Markets Overview

  • ASX SPI 200 futures up 0.5% to 7,109.00
  • Dow Average down 0.2% to 36,135.99
  • Aussie down 1.0% to 0.6552 per US$
  • U.S. 10-year yield fell 8.7bps to 4.1668%
  • Australia 3-year bond yield fell 3.8 bps to 3.99%
  • Australia 10-year bond yield fell 3.4 bps to 4.41%
  • Gold spot down 0.5% to $2,020.02
  • Brent futures down 0.8% to $77.37/bbl

Economic Events

  • 11:00: (AU) Australia to Sell A$700 Million 3.75% 2037 Bonds
  • 11:30: (AU) 3Q GDP YoY, est. 1.9%, prior 2.1%
  • 11:30: (AU) 3Q GDP SA QoQ, est. 0.5%, prior 0.4%

Treasuries resumed their rally on Tuesday as further labor-market slowdown reinforced speculation the Federal Reserve will be able to cut interest rates next year to prevent a recession.

Benchmark 10-year yields that briefly topped 5% in October broke below 4.2% on Tuesday, following data showing job openings hit the lowest since 2021. Yet concerns about markets being too fast in anticipating Fed easing have surfaced — underscoring the risks for traders expecting a pivot. It’s a bet that stands to pay off handsomely if rate cuts materialize — or backfire if policymakers opt to keep borrowing costs higher for longer.

In a week dominated by labor-market readings, the Job Openings and Labor Turnover Survey — known as JOLTS — trailed all estimates in a Bloomberg survey of economists. The data came a few days before the key payrolls report — currently forecast to show employers added 187,000 jobs in November.

Treasuries also joined an advance in global bonds after one of the European Central Bank’s most-hawkish officials said inflation is showing a “remarkable” slowdown. The S&P 500 was little changed. Banks fell after KeyCorp’s non-interest income outlook. The megacap space outperformed — with Apple Inc. back above $3 trillion.

Other News

Australia’s central bank kept interest rates unchanged at its final meeting of the year on Tuesday as cooling inflation and a softening labor market suggest its policy tightening to date is gaining traction.

Markets showed disappointment at the neutral tone of the post-meeting statement, sending the currency and government bond yields lower after the Reserve Bank held its cash rate at a 12-year high of 4.35%, as anticipated.

“Higher interest rates are working to establish a more sustainable balance between aggregate supply and demand,” Governor Michele Bullock said. “Holding the cash rate steady at this meeting will allow time to assess the impact of the increases in interest rates on demand, inflation and the labor market.”

The currency fell 0.6% and the policy-sensitive three-year government bond yield erased earlier gains to trade at around 4%. Swaps traders trimmed bets the RBA will hike again. They now see less than a 30% chance for an increase in the first half of 2024, down from better than 40% odds before the statement.

“Today’s stale statement offered no further guidance on policy,” said Faraz Syed, an economist at Citigroup Inc., who is predicting one more rate hike in February. “While the statement was similar to November, it wasn’t as hawkish as the Minutes from November or the recent commentary from the RBA governor.”

The RBA has proved to be a careful hiker in the current campaign, even as elevated services prices mean core inflation remains sticky. Australia’s 4.25 percentage points of hikes is 1 point below that delivered by the US and New Zealand.

Markets are pricing in cuts from the Federal Reserve next year, whereas there remain bets on tightening by the RBA. Australia’s central bank meets next on Feb. 6 and by then will have had a chance to see the inflation reading for the final three months of this year.

That figure is “absolutely critical for the RBA,” said Tim Baker, head of macro research at Deutsche Bank AG in Sydney. “If it cools down, they’re done. If not, brace for a February hike.”

The RBA is trying to bring the economy in for a soft landing. Bullock and her colleagues have so far been successful, with data today expected to show the A$2.3 trillion economy expanded 0.5% in the third quarter and 1.9% from a year earlier.

At the same time, monthly inflation slowed more than expected in October  — the first reading for the fourth quarter — in a welcome sign for policymakers. Another reason for RBA caution is Australia’s highly geared borrowers who are overwhelmingly on variable rates, unlike the US where most mortgages are fixed for 30 years.

“The limited information received on the domestic economy since the November meeting has been broadly in line with expectations,” Bullock said on Tuesday.

“Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks,” she said. “The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”

Data on the economy has been mixed lately. The housing market is at record highs, home loans jumped in October and business confidence is still resilient. Also helping the economy is surging population growth that’s boosting demand for everything from housing to transport and dining out.

On the flip side, consumer sentiment is in the doldrums while the labor market is beginning to show signs of loosening, with economists predicting the jobless rate will soon rise from the current ultra-low 3.7%. Figures this week showed job ads dropped for a third straight month in November to be down almost 17% from a year earlier.

Australian Treasurer Jim Chalmers welcomed the RBA’s decision saying “the last thing that people needed at Christmas time was another rate rise.”

Most economists reckon the RBA is done with tightening in this cycle, though a few see the risk of another hike early in 2024.

Australia’s central bank doesn’t meet in January. In the following month it will introduce a new system under which the rate statement will be signed by a monetary policy committee and Bullock will hold a post-meeting press conference. RBA meetings will also be reduced to eight from 11 per year.