Morning Report
Today's economic developments and market movements.
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Key themes: Hotter-than-expected inflation data out of the US drove a sell-off in treasuries, a pull-back in equities and a delay in FOMC rate cut expectations.
FOMC Chair Powell continued to reiterate earlier guidance on a patient approach to assessing inflation’s persistence and the consequences of tariff policies.
Chinese equities were positive on the news of authorities considering offering support to a major property developer.
News of preliminary talks between Trump and Putin on working toward ending the Russia-Ukraine war saw the Euro outperform in the G10 currencies and oil futures fall.
Share markets: US equities opened sharply lower following the hotter-than-expected inflation update but managed to regain some momentum over the course of the session, albeit still finishing in the red. The S&P 500 fell –0.4%, the Dow Jones fell –0.5%, while the NASDAQ held about flat. Stocks were also up across Europe, including the Euro Stoxx 50 (0.3%), FTSE 100 (0.3%) and DAX (0.5%).
Chinese markets reacted positively to news that authorities are considering offering financial support to China Vanke, one of China’s largest property developers, seeing the CSI 300 rise 0.9%. Meanwhile, news that Alibaba and Apple are planning to codevelop AI features for iPhone users locally drove a 2.6% rise in the tech-heavy Hang Seng, to its highest level in six months. Stocks also closed higher in Tokyo (0.4%).
The ASX 200 posted a 0.6% gain yesterday, breaking a multi-day stretch of flat-to-negative growth on the back of constructive earnings results in the financial (+1.4%) and industrial (+1.9%) sectors. Futures markets are pointing to a modestly positive open this morning.
Interest rates: Treasuries sold-off following the above-consensus inflation read, with the two-year treasury yield rising 7 basis points to 4.36% and the ten-year treasury yields rising 9 basis points to 4.63%. Swaps markets have now pushed back the first fully priced-in rate cut from September to December.
Yields also rose across Europe, with the ten-year Bund up 5 basis points and the ten-year Gilt up 4 basis points. Swaps markets continue to have three rate cuts fully priced in for the ECB and two rate cuts fully priced in for the Bank of England through to year-end.
Australian government bonds also sold-off across the curve, with the three-year government yield rising 6 basis points to 3.87% and the ten-year government yield rising 7 basis points to 4.46%. That momentum extended into the futures market following the offshore action overnight, with the three-year and ten-year futures yields rising 9 and 8 basis points respectively. Swaps markets continued to price in a high chance of a February rate cut (89%), although it has slowly started to pare-back over the past week, with markets now anticipating just under three cuts through to year-end.
Foreign exchange: The USD weakened across most G10 currencies overnight. The DXY traded a wide range in the wake of the critical inflation data, initially spiking and testing the critical resistance level of 108.50 before paring back to an intraday low of 107.65. It is currently trading 107.93 at the time of writing, unchanged from yesterday’s close.
The Euro looks like the chief culprit behind this post-CPI pull-back in the DXY, with markets reacting positively to news that Trump and Putin have started engaging in talks on ending the Russia-Ukraine war. The EUR/USD advanced some 0.3% to reach 1.0389.
The Aussie dollar edged a little lower following the aftermath of the US CPI data, with the AUD/USD falling –0.2% to 0.6282 at the time of writing. It was a similar story for the Sterling as well, the GBP/USD trading a wide range but currently holding broadly flat from yesterday’s close at 1.2243.
The Japanese Yen has extended its losing streak against the greenback over concerns around potential tariff impacts. The USD/JPY has risen some 2.0% over the past week and is currently trading at 154.42.
Commodities: Preliminary talks being held between Trump and Putin around ending the Russia-Ukraine war, combined with the IEA reporting yet another rise in US crude inventories, drove oil futures to start moving back toward early-February lows. The West Texas Intermediate (WTI) futures contract fell –2.8% to US$71.28/bbl, while Brent futures fell –2.5% to US$75.06/bbl.
Metals were broadly mixed as markets continue to assess tariff impacts. Copper rose 1.2% to $9469 while aluminium fell –0.7% to $2626. Gold has broadly held flat since yesterday’s close despite a wide intraday range following the US CPI result, currently trading US$2900/oz.
Iron ore also jumped on concerning news of potentially severe weather hitting Australia’s west coast later this week, the March SGX contract rising 1.8% to $107.60.
Australia: The latest batch of housing finance data, which is now being released at a quarterly frequency, revealed somewhat of a softer finish to the year. The total value of finance approvals (excl. refinancing) rose 1.4% in Q4; while there were fewer loans approved over this period (–0.4%qtr), the total value continued to rise on the back of higher average loan sizes – a dynamic that has been responsible for more than half the growth in total housing finance value since Q2 2022. Indeed, despite pulling back from a stellar annual pace of +25%yr in September, total housing finance values are still tracking a solid +16%yr in the context of robust house price growth and stretched affordability. For more detail, see here.
United States: January’s CPI printed above expectations, with the headline rising 0.5% (3.0%yr) and the core series rising 0.4% (3.3%yr). Driving the result was a few important factors. The ‘food at home’ sub-group is currently tracking a three-month annualised pace of 6.0% on the back of recent gains. Meanwhile, energy prices have moved from month-on-month declines to increases, up 1.1% (1.0%yr) in January. That trend was broadly shared by the ‘core goods’ group as well, which has showcased a transition from deflation to modest inflation. As has been the case over much of the past couple of years, shelter remains a primary contributor, up 0.4% (4.4%yr), highlighting that capacity constraints remain an important factor driving the inflation story in the US.
In his second day of congressional testimony, FOMC Chair Powell largely reiterated yesterday’s guidance around the inflation outlook and the likely path for policy, with the latest inflation data supporting the stance to “keep policy restrictive” while acknowledging that significant progress has been made to date and that time is on their side to assess the risks around inflation’s persistence. On tariffs, Chair Powell continues to emphasise – as he has done before – that while the policies could affect the monetary policy setting, they would need time to assess the consequences of the trade policies before making that judgement.
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