Markets Overview

  • ASX SPI 200 futures little changed at 7,098.00
  • Dow Average down 0.2% to 35,082.37
  • Aussie little changed at 0.6557 per US$
  • U.S. 10-year yield little changed at 4.4140%
  • Australia 3-year bond yield fell 3 bps to 4.10%
  • Australia 10-year bond yield fell 6 bps to 4.45%
  • Gold spot up 1.1% to $1,999.91
  • Brent futures up 0.2% to $82.52/bbl

Economic Events

  • 10:30: (AU) Oct. Westpac Leading Index MoM, prior 0.07%
  • 11:00: (AU) Australia to Sell A$800 Million 3.5% 2034 Bonds
  • 19:35: (AU) RBA’s Bullock-Speech

Stocks, bonds and the dollar barely budged after the Federal Reserve minutes only reiterated the central bank’s cautious approach on interest rates, with traders focused on Nvidia Corp.’s results.

The S&P 500 edged lower after hitting “overbought” levels and the Nasdaq 100 underperformed. As the earnings season winds down, questions on the sustainability of the advance led by the “Big Seven” group of megacaps have resurfaced. In late trading Nvidia, the world’s most valuable chipmaker, whipsawed after its latest forecast failed to meet investors’ sky-high expectations.

Some $6 trillion in market capitalization has been added to the US equity benchmark in 2023 in a rally fueled by the artificial intelligence boom, Corporate America’s resilience and bets the Fed will pivot to rate cuts next year. The gains left the index about 5% away from reclaiming its all-time high.

For a market surge that has been predicated squarely on the belief the central bank has completed its hiking cycle and rate cuts are due in 2024, the Fed minutes just underscored the most-recent messaging — officials are still not prepared to declare victory and they have no intention so far to ease policy, according to Quincy Krosby at LPL Financial.

Investors held back from a sale of 10-year Treasury inflation protected securities, with demand tempered by this month’s big rally and outflows from exchange traded funds tracking the sector.

For investors stashing record sums in cash, US bond managers overseeing a combined $2.5 trillion have a bit of advice: It’s time to put that money to work. That’s the message from Capital Group, DoubleLine Capital, Pacific Investment Management Co. and TCW Group.

Signs of ebbing inflation and softer growth have fueled a 3.6% surge in the Bloomberg US Aggregate Index in November, leaving it with a return of about 0.7% for 2023. That’s still well short of what cash has earned this year. But it shows what a real turning point could deliver after a year marked by head fakes over price pressures and Fed policy.

“If people are moving into cash because of 5% rates, we could see that money start trickling back into markets soon. Inflation is coming under control, and the bond market is now preparing for the Fed to start cutting rates in March,” said Callie Cox at eToro.

Other News

Australia’s swap rates have declined this month on conviction that the nation’s central bank may be done raising rates in the current cycle, but elevated inflation expectations underscore the risk to that view.

The two-year swap rate has fallen some 28 basis points to 4.36%, consistent with pricing in other corners of the markets that see little chance of the Reserve Bank of Australia raising rates again in the current cycle.

Earlier Tuesday, Governor Michele Bullock emphasized how the current bout of domestic inflation isn’t all supply-driven, “There is a bit of a perception that inflation at the moment really is all supply-driven — petrol prices, rents and energy. There is actually an underlying demand component as well, and that’s what central banks are trying to get on top of…Although you want to look through supply shocks, if you keep getting them, there comes a point where everyone just expects inflation to remain high and if inflation expectations adjust, then that’s a problem.”

On that front, despite 425 basis points of cumulative tightening in this cycle, the RBA’s efforts haven’t made much of a dent on inflation expectations. Five-year zero coupon inflation swaps, which were trading around 2.88% when the RBA started raising rates, are still around there. The RBA itself expects inflation to decline to the top of its 2%-3% target range in only late 2025, later than it had envisaged in August.

Given the nation’s unbending inflation expectations and an economy that is still largely resilient, there is an undeniable upside risk to domestic swap rates. The markets don’t see it at the moment, but will eventually calibrate their expectations.