Morning Report
Today's economic developments and market movements.
Morning Report PDF (PDF 282KB)
Key themes: Sentiment improved on the back of a further rate cut by the Bank of England (BoE), and a 50-basis point cut in Mexico. Global equity markets were generally higher as a result. In the US, option pricing suggests significant moves in equity valuations tonight, once the jobs report drops.
The US dollar index was broadly unchanged, with the Aussie also finishing flat. The big moves were in the Yen which continues to outperform, and the Pound, which fell by as much as 70 pips following the BoE announcement but partly recovered as the BoE Governor walked back the reaction. Movements in yields were muted and remained with recent ranges.
The Iron ore price increased further on threat of supply side disruptions, a positive for the Federal budget as we approach the 25 March budget.
Share markets: Global equity markets were generally higher. US markets were in a bit of a holding pattern ahead of tonight’s jobs report and post close earnings report from Amazon. In late trade, Amazon stocks declined as its forward-looking sales forecasts were softer than expected. For tonight, options markets expect the S&P 500 to move at least 0.9% in either direction after the jobs report drops.
Major US equity indices continue to be lower than at the start of the week when sharp declines were triggered by the threat of a full-blown trade war. The S&P 500 closed 0.4% higher, the Dow Jones was 0.3% lower (in part driven by a sharp fall in Honeywell International), and the NASDAQ closed 0.5% in the green.
There was a sea of Green across Europe with the FTSE 100 and German DAX both closing at fresh record highs. The gains in the UK were supported by the BoE’s dovish cut where two members of the policy setting committee voted for an outsized 50-basis points. Solid company earnings also supported valuations, particularly in German were the likes of Siemens best market expectations. The Euro Stoxx 50 closed 1.6% higher, the FTSE 100 was up 1.2%, while the DAX finished 1.5% higher.
Markets were also higher across Asia. The ASX200 index gained 1.2% with ten of the eleven sectors finishing in the green, led by financials. Futures are pointing to a soft open this morning.
Interest rates: Yields finished slightly higher with US bonds paring losses as Treasury Secretary Bessent reiterated his view that the 10-year bond yield is on its way down under the Trump administration. The 2-year bond yield increased 2 basis point to 4.21%, while the US 10-year bond also increased 2 basis points to 4.44%. Money markets are pricing in around 45 basis points of cuts through 2025.
Yields were mixed across Europe, with the 10-year bond yield 5 basis points higher to 4.49% in the UK, after initially falling to below 4.38% following the BoE decision. Communication from the BoE Governor helped walk back the initial reaction. Money markets now expect the BoE to ease by 67 basis points in 2025, up from 60 basis points before the meeting.
The Aussie yield curve shifted higher. The 3-year and 10-year futures yield increased two and three basis points to 3.74% and 4.37%, respectively. The first full rate cut is expected by April 2025, with around an 93% chance of a cut in February. There are around 90 basis points of cuts expected over 2025.
Foreign exchange: The US dollar index was broadly unchanged (up 0.1%), giving up most of its early gains from the Asian and European sessions late in New York trade. The Aussie was also unchanged, mirroring movements in the US dollar.
The Yen continues to outperform, with the USD/JPY down 0.7% this morning to 151.50. The Yen has strengthened by around 4% across the Greenback over the week thus far, reflecting it haven status and yield support.
The other big mover was the Pound which declined by 70 pips following the BoE announcement. Some of these losses were pared as the BoE Governor walked back some of the reaction. The Pound finished 0.6% lower at 1.2435. The Euro finished broadly unchanged.
Commodities: Crude fell again even as the US Treasury sanctioned a network of entities and individuals based in China, India and the UAE plus vessels involved in facilitating the shipment of Iranian crude to China. The focus remains on President Trump’s plans to drive the price of oil down. The West Texas Intermediate (WTI) futures declined 0.7% to USD75.56 per barrel.
Metals were higher as the threat of tariffs appears to be bringing forward orders. Copper is up 1.0% at USD9,136 while the spread between the Comex and LME contracts is trading at $668/t suggesting the market is pricing in a significant premium with the Comex contract hitting a 4-month high.
Iron ore was again lifted by supply concerns with a string of tropical cyclones off the Pilbara impacting shipping activity. The Bureau of Meteorology has a 25% chance of another tropical cyclone forming next week. Iron ore jumped 2.1% to USD106.15 per tonne.
Australia: The trade balance on goods declined AUD1.7bn in December to a surplus of around AUD5bn. Imports increased 5.9% in the month driven by a large increase in capital goods. Despite the increase, growth in underlying endogenous imports remains subdued. Exports partly offset this increase, up 1.1% over the month on the back of higher commodity exports. Exports to the US spiked in December, rising more than 60% in December and 92% in annual terms – the strongest annual increase going back to the early 1990s (outside of covid). Imports from the US were up around 25% in annual terms. Over the past year Australia’s trade deficit with the US was around AUD27bn.
Eurozone: Retail sale volumes declined 0.2%mth in December, broadly in line with the fall of 0.1%mth expected by the market and down on the flat outcome recorded in November. Sales of food/drinks and tobacco declined 0.7%, falling sharply after the decline of 0.1% recorded in November. Non-food sales increased 0.3%mth after falling for two consecutive months. Retail sale volumes declined sharply in Germany and France over the month.
United Kingdom: The Bank of England (BoE) cut rates by 25 basis points to 4.5% overnight. While the move was expected, two out of nine members from the policy setting committee voted for a larger 50-basis point cut, while the remaining seven voted in favour of a 25-basis point cut. The BoE Governor said “we expect to be able to cut bank rate further as the disinflation process continues, but we will have to judge meeting by meeting, how far and how fast.” In updating its forecast, the BoE halved its forecast for growth to 0.75% in 2025 and increased its inflation forecast with inflation now expected to fall back to the 2% target by the final quarter of 2027, six months later than previously expected.
United States: Initial jobless claims increased 11k to 219k in the final week of January. This was a touch higher than the 213k expected by the market. The monthly moving average also increase by around 4k compared to the previous week, suggesting that the labour market is only gradually easing.
Labour productivity continues to fire in the US increasing 2.3%yr over 2024 and 1.2%yr in annualised terms over the final quarter of 2024. As a result, nominal unit labour costs increased by 3.0% in annualised terms over the December quarter 2024, which was below the 3.4%yr expected by the market. These numbers show that the labour market and wage pressures are not a source of inflationary pressures and remain consistent with the inflation target of 2.0%.
In an interview with Bloomberg, Treasury Secretary Bessent noted that the Trump administration is focused on policy moves that result in a lower yield and that the US continues to have a “strong dollar” policy under President Donald Trump. The Fed’s Austan Goolsbee said that while fiscal policy uncertainty may lead to fewer rate cuts, he still expects some reductions over the year or two.
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