Morning Report
Today's economic developments and market movements.
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Key themes: European equities outperformed setting new records in the UK, Germany and Europe. Asian equities however were downbeat as markets weigh the consequences of reciprocal tariffs.
The US yield curve steepened following increased expectations that rates will remain higher for longer after Fed Chair Powell's comments in the Senate hearing. Yields also shifted up in Europe and the UK.
The US dollar weakened reversing most of yesterday's gains. The British pound was the strongest performer among the G10 while the Japanese yen the weakest.
Oil prices continue to rise as supply headwinds come to head. Metals prices also saw increases as tariffs on copper and aluminium become a reality.
Share markets: Equities had a slow day in the US ahead of the CPI release. The S&P500 finished flat while the Dow Jones was up 0.3%. The NASDAQ fell 0.4%.
European markets were upbeat setting new records. The Euro Stoxx 50 closed 0.6% higher led by energy stocks, pushing the index to a record high of 5390.91. London's FTSE100 also closed at a record high of £8777.30 rising 0.1% in the day. The German DAX rose 0.6% hitting a record high of 22037.83.
In Asia, markets were more glum. The Japanese Nikkei was the best performer finishing flat. India's NIFTY50 closed 1.3% lower reflecting risks around reciprocal tariffs from the US on domestic growth. India and Thailand both run trade surpluses with the US and currently have tariffs against US goods, mainly to protect domestic industries and prices of essential goods. Tariffs on US goods could be partially unwound to avoid being tariffed on key exports by the US. Hong Kong's Hang Seng was down 1.1%.
The ASX200 finished flat in the day. Yesterday's session started strong with expectations that Australia would be exempt from the US' steel and aluminium tariffs but this quickly reversed after US President Trump noted there would be 'no exceptions'.
Interest rates: In the US, the yield curve steepened through the 2-year and 10-year maturities as markets price in expectations for the Fed to deliver fewer than expected rate cuts. Fed Chair Powell's comments during a Senate hearing reiterated that the FOMC is in no hurry to ease monetary policy. The 2-year bond yield rose 1 basis point to 4.29% while the 10-year was up 4 basis points to 4.53%. Futures pricing for Fed cuts pared back slightly with the next cut fully priced in for September and a second not fully priced in until September 2026.
German Bund yields also rose -- the 2-year yield was up 6 basis points to 2.08% while the 10-year was up 7 basis points to 2.43%.
In the UK, the 2-year bond yield rose 4 basis points to 4.18% while the 10-year gilt was up 5 basis points to 4.51%. In the session, the UK sold a record £13bn in 10-year bonds. High yields, which are near record-highs, gave way to strong demand which saw £142bn flow through to the government.
In Australia, futures rates are up 5 basis points for the 3-year and 10-year suggesting yields will open higher today. Australian swaps pricing show the first rate cut is fully priced in for April with three cuts fully priced in for 2025.
Foreign exchange: The DXY Index unwound its gains from yesterday falling 0.4pts to 107.92. Among the G10, the British Pound benefitted the most -- likely owing to optimism in being sparred from the tariff wrath (for now) and the issuance in the 10-year. The pound finished at 1.2438 against the greenback at time of writing.
The euro was the next best performer rising to 1.0361 against the US dollar. Threat of retaliatory tariffs against the US saw sentiment reverse.
The yen however was the worst performer depreciating to 152.47 against the greenback. Yen tested 152.6 twice failing to break through, presenting itself as a technical level.
The Australian dollar went from strength to strength through most of the session but was constrained by the 63 cent ceiling. Around the time of writing, it pushed through briefly before settling lower. The Aussie/US pair has not been above 63 cents materially since 24 January. Headwinds to the pair include the fallout from tariffs on China but also the impending rate cut by the RBA.
Commodities: Crude oil prices continued their ascent as supply remains constrained from aggressive additional sanctions on Russian banks and vessels announced on 10 January. WTI futures rose 1.2% to US$73.21. However, the EIA revised up its surplus forecasts for 2026 from 800kbpd to 1mbpd, on the basis that US and non-OPEC production will be stronger than expected, “placing downward pressure on prices”. Iraq confirmed that it was gradually resuming flows from the massive Rumaila field which had been impacted by a fire late-January, though production is still down about 300kbpd. European gas prices hit 2-year highs early in the week on cold weather and heavy withdrawals from storage.
Metals weakened across the board with concerns about trade wars weighing on demand expectations. Copper prices remain constrained as tariffs on steel and aluminium become a reality. China announced that it will increase domestic copper resources by 5% to 10% by 2027, strengthen international investment in the domestic copper industry and encourage financial institutions to support the construction and upgrading of major projects.
Gold hit a fresh record high at $2942 though retraced later in the day to close lower in the session despite tariff threats which should see strength in safe haven assets.
Australia: The Westpac-Melbourne Institute Consumer Sentiment Index was basically unchanged in February, edging up 0.1% to 92.2 from 92.1 in January. While the overall mood improved materially over the second half of 2024, recovery has stalled in the last three months owing to continued pressures on family finances and a more unsettled global backdrop. The ‘family finances vs a year ago’ sub–index slipped 3.4% lower in February to 75.1, down 10.6% from its December peak but still up 18.9% on the low in May last year. Some of this may be a bigger than normal ‘hangover’ from the Christmas–New Year period. It may also be a sign that the boost from tax cuts and fiscal support measures is starting to wane. The pull–back has been most pronounced for low– income earners, females and those aged 18–24. However, expectations for the year ahead climbed higher to 105 and is sitting at around three-year highs led by optimism amongst mortgage holders who are anticipating rate cuts to come. The ‘time to buy a dwelling’ index declined 2.3% in February to 87.8. Homebuyer sentiment has recovered strongly over the last six months, the index surging 23% with a clear boost from the shifting interest rate outlook. However, buyer sentiment remains firmly pessimistic overall, reflecting the still– formidable affordability challenge of high prices.
Also out in the day, NAB business survey printed that the business conditions index fell 3 index points in January to +3, in line with the result from November which itself represented the weakest read since ‘omicron’ scare in January 2022 and below the historical average of +7. Looking at the constituent sub-indexes, the monthly move was once again driven by trading conditions and profitability, both of which have now reached their weakest levels since 2020.
United States: Fed Chair Jerome Powell's comments in front of the Senate Banking committee suggested that the FOMC is in no hurry to ease monetary policy further. Given that they have already cut fed funds rate by cumulative 100bp, interest rates are much less restrictive now, and “reducing policy restraint too fast or too much could hinder progress on inflation”. He described the labour market as “broadly in balance” and, therefore, “not a source of significant inflationary pressures”. Pressed by lawmakers to assess the impact of President Trump’s decisions, Powell maintained his neutral position saying that he will do a better job of keeping inflation low if he stays away from politics.
The NFIB Small Business Sentiment Survey showed that businesses confidence remained strong at the start of the year, although businesses were slightly less optimistic in January compared to December, with the headline confidence index easing by 2.3pts to 102.8. Sharp increases in November and December lifted it to the highest level in more than six years, as President Donald Trump’s victory in the elections stirred expectations of deregulation, lower taxes and higher economic growth ahead. But with economic uncertainty rising, slightly smaller share of businesses, a net balance of 47%, down from the highest level since Q4 1983 of 52% in December, are expecting economy to improve.
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