Morning Report
Today's economic developments and market movements.
Morning Report PDF (PDF 287KB)
Key themes: Momentum from Friday’s payroll’s induced rates selloff continued offshore overnight, with a lack of any significant data.
Domestic bond’s repriced sharply in physical trade yesterday, marking-to-market Friday night’s move before selling off a little further still.
Equities were mixed overnight, selling pressure continued in European markets while US equities managed to erase early losses. The exception being the NASDAQ which couldn’t sustain a late rally.
The US dollar continued its grind higher, briefly breaking through 110. Most major’s slipped to fresh multi-month or multi-year lows before largerly retracing the moves.
Crude futures continued to push higher following the US’ announcement last week of fresh sanctions against Russia.
Share markets: The ASX 200 opened sharply lower yesterday, repricing after steep falls in offshore markets on Friday night. The selling continued throughout the day with the domestic bourse finishing down 1.2%. Other Asian markets were similarly downbeat, the Japanese Nikkei shed 1.0%, while stocks also fell in China.
Overnight, European and US markets opened lower, continuing Friday’s bearish momentum. A wave of dip-buying saw most indices retrace part of the initial fall despite largerly closing in the red. The S&P 500 was down 0.1%, while the Euro Stoxx 50 shed 0.5% and the UK’s FTSE lost 0.3%. Aussie equity futures are up 0.3% on yesterday’s close.
Interest rates: Reverberations from the upside surprise to the US payrolls on Friday continued at the start of the week as global markets internalized expectations for a higher Fed policy rate path. The sell off in the US Treasuries continued, albeit at a modest pace, with the curve moving 1-3bp higher. The 10-year treasury yield hit 4.79%
UK Gilts underperformed as the Bank of England asset sales under the Quantitative Tightening (QT) programme provided additional selling pressure. The 10-year yield gained 5 basis points on the day reaching 4.89%. The move will add to concerns about the sustainability of the public finances and weak economic growth in the UK. Meanwhile, a change in German Bund yields was more muted, with the equivalent yield up 2 basis points to 2.61%.
In yesterday’s session Aussie bonds caught up with the sell-off in international markets at the end of last week. The 10-year yield was up almost 10 basis points to 4.63%, not too far from last year’s peak of just below 4.70%. The short-end of the curve was even more in red, with the 3-year yield rising 13 basis points to 4.07%. The overnight losses in bond futures were much smaller – the 3-year yield was up 3 basis points – suggesting that the cash market might see a quieter open today.
Foreign exchange: The US dollar continued its grind higher, briefly breaking through 110 before pulling back to around 109.89 at the time of writing. US economic exceptionalism and political/geopolitical uncertainty remain driving forces behind the US dollar bid. Inflation data later this week will be the next key data point for the greenback.
Most major’s slipped to fresh multi-month or multi-year lows before largerly retracing the moves. The Aussie dollar touched a fresh low since 2020 at 0.6431 before rebounding to post a slim daily gain. The domestic economic narrative continues to leave the Aussie dollar vulnerable, while angst around the Chinese economy is compounding the pressure. Any near-term reprieve likely rests with some meaningful policy action in China or a unwind in expectations for RBA rate cuts which have lifted noticeably on late last year.
The euro and the British pound are both lower against the greenback with the latter noticeably so. Both majors broke sharply through key psychological levels overnight at 1.02 and 1.22, respectively. Only the euro has managed to trade back above this level with the Pound languishing around 1.2177 as concerns around fiscal sustainability persist.
Commodities: Crude futures continued to push higher following the US’ announcement last week of fresh sanctions against Russia. Alberta’s Premier said that Canada should prepare for 25% tariffs from the US with no exceptions once Trump is inaugurated. More than half of US crude imports come from Canada, most from Alberta.
West Texas Intermediate (WTI) futures are up 2.8% to US$78.70 per barrel, the highest since August last year.
Iron ore futures rose 1.6% to US$99.05 after briefly lifting above US$100. Strong chinese export data, the likely result of front-loading ahead of anticipated trade tariffs, were also supportive. Nickel futures are trading up 1.6% at US$15,901, extending a recent uptrend. However, copper failed to cash in with futures currently down 0.2% at US$8,979 and comfortably within its recent range.
Australia: There were no major economic data releases yesterday.
China: The trade balance widened to a record US$104.8bn in December, a likely sign exports are being front loaded ahead of expected US tariffs. Over the calendar year, the cumulative surplus topped US$992bn, a record high and 21% higher than the previous year. While exports rose 10.7% over the year to December, the record surplus was also aided by soft imports on the back of weak domestic demand. That said, import growth stabilised somewhat in December, up 1.0% on a year earlier following a 3.9% annual fall in November. The upcoming Lunar New Year holidays which fall almost two weeks earlier this year likely provided some additional support to imports.
Exports to Australia were down 11.8%yr, which was the lowest reading since the start of the year. Imports from Australia remained on a downward trajectory posting -15.4%yr growth, virtually unchanged from the prior month.
The People’s Bank of China (PBoC) announced tweaks to its capital controls, ramping up its efforts to support the Yuan alongside a pledge to keep the currency stable at reasonable levels. The changes allow Chinese firms and financial institutions to borrow more from overseas, which may help increase capital inflows and support the Yuan.
New Zealand: New building permits rose 5.3% in November following a similarly large 5.2% fall in the prior month. Multi-density permits are driving outsized volatility in new approvals while stand-alone consents remain soft falling 0.7% in the month - the fourth consecutive monthly decline.
United States: Following last week’s release of the University of Michigan Consumer Sentiment Survey which showed that consumer inflation expectations increase notably in the latest month, similar data from the New York Fed was more mixed. The NY Fed reported that inflation expectations at the 1-year horizon were virtually unchanged, at the 3-year horizon they increased by 0.4ppt to 3%, about 0.3ppt higher than the average in 2024. The 5-year expectations eased 2.7%yr, the lowest level in nine months. Meanwhile, market measures of US inflation expectations took a step higher recently, with the 2-year breakeven rate up about 25 basis points.
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