Morning Report
Today's economic developments and market movements.
Key themes: The ECB cut by another 25bps as expected while the Swiss National Bank made a 50bps cut. Attention now turns to the US Fed next week, with the market fully pricing in another 25bps cut. The focus will be on guidance and whether the stronger than expected US producer prices will see the Fed up the ante on its cautions rhetoric, bringing into focus the pace of future rate cuts.
US equities drifted lower with the rally in early trade fading following the hotter than expected US producer price read.
US bond yields and the US dollar index were higher. The Aussie retraced the gains made following the jobs report. Aussie yields continued to drift higher overnight. The chances of a February cut have fallen to around 50% (from 66% before the yesterday’s jobs report), while the first-rate cut has now been fully priced in by May.
Share markets: US equities drifter lower after the stronger than expected producer price outcome triggered a selloff. The Nasdaq finished 0.7% in the red, while the Dow Jones finished 0.6% lower and the S&P 500 was 0.4% lower.
European stocks finished slightly higher, as the ECB delivered another rate cut and signalled further easing in 2025. The Euro Stoxx 50, the DAX and the FTSE 100 all closed 0.13% higher in a volatile session.
The ASX200 index slipped 0.3%, chalking up its third consecutive day of losses. The Index gave up early gains after a stronger-than-expected domestic labour market report dimmed chances for a February rate cut. Nine of the eleven sectors finished lower, led by interest rate sensitive sectors such as real estate stocks. Futures are pointing to a soft open this morning.
Interest rates: Treasuries were sold off following the release of the US producer price data. The policy sensitive 2-year bond yield was 4 basis points higher at 4.14%. The US 10-year bond yield was 6 basis points higher 4.33%. Money markets are pricing in an 95% chance the Fed will cut by 25bps on 18 December. There are 78bpts of cuts priced in by the end of 2025, lower than the 82bps priced in last week.
The sell off in domestic treasuries continued in the futures market overnight. The 3-year futures yield increased 1 basis points to 3.86%, while the 10-year futures yield increased 4 basis points to 4.31%. The 3-year bond yield increased 11 basis points yesterday following the jobs report, while the 10-year yield increased 8 basis points.
European yields were lower across the curve, with UK 10-year Gilt yields down 5bps and the German 10-year yields down 7bps. Following the ECB’s 25bps cut overnight, markets have priced in 5 more rate cuts over 2025.
Foreign exchange: The US dollar was firmer rising to be above the 107 level, on the back of yield support. Fed guidance following next week’s final meeting for the year will help determine how well supported the Greenback is in the near term. Recent data could see the Fed double down on its cautious and measured approach, supporting the Greenback.
The Aussie was broadly unchanged. After increasing to 0.643 following the jobs report, the rally lost steam during the New York session where attention turned to US producer prices. The Aussie was supported on the crosses, up 0.5% against the Pound and 0.3% against the NZD. The Aussie remains vulnerable to shifts in risk sentiment and softer real economic data, with more stimulus out of China and still resilient labour market conditions providing an offset.
The Japanese Yen was softer, with the USD/JPY increasing 0.1% to 152.65. Money markets are currently pricing in a 15% of a hike in December and are pricing in a full hike by May. The euro wobbled after the ECB cut rated and remains susceptible to downside risks given political instability and the ECB signalling further rate cuts.
Commodities: Oil markets were broadly unchanged as crude contracts pared losses despite the International Energy Agency warning of a supply glut in 2025. The pledge from Chinese officials to provide more stimulus following the two-day Central Economic Work Conference in Beijing improved sentiment. The West Texas Intermediate (WTI) is trading at US$70.2 per barrel.
Iron ore jumped 1.4% following the pledge made by Chinese officials, to be trading at US$104.60.
Australia: The November jobs report delivered some notable surprises, in part driven by shifting seasonality. The ABS noted in their media release: “In November, we saw a higher than usual number of people moving into employment who were unemployed and waiting to start work in October.” There is a risk of an unwind in December. As such we assess the outcome as remaining broadly consistent with a ‘normalisation’ in labour market conditions.
The level of employment increased by +35.6k (0.2%) in November. The current pace of employment growth is easing back from a burst of strength over Q3, the three-month annualised pace slowing from 4.4%yr in September to 3.0%yr currently. The monthly gain in employment slightly outstripped population growth, driving a modest increase in the employment-to-population ratio, enough to round up to 64.4% (from 64.33% to 64.36%).
The participation rate dipped lower, from 67.1% to 67.0%, implying a measly +8.6k increase in the size of the labour force – the smallest increase recorded all year. In essence, there were very few new entrants in November, meaning employers could only satiate their labour demand via already-existing job seekers who were categorised as unemployed in October.
As a result, the unemployment rate fell sharply lower in November, from 4.1% to 3.9%, beating all expectations. Highlighting the sensitivity of unemployment to labour supply, if instead the participation rate had held flat from October – as per the consensus forecast – the unemployment rate would have held flat at 4.1%.
United States: Wholesale or producer prices surprised to the upside in November rising 0.4% following an upwardly revised 0.3% gain in October (previously 0.2%). However, these outcomes were due to food and energy costs, with core PPI inflation as expected at 0.2%. Annual headline and core PPI inflation stands at 3.0%yr and 3.4%yr.
Initial jobless claims rose from 225k to 242k last week, still a very low level versus history.
China: Policymakers signalled more public borrowing and spending in 2025 with a shift of policy focus to consumption. Top officials led by the President vowed to raise the fiscal deficit target next year in an announcement made following the two-day Central Economic Work Conference in Beijing. Policymakers also vowed to strengthen the social safety net with broad promises to bolster health care and pensions.
Eurozone: The ECB delivered another 25bp cut at their December meeting as expected. Guidance given on inflation was confident, “headline inflation [seen] averaging 2.4% in 2024, 2.1% in 2025, 1.9% in 2026 and 2.1% in 2027”.
Lingering strength in domestic inflation was seen because of past inflation, not current supply or demand pressures. Greater caution was shown over the activity outlook, with the upside surprise of Q3 expected to be followed by a soft print in Q4, at least in part because policy is still restrictive and given the lags with which policy impacts the economy. Still, the staff expect GDP to grow around trend from 2025, at “1.1% in 2025, 1.4% in 2026 and 1.3% in 2027”. Underlying this view are gains for real income, the fading restrictiveness of policy and business investment responding to a need for greater capacity across the economy given persistent growth.
US trade policy, global growth overall and threats to European manufacturing competitiveness are risks to this view. The ECB will continue to cut in H1 2025, though on the forecasts at hand is likely targeting neutral not an outright expansionary policy setting.
Thank you for your readership over the past year. This is the last Morning Report for 2024. We will resume publishing this report in mid-January, 2025.
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