Morning Report
Today's economic developments and market movements.
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Key themes: Markets had a lot of new information to digest, both locally with a modest downside surprise in inflation data, and globally with the FOMC’s policy decision.
US equities sold-off following news of news of Trump officials considering tighter restrictions on chip sales to China. Meanwhile, global markets continued to rally off the back of the earlier tech-led rebound.
Following the modest downside surprise on Australian inflation data, futures markets are now pricing in a 90% chance of a rate cut in February.
The DXY managed to eke out a modest gain. Performances across the G10 were mixed, with the Japanese Yen a highlight, while the Aussie, Euro and Canadian dollar weakening.
Share markets: In the US, news of Trump officials considering tighter restrictions on chip sales to China sparked a fall in Nvidia stock. Subsequently, the FOMC’s on-hold decision and succinct guidance drove a further pull-back in US equities that was mostly reversed after Chair Powell, in the press conference, emphasised that inflation is expected to continue trending to target, warranting further policy easing in time. The S&P 500 and NASDAQ finished –0.5% lower on the day, and the Dow Jones fell –0.3%.
Elsewhere, the earlier bounce-back in tech stocks extended into global markets. European stocks finished on a positive note, the Euro Stoxx 50 up 0.7%. Germany’s DAX outperformed (+0.9%), while London’s FTSE 100 rose 0.3%.
Solid gains were also observed across Japan’s Nikkei (+1.0%) and India’s NIFTY 50 (+0.9%). Markets were closed across Singapore, Hong Kong and Shanghai for Lunar New Year.
Against this backdrop and alongside constructive local inflation data, the ASX 200 also rose, the index briefly touching its highest intraday level since December 5th before closing 0.6% higher on the day. Virtually all industries were in the green, with gains led by information technology and utilities. Futures markets are pointing to a slightly weaker open this morning.
Interest rates: The US yield curve flattened overnight, following a modest sell-off in the short end in the wake of the FOMC’s decision. The 2-year treasury yield rose 2 basis points to 4.22%, while the 10-year treasury yield was unchanged at 4.53%. Rate cut expectations pulled-back slightly, with futures markets now pricing in only a 20% chance of a rate cut in March and a cumulative 47 basis points of policy easing now priced in through to year-end.
Yields generally moved higher across Europe, with the 10-year Bund yield up 2 basis points to 2.58% and the 10-year Gilt yield up 1 basis point to 4.62%. Money markets have fully priced in a 25 basis point rate cut for the ECB’s forthcoming policy meeting, with a cumulative 89 basis points priced in to year-end.
Australian yields shifted lower across the curve in response to a softer-than-expected inflation print, with the 3-year yield falling 6 basis points to 3.79% and the 10-year yield falling 5 basis points to 4.37% during the local session. Futures market pricing now implies a roughly 90% chance of a 25bp rate cut in February and a cumulative 85bps through to year-end. Taking the cue from overnight developments, the 3-year futures yield rose 1 basis point to 3.79% and the 10-year futures yield rose 2 basis points to 4.42%.
Foreign exchange: The US dollar managed to eke out a modest gain. From initially opening around 107.90, the DXY managed to gain momentum to an intraday high just under 108.30 before finishing just 0.2% over the day. The DXY is currently trading at 108.06 at the time of writing.
Relative to the modest downside surprise to local inflation data, the AUD/USD reaction was well within historical patterns, gapping lower from circa 0.6250 to 0.6230. The Aussie dollar continued to weaken against the greenback, briefly touching a low of 0.6210 before ultimately finishing at 0.6230 (–0.4%).
The EUR/USD finished weaker, falling –0.1% from around 1.0430 to 1.0415. Meanwhile, the GBP/USD held broadly flat, currently trading at 1.2443. For the Euro, Q4 GDP data and the ECB’s policy decision will have an important bearing over currency action in the day ahead.
The Canadian dollar weakened against the US dollar following more cautious guidance from the Bank of Canada following its policy decision overnight, the USD/CAD rising +0.2% to 1.4421. Most other currencies across the G10 generally weakened against the US dollar, with the exception of the Japanese Yen, the USD/JPY falling –0.2% to 155.28.
Commodities: Crude markets remain sensitive to tarrif comments, with the White House confirming that tariffs were still “on the books” but President Trump’s pick for Commerce Secretary, Howard Lutnick, suggesting that tariffs on Canada and Mexico might not happen if they take action on illegal migration and fentanyl flows. IEA reported that US crude stockpiles rose by a hefty 3.6mb last week, the first rise in two months. West Texas Intermediate (WTI) futures fell –1.2% to US$72.88 per barrel.
Metals markets strengthened overnight, with LME aluminum and copper rising 1.8% and 0.9% respectively. Gold is holding broadly stable around the $2700 level.
Australia: Q4 CPI printed modestly to the downside of market consensus, with headline inflation rising 0.2% (2.4%yr) and underlying trimmed mean inflation lifting 0.5% (3.2%yr). Cost-of-living measures, most notably the various Commonwealth and State energy rebates, played an important role in reducing the pressure on headline inflation, with electricity prices falling –9.9% (–25.2%yr). Another important source of abating pressures is in the housing group, including rents and homebuilding costs, which were one of the main drivers behind the lower read on trimmed mean inflation. Services inflation also moved lower (4.6%yr to 4.3%yr), partly driven by a downward revision to calculations of child care costs. Meanwhile, the more specific measure of market services inflation continues to hover just north 4.0%yr.
The main takeaway from the data is that inflationary pressures across the broader consumer basket look to be fading a bit faster than what the RBA anticipated, implying a greater chance that the RBA will start gradually easing policy from its currently restrictive stance. As detailed above, that has seen futures markets become more confident in the prospect of a February rate cut.
United States: Sweden’s Riksbank opted to reduce its policy rate by 25 basis points to 2.25%, as widely expected by most analysts. This marks the sixth rate cut from one of the first central banks across the developed world to begin policy normalisation back in May 2024. While policymakers have exhibited a clear degree of confidence over inflation’s trajectory, they have also indicated that their December forecasts, which points to the current rate being the terminal rate, remain broadly place.
However, by noting the “particular uncertainty regarding developments abroad, for instance, with regard to economic policy in the United States and Europe and geopolitical tensions” and “risks linked to the recovery in the Swedish economy and the krona exchange rate”, policymakers are indicating a need to closely watch the data near-term and remain ready to act should risks around the outlook shift.
United States: The FOMC held policy steady as widely expected, leaving the fed funds rate at 4.375% in January following a cumulative 100bps of rate cuts over back end of last year. The press release featured relatively succinct guidance that “inflation remains somewhat elevated”, initially interpreted as a greater degree of uncertainty over inflation’s trajectory. In the subsequent press conference, Chair Powell assured that the change in language was not intended to signal a change in view around inflation’s progress; rather, his tone continued to emphasise the baseline expectation that inflation will trend toward target and, in time, this will warrant further policy easing.
More broadly, the Committee remains constructive on the health of the economy, with activity continuing to expand at a “solid pace” and the unemployment rate having stabilised “at a low level in recent months”. Chair Powell made clear in the press conference though that, while strong, the economy is not overheated, with the labour market seen as broadly in balance and not a source of significant inflationary pressure.
Meanwhile, after a relatively tumultuous day in US politics following President Trump’s memo to pause federal aid, the focus soon turned to Trump officials announcing that they are considering further restrictions on the sale of Nvidia chips to China. That was alongside comments from President Trump’s pick for Commerce Secretary, Howard Lutnick, suggesting that tariffs on Canada and Mexico might not happen if they take action on illegal migration and fentanyl flows.
Canada: The Bank of Canada cut its overnight rate by 25bps to 3.00% at its January meeting as expected. An end to quantitative tightening was also announced, the BoC believing that balance sheet normalisation is largely complete. Communications highlighted that current projections are “subject to more-than-usual uncertainty” given the “rapidly evolving policy landscape, particularly the threat of trade tariffs by the new administration in the United States”. Past policy decisions are providing support, with jobs growth and household demand picking up, although the labour market is “soft” overall and population growth more modest. Inflation is currently near 2% and is expected to remain near that rate, absent trade conflict. However, if tariffs are imposed by the US, there is a risk of weaker growth but higher inflation, depending on the specific policy implemented by the US and possible retaliation.
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