Morning Report
Today's economic developments and market movements.
Morning Report PDF (PDF 170KB)
Key themes: The sell-off in rates faded with the markets in the wait and see mode ahead of today’s US CPI release.
The risk on sentiment was supported by the news headlines suggesting that the new US administration might adopt a more gradual approach when imposing import tariffs.
Equity performance was mixed. Chinese equites led the way with 2.6% gain, European and domestic stock markets also traded in the green, but the US benchmark indices ended the trading session negative.
The US dollar eased back towards 109 with gains in most major currencies.
Crude prices dipped on the back of the news headlines from the Middle East and expectations of higher supply in the future.
Share markets: The ASX 200’s gains at the opening of yesterday’s trading session were reversed later in the day, but the index still finished the day in green. Performance in the overseas markets was mixed, with Chinese CSI300, up by more than 2.5%, standing out. Travel-related stocks there were among the best performers as Chinese government announced plans to boost tourism by extending visa-free entry to more countries and directing more resources into the tourism sector. Meanwhile, the S&P500, Nikkei and FTSE100 all posted losses, but Eurostoxx 50 gained 0.5% on the day, while domestic bourses of major euro area member states also rose. So far on the year-to-date basis European equities are outperforming most key counterparts in the US and Asia.
Interest rates: The sell off in rates seen in recent days faded with the profit taking and repositioning in the bond markets ahead of today’s US CPI release supporting some decreases in yields. The short end of the US Treasury yield curve lost about 2 basis points, but the 10Y benchmark was little changed remaining below the 4.80% mark.
UK 10Y Gilt yield was unchanged at 4.89%, with the successful government bond auction suggesting that demand for UK debt remains strong. Equivalent yields for German Bunds and Japanese JGBs were both up 4 basis points, with the comments from policy makers about the upcoming ECB and BoJ policy changes providing some additional support.
In yesterday’s session Aussie bonds followed the US Treasuries higher. The 10-year and 3-year yields were down 2 basis points, but the overnight sell off in bond futures of around 1-3 basis point is pointing to a possible reversal today.
Foreign exchange: The US dollar reversed the gains made after the release US labour market report on Friday as the headlines suggested that the new US administration might take a bit more gradual approach when imposing new import tariffs. The DXY index eased from above 110 to 109.2. The CPI data, due tonight, should provide a new sense of direction to the markets, with likely significant impact on the trajectory of USD over the remainder of this week and beyond.
With the lack of any major economic news on the domestic front, the USD weakness was the main driving force behind the small AUD gain back towards the 0.62 mark. Similarly, the euro pulled higher rising back above 1.03, while the British pound also made gains from Monday’s lows.
Commodities: Crude dipped on signs that a ceasefire in Gaza is all but agreed, potentially reshaping the distribution of risks for oil supply. West Texas Intermediate (WTI) futures are down 1.3% to US$77.80 per barrel. The US Energy Information Administration (EIA) revised up its forecast for the rise in global crude production to 1.75m barrels per day from 1.64m barrels per day in 2025 and issued its first forecast for the rise in 2026 at 1.53m barrels per day. World oil markets will see an average surplus of 800k barrels per day in 2026, up from 300k barrels per day in 2025.
Metals benefited from reports suggesting that the Trump administration was said to be considering slowly ramping up tariffs, though the proposal was said to be in the early stages of discussion and had not been presented to Trump. Trump had previously described a similar report as false. Copper is at a fresh one month high at $9,033 while aluminium was capped at $2,600.
Iron ore jumped after record Chinese imports bolstered sentiment. China announced Monday that it had imported 112.5m tonnes of iron ore, up 10.4% month-on-month, bringing the total for the year to 1.2b tonnes, up almost 5% versus the total for last year. That’s the 2nd highest monthly total ever and emphasises why iron ore prices have been so sticky around this $100 level. Iron ore futures closed above US$100 per barrel for the second time this year after a 1.6% gain.
Australia: The Westpac-Melbourne Institute Consumer Sentiment Survey suggested that consumer mood worsened at the start of this year, with the headline confidence index down 0.7%mth to 92.1, below the peak of 94.6 reached in October, but well above levels that prevailed for 2½ years before that. Having reported a notable improvement a month ago, this time consumers reported that their financial situation deteriorated again. That result contrasted with a more positive reading for the forward-looking assessment of personal finances. Meanwhile, expectations for the economy as a whole were little changed, despite a more negative assessment of the labour and housing markets. The views on the economy were likely underpinned by consumers keeping their assessment of the interest rate outlook unchanged.
China: The latest Chinese credit data showed 32.3 trillion yuan of borrowing in 2024, above expectations, but well below 35.6 trillion yuan reported in the prior year. The monthly increase of 2.9 trillion in December was only a touch stronger than the average monthly rise in the last twelve months, and majority of it, 1.8 trillion, was accounted for by government borrowing, which was likely supported by previously announced measures to swap the off-balance sheet debts held by local governments with more regular borrowing.
United States: Having taken a big step up after the Presidential election, the NFIB Small Business Sentiment Index rose further in December gaining 3.4 points to reach 105.1, the highest level in more than six years. More positive business owners’ assessment of the economy, likely linked to expectations that the new government will reduce taxes and regulations seems to be the main driving force of the optimism. Indeed, a net balance of 52% of business owners, the highest level since Q4 1983, are expecting the economy to improve, and 20%, the post-pandemic high, think it is a good time to expand their business.
Ahead of tomorrow’s release of the US CPI numbers, the US PPI suggested that underlying inflationary pressures softened at the end of last year. The headline PPI increased 0.2%mth, down from the 0.4%mth pace in November and below the 2024 average pace of 0.3%mth. Core PPI was unchanged on the month, which represented the second lowest reading last year. The PPI inflation looked much more resilient on an annual basis – the headline rate rose to 3.3%yr and the core remained unchanged at 3.5%yr.
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