Markets Overview

  • ASX SPI 200 futures little changed at 7,248.00
  • Dow Average up 0.3% to 33,586.52
  • Aussie down 0.4% to 0.6642 per US$
  • U.S. 10-year yield rose 2.2bps to 3.4149%
  • Australia 3-year bond yield little changed at 2.82%
  • Australia 10-year bond yield little changed at 3.19%
  • Gold spot down 0.8% to $1,991.18
  • Brent futures down 0.9% to $84.32/bbl

Economic Events

  • 10:30: (AU) April Westpac Consumer Conf SA MoM, prior 0%
  • 10:30: (AU) April Westpac Consumer Conf Index, prior 78.5
  • 11:00: (AU) Australia to Sell A$100 Million 0.25% 2032 Linkers
  • 11:30: (AU) March NAB Business Conditions, prior 17
  • 11:30: (AU) March NAB Business Confidence, prior -4
  • 16:30: (AU) March Foreign Reserves, prior A$85b

Equity markets in Asia are poised for a muted start as US stocks caught bids late in the day amid holiday-thinned trading. The dollar gained as investors boosted bets on the Federal Reserve’s rate-hike path.

Futures on Japanese stocks point to a higher open in Tokyo and Australia and Hong Kong are set to reopen after a long weekend. Declines in the Golden Dragon index of US-listed Chinese companies signal potential headwinds for mainland markets.

After spending most of the day in the red, the S&P 500 eked out a gain in the final minutes of the session. Volumes were light — more than 20% below the 30-day average — with much of Europe still shuttered for holidays ahead of Tuesday’s reopening. The Nasdaq 100 pared losses into the close, ending marginally lower as an Apple Inc. report that personal computer shipments fell sharply weighed on the tech-heavy benchmark.

Treasury yields posted modest gains as traders continued to mark up chances of another quarter-point Fed hike in May. Swap contracts repriced to levels indicating about 80% odds of a quarter-point hike on May 3, up from 75% on Friday. After the Fed set its policy band at 4.75%-5% on March 22, the odds of a May rate hike almost vanished amid a collapse in bank shares after several institutions failed.

Traders upped wagers on a May rate hike in the US ahead of Wednesday’s report on consumer prices, which is expected to show a 0.4% monthly increase in core CPI.  Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup Inc. kick off reporting for the banking sector Friday, offering insights on the health of the financial system.

In a report Monday, the International Monetary Fund put forward that rates in the US and other industrial countries will revert toward ultra-low levels instead of the 1.5% to 2% real neutral interest rate former US Treasury Secretary Lawrence Summers has suggested.

Other News

The International Monetary Fund lined up against former US Treasury Secretary Lawrence Summers in the debate over where interest rates will gravitate to once inflation is beaten.

In its latest World Economic Outlook, the IMF argued that rates in the US and other industrial countries will revert toward the ultra-low levels that prevailed prior to the pandemic, driven by aging populations and sluggish productivity growth. It sees the so-called natural or neutral rate – the inflation-adjusted short-term rate that neither pushes the economy ahead nor pulls it back – comfortably below 1% in the US in the coming decades.

That contrasts with the stance taken by Summers, who suggested last month that the real neutral interest rate — or R* in economists’ parlance — might be in a range of 1.5% to 2% going forward, in part because of stepped-up government borrowing to finance increased military outlays and the transition to a greener economy.

Where rates settle over time has widespread ramifications for everything from stock and housing markets to monetary and fiscal policy. Higher rates would raise borrowing costs for home buyers and governments and lessen the attractiveness of owning shares as opposed to bonds.

The IMF said the lower rates it envisions will make it easier for some countries to handle elevated government debt levels coming out of the pandemic.

Many though will still have to act to rein in budget deficits to stabilize or reduce outstanding borrowings as a share of gross domestic product, it said. For advanced economies, spending cuts are more likely to lower debt ratios than increasing government revenues, according to the global lending institution.

The Fund’s estimate of the US neutral rate is basically in line with that of Federal Reserve policymakers, who implicitly peg it at a half percentage point, according to median long-run projections contained in their quarterly economic forecasts.

The low level of neutral rates will limit the ability of the Fed and other central banks to stimulate their economies going forward, the IMF said.

“The effective lower bound on interest rates may become binding again” as monetary policymakers are forced to cut rates to about zero to handle future economic downturns, it said.

The IMF allowed that some factors might push up natural rates, though that’s not its base case. It said the short-to-medium term impact of a transition to net zero carbon emissions was unclear, depending in part how its financed.

It forecast that natural rates in emerging market economies will converge toward the lower levels in industrial countries as their populations age.

(Bloomberg)