Morning Report
Today's economic developments and market movements.
Morning Report PDF (PDF 271KB)
Key themes: Markets reacted to the weaker than expected US retail trade data and ongoing developments in US trade policy. Treasuries rallied on the back of the retail data, with money markets now pricing around 40bps of cuts this year. The US dollar continued to ease on the back of lower yields.
US officials will provide the President with options on reciprocal tariffs by early April, providing time for negotiations, which supported risk appetite and saw risk currencies like the Aussie outperform. Copper spiked to a fresh record high as the threat of tariffs remains.
It’s a massive week for the Aussie economy with the RBA Board to announce its first decision for the year tomorrow, followed by key wages and the labour market data.
Share markets: Equities were generally lower but remained around recent highs as traders continue to assess the fallout from the ongoing US tariff announcements. The weaker than expected US retail trade outcome also weighed on sentiment. However, this was offset by resilient earning reads, particularly in the tech space.
The broad-based S&P 500 was virtually flat (down 0.01%) but finished the week 1.5% higher. The Dow Jones was 0.4% lower but finished the week 0.6% higher. The Nasdaq outperformed finishing 0.4% higher to end the week 2.6% in the green.
European stocks dipped from around record levels as investors monitored the outlook for trade with the US. European stock funds attracted their biggest weekly international inflow since January 2023 supporting valuations. The Euro Stoxx 50 closed 0.1% lower, the FTSE 100 was down 0.4%, while the DAX also finished 0.4% lower, with all indices making solid weekly gains.
Markets were generally higher across Asia, with the Hang Seng up 3.7% and the CSI 300 up 0.9%, supported by solid international trade data coming out of China. The ASX200 index closed 0.2% higher to end the week 0.5% in the green. Eight of eleven sectors were higher, led by consumer staples. Futures are pointing to a soft open this morning.
Interest rates: US Treasuries rallied following the weaker than expected US retail trade data. The 2-year bond yield fell 5bps to 4.26%, after falling as much as 8bps during the session. The 10-year bond yield followed suit, falling 5bps to 4.48%. Money markets are pricing in around 40bps of cuts through 2025, with the first full rate cut now expected in September (from October before the release of the retail data).
Yields were generally higher across Europe but remained within recent ranges. The 2-year and 10-year Bunds were 3bps and 1bp higher at 2.11% and 2.43%, respectively. In the UK, the 2-year and 10-year Gilt yields were 2bps and 1bp higher at 4.19% and 4.50%, respectively.
The Aussie yield curve flattened and shifted lower during Friday’s session with futures remaining broadly unchanged. Money markets continue to expect the RBA Board will announce a 25bps rate cut on Tuesday although are slightly less certain suggesting there is an 85% chance of a cut this Tuesday, down from the 95% probability priced in one week ago. There are around 80bps of cuts priced in over 2025.
Foreign exchange: The US dollar index declined 0.3% in what was a muted session by recent standards. The DXY declined to its lowest level this year (106.566) following the release of the soft US spending data, before closing at around 106.710. The DXY ended the week 1.2% lower, as falls in bond yields and prolonged uncertainty over US trade policy reduced the case for further immediate gains.
The Aussie outperformed, up 0.6% against the Greenback as delays to tariff implementation as well as growing expectation that the RBA Board will deliver a ‘hawkish cut’ on Tuesday provided the currency with a tailwind. The AUD/USD pair reached a session high of 0.6368 (highest level of 2025 thus far) before settling at 0.6352.
Looking ahead, it’s a massive week for the Aussie, with the RBA to announce its first decision of the year tomorrow, followed by key wages and labour market data later in the week. With the market positioned for a rate cut and almost 80bps of cuts over 2025, any upside surprises in labour market indicators are likely to provide the Aussie with a tailwind.
The euro advanced for a fourth consecutive session, ending the week 1.6% higher against the Greenback. Better than expected EU activity data as well as delays to traffic implementation saw the euro supported through the week. The Pound also ended the week 1.5% higher against the Greenback.
Commodities: Crude markets finished broadly unchanged with key market indicators pointing to plentiful supplies and outweighing concerns over the US objective to see Iran cut its oil exports to 100k barrels a day (b/d) (from the current figure of about 1.6m million b/d). The West Texas Intermediate (WTI) futures is currently at US$70.74 per barrel, recording almost no change over the week.
Metals jumped with copper markets experiencing major dislocations on Friday due to the potential for tariffs on metals. Copper jumper to reach a fresh record high of US$9,490 a ton. The gap between the US and global prices reached a record high of around $1,200 a ton. At around US$1,200 a ton, or around 10% of the benchmark LME price, at this stage, traders are fully pricing in tariffs of about 10%.
Iron ore slipped on Friday but remained around the US$105 a tonne mark. Iron Ore was rising toward US$110 a ton but has eased as the worst-case scenario from Tropical Cyclone Zelia has passed, with the Port Hedland (a major iron ore export hub) reopening on Saturday. Broader risks to production and infrastructure remain, supporting prices in the near terms.
Australia: There were no significant data releases on Friday.
Eurozone: Economic activity in the Eurozone expanded 0.1% in the December quarter 2024, an improvement on the preliminary read of 0.0%. This comes on the back of 0.4%qtr growth recorded in the September quarter. In annual terms the eurozone grew 0.9%, in line with preliminary estimates.
New Zealand: The BusinessNZ PMI increased to 51.4pts in January from 46.2pts in December. Notwithstanding the increase, the PMI remains below the long-term average of around 52.5pts. All subcomponents showed increases, with new orders, employment and finished stocks all higher.
Food prices rose 1.9%mth in January, following a 0.1%mth increase in December. Higher prices for grocery food contributed the most to the monthly increase. The outcome showed that the proportion of the food basket that increased by at least 5% was the highest in several years.
United States: President Trump ordered officials to develop proposals to levy tariffs on imports from all trading partners and report their recommendations for imposing reciprocal tariffs. Commerce Secretary Lutnick said the new study along with recommendations would be complete by early April. This delay provides an opportunity to negotiate new trade deals. The President also reiterated that he would unveil new tariffs on automobiles.
Retail sales contracted 0.9% in January, much worse than the fall of 0.2%mth expected by the market. It was the biggest decline since March 2023, with severe weather and LA fires weighing on consumer spending. Spending in the control group declined 0.8%mth much worse than the slight gain expected by the market.
US industrial production beat expectations in January, gaining 0.5% in the month after an upwardly revised 1.0% gain in December. Manufacturing production was weak however, edging 0.1% lower in the month. Business inventories also fell 0.2% in January, and the import price index gained 0.3%, 0.1% ex-petroleum, largely as anticipated.
Lorie Logan, President of the Dallas Fed, suggested that the economy remains resilient reducing the need for rate cuts even as inflation moderates. She said “Even if we do get better data — and it does look like it’s coming close to 2% — I think we should be cautious. Because if the labour market and the overall economy is strong, even in that environment, it doesn’t necessarily mean there’s room to cut rates further.”
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