Morning Report
Today's economic developments and market movements.
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Key themes: Stocks gained traction across the US, Europe and Australia as immediate risks around tariffs look to have eased, although the consequences for China continue to be assessed.
The USD continued to weaken against most G10 currencies as tariff hedges are unwound. The Japanese Yen outperformed, and the Canadian dollar has returned to earlier 2025 levels.
Long-end global yields moved sharply lower as the focus returns to economic data and the consequences for near-term policy. Strong interest in the sale of March 2036 in Australia also supported the rally locally.
Share markets: After struggling earlier in the session with disappointing earnings from Alphabet and AMD, a broader rally across the market allowed the S&P 500 managed to gain traction and finish 0.4% higher. Being somewhat less exposed to tech stocks, the Dow Jones outperformed with a 0.7% gain, while the NASDAQ rose 0.2%
London’s FTSE 100 moved notably higher (+0.6%), while the Euro Stoxx 50 was little changed, moving just 0.1% higher. Equities were generally mixed across Asia as markets assess the impact of US-China trade tensions. Declines observed across Hong Kong (–0.9%) and Shanghai (–0.6%), while Tokyo managed to eke out a modest gain (+0.1%).
The ASX 200 finished in the green for the first time this week, up 0.5% as immediate risks around tariffs look to have subsided. Most sectors reported decent gains, with materials and information technology outperforming, slightly offset by a decline in health care. Futures markets are pointing to a strong opening this morning following momentum overnight.
Interest rates: With the immediate focus shifting from tariff risks to economic data and its implications for policy, strong demand saw yields drop sharply to 2025 lows in the US overnight. The two-year treasury yield fell 3 basis points to 4.18% while the ten-year treasury yield fell 9 basis points to 4.42%. Futures markets have the next rate cut priced in by July and around 47 basis points priced into year-end.
Gilts also rallied ahead of the Bank of England’s forthcoming policy decision, with the two-year and ten-year gilt falling 3 basis points and 9 basis points respectively. Bunds were relatively mixed, with short-end yields rising marginally while the long-end fell.
Yesterday in Australia, bonds rallied following a very strong showing of interest in the AOFM’s syndicated sale of March 2036 bonds yesterday, with a record order book of over $82bn. The Australian three-year yield fell 3 basis points to 3.75% and the ten-year yield fell 6 basis points to 4.36%. Futures yields point to ongoing bull flattening as the rally persisted in US markets overnight. On monetary policy, futures markets continue to price in a high chance of a February rate cut (93%) and still see circa 90 basis points of easing this year.
Foreign exchange: The US dollar fell against most major currencies overnight as traders pare back tariff hedges with the risk of aggressive trade wars easing somewhat, albeit for now. The DXY fell –0.3% to 107.61 at the time of writing. With economic fundamentals playing a more important role in driving short-term price movement, mixed labour market data in the lead-up to the employment report on Friday makes for an uncertain environment.
The Aussie dollar traded a relatively tight range during the Asian session yesterday but broke higher into the European session, the AUD/USD up +0.5% to 0.6287 at the time of writing. With a relatively sparse data calendar in the lead-up to the RBA’s policy meeting in mid-February, USD action will remain an important driver in the currency pair over the immediate near-term.
The Japanese Yen outperformed in the G10 currencies and appreciated notably against the greenback, with the impetus from the solid wages growth data supporting the backdrop of the BoJ’s policy tightening and relatively lower exposure to tariff risks. The USD/JPY fell some –1.1% to 152.61.
The Euro and Sterling also had a solid innings, with the EUR/USD and GBP/USD up 0.2% and 1.1% to 1.0403 and 1.2504 respectively. For the latter, the Bank of England’s forthcoming policy meeting will play an important role in the currency pair over the day ahead; while a 25bp rate cut is fully priced in, guidance around the near-term path amid current uncertainty will prove key.
The Canadian dollar has returned to earlier 2025 levels following recent volatility, the USD/CAD back to around the 1.43 mark. The Chinese Renminbi continues to weaken against the greenback as tariff risks continue to be assessed, the USD/CNY up 0.4% to 7.2721.
Commodities: EIA data reported an increase of US crude inventories by 8.66 million barrels last week. Additionally, against a backdrop of receding tariff anxieties, at least for the near-term, West Texas Intermediate (WTI) futures fell 2.1% to $US71.19/bbl, while Brent futures fell 2.0% to US$74.70/bbl, back down to around 2025 lows.
Metals markets posted a solid innings overnight, sentiment strengthening as the US dollar softened. Copper rose 0.5% and nickel was up 0.4%. Gold also moved 0.7% higher to US$2862/oz, reaching a fresh record high, likely reflecting that even in a context where immediate uncertainty around tariffs may be eased, volatility around President Trump’s policy announcements remain a wildcard. Also note that iron ore markets softened as Chinese traders returned from Lunar New Year, down –1.2% to US$104.25/mt.
Australia: There were no major data releases in Australia yesterday.
New Zealand: The Q4 Labour Force Survey (see here) showcased a softening in labour market conditions into year-end that was more-or-less in line with expectations. Employment declined only modestly in the quarter (–0.1%) and, despite an ongoing easing in labour force participation, the unemployment rate continued to climb, up from 4.8% to 5.1%. This reflects the fact that labour demand is not able to absorb much of the growth in labour supply at present, seeing wage pressures ease to step down on a year-over-year basis. This is all broadly in line with the expectations, so the data is unlikely to be seen as much of a surprise relative to RBNZ’s existing view.
Japan: Growth in nominal cash earnings surprised to the upside, building on a significant upward revision to November’s figures (3.0%yr to 3.8%yr), rising to 4.8%yr in December. An increase in bonuses was the main driver, seeing nominal cash earnings reach its highest rate since 1997. However, the results in an inflation-adjusted context highlights the scale of income pressures of late, with real cash earnings recovering to just 0.6%yr after having averaged –1.4%yr since 2022. While the nominal story provides some support to the BoJ’s pursuit of rate hikes, the backdrop of persistent weakness in real incomes emphasises the need for policymakers to also balance the risks against the economy.
Following the data release, the BoJ’s Masaki noted that underlying inflation remains below target but is rising gradually, stating that provided the Bank’s outlook for inflation to eventually reach target is realised, further increases in the policy rate could be delivered.
China: The Caixin Services PMI printed notably to the downside of expectations looking for a modest improvement, instead falling from 52.2 in December to 51.0 in January. The report cited firms’ concerns over competition and global trade uncertainties, a key theme that will likely remain at play over the coming months as China and the US navigate their trade relations. Looking ahead, consumer spending over Lunar New Year should provide some support to the services sector.
United States: The ISM services index eased from 54.0 in December to 52.8 in January, remaining in modest expansionary territory. The pull-back was mostly driven by an unwind in new orders, while an improvement in employment and a decline in prices paid was also reported. While weather conditions may not have been supportive, there is a broader question around how consumer demand is behaving amid the uncertainty associated with tariffs; a question that can only be answered with further data.
Growth in ADP private employment beat expectations in January, with a lift of 183k reported and a circa 55k upward revision to December’s result. This data series has an arguably patchy history in its overlap with BLS nonfarm payrolls figures (due later this week), but at least for now, recent ADP outcomes are somewhat closer to the BLS trend that is broadly consistent with labour demand and supply being in balance.
The trade deficit widened broadly as expected in December, from US$78.9bn to $98.4bn. This may be reflecting a ‘pull-forward’ effect, with importers bringing forward shipments of China ahead of tariff, but more broadly, the trend is consistent with solid momentum in consumption into year-end.
The FOMC’s Jefferson did not provide much in the way of policy guidance, expressing a view that policy will continue to move toward a more neutral stance as inflation continues to track a downward and likely bumpy path. Jefferson emphasised that there is not a hurry to do so, citing acknowledging that there are “additional uncertainties about the exact shape of government policies, as well as their economic implications”. The FOMC’s Barkin broadly echoed this sentiment, particularly as it relates to President Trump’s policies.
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