Markets Daily
The FOMC delivered the expected on-hold decision. However, the details of the policy statement and Chair Powell’s comments were taken as very dovish, sparking a slide in bond yields and the US dollar and a bounce in equities. AUD rose to 0.6670. Today’s crowded calendar includes Australia November employment, policy decisions by the ECB, BoE and SNB and US November retail sales.
Yesterday
The basic outline of the Australian federal government’s mid-year budget update was flagged beforehand: a sharp improvement in the projected 2023/24 deficit from -$13.9bn to a negligible -$1.1bn, widely expected to be upgraded to a surplus at the May 2024 budget. FY24/25 is seen improving to -$18.8bn or -0.7%/GDP. AUD/USD traded a very tight range, mostly 0.6550-65. The Kiwi was easily weakest in the G10 on the day, AUD/NZD jumping from below 1.0700 to 1.0750. Stats NZ’s expanded monthly prices update provided timely information on 45% of the CPI, including a number of volatile items that can cause sharp quarter-to-quarter swings in the CPI. We have revised our forecast for Q4 inflation to 0.3%qtr (down from 0.6% previously), 4.5%yr. Regional equities were mixed, the underperformance of Chinese indexes notable given headlines from the CCP’s annual economic work conference.
Currencies/Macro
The US dollar fell heavily after on the FOMC headlines. but has weakened sharply since. USD/JPY dropped from 145.15 to 143.00, while EUR bounced from 1.0785 to 1.0880. After being marked down after soft UK industrial production data, GBP/USD recovered to 1.2625, net +0.5%. AUD/USD jumped from 0.6575 to 0.6670 in the wake of the FOMC. NZD rallied from 0.6120 to 0.6205. AUD/NZD consolidated its local session gains at 1.0750 or +0.5%.
The FOMC delivered the expected on-hold decision. However, the details of the policy statement were dovish. The dot plot showed that no participant expects a rate hike from here, while there has been a 50bp downward revision to the expected fed funds rate at end-2024 to 4.6% from 5.1% previously (i.e., implying 75bps of cuts over the coming year). Expectations for the funds rate in 2025 were also revised down. Despite the lower profile for rates, Committee members also revised down their expectations for inflation both this year and next. In the press conference, Chair Powell said that the timing of rate cuts was discussed today.
Interest rates
The US 2yr treasury yield slid ahead of FOMC -7bps to 4.67% and dropped sharply, extending during the Powell press conference to 4.43%. 10yr yields fell from 4.15% to 4.02% on the Fed headlines. In the wake of the FOMC statement, Dec 2024 Fed pricing has dropped to -146bps or 3.87% - a significantly more aggressive easing than depicted by the Fed today.
Ahead of the FOMC meeting, Australia 3yr government bond futures ticked up +2bps (implying 3.92%), while 10yr yields also were -3bps to 4.25%. Market pricing in February 2024 and March 2024 remain effectively for zero change. New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged on 28 February, with no further rate hikes in this cycle, but pared pricing of cuts for August 2024 to 21bps.
Commodities
Oil markets saw modest gains helped by EIA inventory data showing larger than expected crude draws and an OPEC Monthly which forecast a significant deficit next quarter. The January WTI contract is up 91c at $69.52 while the February Brent contract is up $1.05 at $74.29. EIA inventory data showed a larger than expected 4.258mb draw in crude inventory though distillate grew again by 1.49mb. Implied distillate demand fell again, bringing total declines in the last 3 weeks close to 400kbpd, with consumption falling to the lowest seasonal level since 2009. Production was unchanged at 13.1mbpd though exports dropped again by 568kbpd. REG’s Bob McNally said that “for the next couple of years, at least, continually unified, vigilant, and effective OPEC+ supply management will be required to prevent a collapse in oil prices”. Wood Mackenzie warned that stockpiles of diesel are set to rise in Northwest Europe driven by weak consumption and strong supply. The January/ February European gasoil contract spread fell hit the lowest level back to May of this year. A fuel tanker was struck by a missile claimed to have been fired by Houthi rebels. At least 10 merchant ships have now been attacked or approached around Yemen.
Metals were mixed despite the plunge in yields and the US$ driven by the FOMC outcome late in the NY session. Copper is down 0.2% to $8,339 while nickel fell 0.73% to $16,400. However, aluminium rose 1.1% to $2,145 after the recent plunge below $2,150. The fall in nickel was despite South32 declaring force majeure at its Colombian ferro-nickel operation as community protestors blocked the movement of people and supplies. The US announced sanctions on Russian mining magnate Vladislav Sviblov and several mining companies connected to him including on what will be the world’s largest zinc ore project, the Ozernaya mine located in Siberia. At full capacity, the mine will account for 4% of global output.
Iron ore markets softened on disappointment after the CCP annual economic work conference earlier in the week in Beijing disappointed economists who had been looking for a larger stimulus in 2024. The January SGX contract is down 20c from the same time yesterday at $134.00 while the 62% Mysteel index fell by a larger $2.30 to $135.10. CISA reported that steel mill stockpiles rose 8.8% in the first 10 days of December after a previous fall of 15% late November. That leaves steel mill stockpiles 6.4% above the average for this time of year on a rolling monthly basis versus the average over the last 4 years. Steel production fell 4.2% from late November to be down 2.77%yy.
Day ahead
RBA Assistant Governor Brad Jones (Financial Systems) is speaking at the Finance & Banking Conference at 2:00pm.
At 11:30am Syd, we expect Australia November job growth to again beat the market estimate (Westpac f/c: 25k; market median: 12k). The unemployment rate is expected to remain near its historic low into 2024 (Westpac f/c: 3.7%; market f/c: 3.8%).
Melbourne Institute Australia inflation expectations for December will provide perspective on risks to the inflation outlook; the previous reading was 4.9%yr.
Japan: Machinery orders are expected to again be weak in October (market f/c: -0.4%).
Given the sharp downside surprise on Eurozone November CPI, the ECB is fully expected to keep its benchmark rates on hold today, the deposit rate at 4.00%. But there will be plenty for markets to absorb in the quarterly forecasts and President Lagarde’s press conference.
The focus for the Bank of England MPC decision will be the statement and meeting minutes with policy firmly on hold at 5.25%. The MPC split 6-3 in November with the 3 preferring another rate hike, so any change in this composition will be noted.
The Swiss National Bank announces its quarterly monetary policy decision today, with a steady hand at 1.75% expected but some market interest in commentary regarding FX intervention, given franc strength.
US retail sales are expected to firm slightly in November, supported by Black Friday sales (Westpac f/c: 0.2%mth; market f/c: -0.1%mth). Initial jobless claims are likely to be little changed this week, with businesses in aggregate slowing hiring but not reducing headcount (market f/c: 220k).
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