Markets Overview

  • ASX SPI 200 futures down 0.4% to 7,071.00
  • Dow Average up 0.4% to 35,245.87
  • Aussie down 0.2% to 0.6541 per US$
  • U.S. 10-year yield rose 2.3bps to 4.4159%
  • Australia 3-year bond yield fell 1.1 bps to 4.09%
  • Australia 10-year bond yield little changed at 4.45%
  • Gold spot down 0.4% to $1,990.74
  • Brent futures down 0.9% to $81.72/bbl

Economic Events

  • 09:00: (AU) Nov. Judo Bank Australia PMI Compos, prior 47.6
  • 09:00: (AU) Nov. Judo Bank Australia PMI Mfg, prior 48.2
  • 09:00: (AU) Nov. Judo Bank Australia PMI Servic, prior 47.9
  • 10:30: (AU) Australia to Sell A$1 Billion 140-Day Bills
  • 10:30: (AU) Australia to Sell A$1 Billion 91-Day Bills

Treasury yields rose after data showed a further increase in consumer year-ahead inflation expectations, with some traders taking profits on dovish Federal Reserve wagers.

In a thin trading session ahead of the Thanksgiving holiday, two-year US yields hit 4.9%. The S&P 500 edged higher.

Americans expect inflation will climb at an annual rate of 4.5% over the next year, up from the 4.4% expected earlier in the month, according to the final November reading from the University of Michigan. They see costs rising 3.2% over the next five to 10 years, data Wednesday showed.

In other economic news, applications for US jobless benefits fell last week after a run of increases, a slight reprieve in what otherwise has been a gradually cooling labor market. Durable goods orders declined in October by more than expected as commercial aircraft bookings retreated and demand weakened for business equipment.

The stand-out theme in the SOFR options market Wednesday has been the liquidation of dovish hedges — which has picked up in a sign that traders are taking profits on dovish Fed wagers placed as far back as September.

Elsewhere, oil slumped as the OPEC+ meeting that had been set for the weekend was delayed, dimming traders’ expectations that the cartel will intervene to tighten supplies.

Other News

Australia’s remaining inflation challenge is “increasingly homegrown and demand driven” compared with earlier supply-side disruptions, with implications for policy, Reserve Bank Governor Michele Bullock said.

“If inflation is simply the product of global supply disruptions or other price rises” then the appropriate interest-rate response would be limited, she said in a speech to economists on Wednesday evening. “However, a more substantial monetary policy tightening is the right response to inflation that results from aggregate demand exceeding the economy’s potential to meet that demand.”

The RBA resumed hiking earlier this month, taking the cash rate to a 12-year high of 4.35% as economic growth and the labor market prove more resilient to policy tightening than anticipated. It also revised up its inflation forecasts that now see consumer prices only reaching the top of the 2%-3% target in late 2025.

Bullock underscored the various drivers of Australian prices by noting that while it only took three quarters for inflation to ease to 5.5% from 8%, it’s expected to take two years for the print to fall that much again and go below 3%.

“This is because much of the remaining task of bringing inflation back to target will require bringing aggregate demand and aggregate supply into closer alignment,” Bullock said in her address in Sydney.

“That is what the board is aiming to do with monetary policy – to slow the growth of demand enough to bring inflation back to target while keeping employment growing,” she said.

Bullock’s predecessor Philip Lowe referred to this policy approach as a “narrow path,” and the governor affirmed on Wednesday that she is trying to stay on it.

Responding to a question after her speech about whether the RBA will follow a recommendation from an independent review of the central bank to aim for the midpoint of its inflation target, Bullock suggested a forthcoming agreement with the government on monetary policy would clarify that.

“That is in fact what we will be aiming for,” she said, referring to the 2.5% goal. “When a new Statement on the Conduct of Monetary Policy comes out, and I think that might be before the end of the year, then that will be reflected in that statement.”

The RBA has indicated that further rate rises will depend on inflation and employment data and how the global economy evolves. Many economists, including at Commonwealth Bank of Australia, predict that the RBA is probably done hiking, though National Australia Bank and Royal Bank of Canada are among a handful that see at least one more hike to 4.6%.

Bullock’s speech to the annual Australian Business Economists dinner was divided into two parts: the policy response to inflation and the overhaul of the central bank in 2024, as recommended by the independent review.

She set out her position at the outset. “I want to begin by making it clear that I am 100% behind the changes,” she said, adding that as times change, so must the RBA. The goals she outlined for the central bank included the following:

  • Deep and informed deliberation: giving board members longer time to consider policy and more diverse information, including greater access to staff views and more scenario analysis
  • Clearer explanations through better communication: highlighting the appointment of a new chief communications officer
  • Bringing out the best in the RBA’s people: focusing on culture and leadership; being more comfortable in having views contested and strong internal debate

The year ahead will be challenging on two fronts: bringing inflation down to target while preserving gains in the labor market, while changing policy processes and improving the bank’s culture, Bullock said.

(Bloomberg)