full rate cut is expected by April 2025, with around 75bpts of cuts expected over 2025.
Foreign exchange: The US dollar whipsawed ending the session slightly higher (+0.3%). The DXY traded sideways for much of the day, falling after the jobs report data only to more than retrace this fall following the release of consumer sentiment data and Fedspeak signalling a cautious approach to easing. This saw the Greenback increase to a high of 106.159. Strong relative economic performance, coupled with ongoing geopolitical tensions, suggests that the US dollar will continue to be supported.
The Aussie declined to close at 0.6391 – its lowest close since November 2023. While US economic indicators continue to point to a gradual easing in economic conditions, economic indicators have disappointed in Australia, particularly the National Accounts which showed the economy grew 0.3% in Q3, under the 0.5% expected by the market. Following the release of the US consumer sentiment read, the AUD/USD pair declined to a session low of 0.6373. The AUD/USD declined almost 2.0% over the week. The Aussie remains vulnerable to shifts in risk sentiment and softer economic data. A dovish shift in RBA communications this week could see the Aussie come under more pressure.
The euro finished the week broadly unchanged after sliding over the past few months. The euro continues to be susceptible to downside risks given political instability in the zone and increasing tensions in the Russian and Ukrainian conflict. There is also a chance of a 50bpt cut when the ECB meets in December.
The Japanese Yen was the top performer, with the USD/JPY slightly lower at around 150. Money markets are currently pricing in a 38% of a hike in December, and are pricing in a full hike by May, which is supporting the Yen.
Commodities: Oil markets were lower with reports suggesting that the global oil market faces a ‘heavy surplus’ of more than 1 million b/d next year, with non-OPEC+ supply growth expected to meet the below-trend demand growth. The West Texas Intermediate (WTI) is trading 1.6% lower at US$67.20 per barrel.
Iron ore was little changed, continuing to trade above US$100, 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: There was no significant top tier data released on Friday.
United States: Labour market conditions are slowly softening with the unemployment rate ticking higher to 4.2% in November, while wage pressures remain contained. On the jobs front, nonfarm payrolls increased 227K jobs in November, up from the 36k gain in October that was influenced by Boeing strikes and the disruptions caused by the recent Hurricanes. The outcome was broadly in line with the gain of 220k expected by the market. The outcome was driven by health care, leisure and hospitality, government, and social assistance.
The unemployment rate ticked up to 4.2% in November from 4.1% in October, a touch higher than the 4.1% expected by the market. The number of unemployed individuals increased by 161k, while the labour force participation rate edged down to 62.5% in November from 62.6% in October. Average hourly earnings increased 0.4% in November, the same pace as in October and slightly above the 0.3% the market was expecting. Over the year, average hourly earnings have increased by 4.0% in November, matching October’s rate and slightly above the 3.9% expected by the market.
The University of Michigan’s preliminary December survey showed consumer sentiment increased to 74.0pts from 71.8pts in October, which was above the 73.2pts expected by the market. This was the highest read in seven months. Current conditions surged to 77.7pts from 63.9pts in November, while expectations for the future deteriorated to 71.6pts from 76.9pts. A surge in buying conditions for durables and cars propped up current economic conditions. Sentiment among Republicans soared to 81.6pts from 69.1pts, while sentiment among Democrats deteriorated to 70.9pts from 81.3pts in November.
Michelle Bowman, member of the Fed’s Board of Governors, said inflation remains uncomfortably above the Fed’s target and that she ‘would prefer that we proceed cautiously and gradually in lowering the policy rate as inflation remains elevated.’
Cleveland Fed President, Beth Hammack, said policymakers are “at or near” the point where the central bank should slow the pace of interest rate cuts, given the resilient economy.
San Francisco Fed President, Mary Daly, said the US jobs market looked resilient, noting that ‘as jobs are expanding, there’s about one vacancy for every unemployed worker. So that’s a balanced labor market.’
Eurozone: Growth in economic activity was confirmed at +0.4% in the September quarter. This represents a pickup from the 0.2% recorded in the June quarter and was the fastest quarterly pace in almost two years. Household consumption increased 0.7% in the September quarter, while investments advanced by 2%qtr, with trade making a negative contribution. In annual terms, growth in the area was confirmed at 0.9%.
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