Markets Overview
- ASX SPI 200 futures down 0.5% to 8,111.00
- Dow Average down 0.2% to 41,503.10
- Aussie up 0.1% to 0.6764 per US$
- US 10-year yield rose 5.9bps to 3.7056%
- Australia 3-year bond yield rose 2.9 bps to 3.46%
- Australia 10-year bond yield rose 3.1 bps to 3.86%
- Gold spot down 0.4% to $2,559.10
- Brent futures down 1.1% to $72.92/bbl
Economic Events
- 10:30: (AU) Australia to Sell A$1 Billion 161-Day Bills
- 10:30: (AU) Australia to Sell A$1 Billion 84-Day Bills
- 11:30: (AU) Aug. Part Time Employment Change, prior -2,300
- 11:30: (AU) Aug. Full Time Employment Change, prior 60,500
- 11:30: (AU) Aug. Employment Change, est. 26,000, prior 58,200
- 11:30: (AU) Aug. Participation Rate, est. 67.1%, prior 67.1%
- 11:30: (AU) Aug. Unemployment Rate, est. 4.2%, prior 4.2%
A rally that briefly drove stocks to their all-time highs bumped into a wall as the Federal Reserve signaled it’s not in a rush to ease policy after cutting rates by a half-point.
The S&P 500 wiped out a gain of 1% as Jerome Powell cautioned against assuming big rate cuts would continue. While that’s not necessarily bad given that aggressive easing is usually associated with economic stress, traders ended up pushing equities near session lows at the 4 p.m. New York close.
“After a rally ahead of today’s Fed announcement, it wouldn’t be unreasonable for the market to pull back a bit,” said Bret Kenwell at eToro. “However, the long-term outlook remains promising. So long as the economy holds up and inflation doesn’t roar back to life, lower rates and strong earnings growth can continue to drive stocks higher over the long term.”
To Ian Lyngen and Vail Hartman at BMO Capital Markets, Powell’s press conference was consistent with the magnitude of the cut and effectively communicated that officials aren’t particularly worried about any aspect of the real economy at the moment.
“It’s impressive that in the classic, ‘buy-the-rumor, sell-the-fact’ dynamic, the ‘fact’ of a 50 basis-point cut was still met by selling,” they said, referring to the reversal in bonds. “Positions are being squared and the market is moving back into the mode of trading the incoming economic data with an eye to the potential influence from the presidential race.”
The S&P 500 fell 0.3%. The Nasdaq 100 dropped 0.5%. The Dow Jones Industrial Average lost 0.2%. A gauge of the “Magnificent Seven” megacaps slid 0.1%. The Russell 2000 of small firms was little changed.
Markets may temporarily encounter the “buy the rumor, sell the news” phenomenon, according to Florian Ielpo at Lombard Odier Investment Managers. That said, traders will need to remember how the Fed has transitioned from being a headwind to a tailwind, he added.
The market is now pricing in another 70 basis points worth of rate reductions at the Fed’s two remaining meetings this year, reflecting a far more aggressive stance than policymakers. Officials on Wednesday forecast just a half-point of further easing in 2024. They penciled in an additional percentage point of cuts in 2025, according to the median forecast.
“Powell made it clear that today’s decision was not a crisis rate cut but instead a normalization of monetary policy from a very restrictive level,” said Kristina Hooper at Invesco. “I anticipate risk assets could perform well in the coming weeks given the Fed’s reassurances – unless future economic data suggests greater weakening.”
Other News
Australia’s latest attempts to solve its housing crisis are stuck in political gridlock as the amount of available rental space in the nation hovers near a record low.
A key piece of the center-left Labor government’s housing program is in limbo after opposition parties on Wednesday voted to defer for two months legislation that aims to help first home owners break into the market. The bill is for a shared equity scheme which would allow citizens to buy houses with a smaller deposit.
A separate bill that would give tax incentives to developers to build rental housing could face the same fate on Thursday, after also drawing criticism from opposition parties. The changes are intended to attract institutional investors.
“The build to rent idea I think is a very bad idea,” Senator Andrew Bragg, who has spearheaded the center-right opposition’s position on housing, said in a radio interview Tuesday. “Australians don’t want to live in a country where corporations are landlords, like BlackRock, and so that’s why we’re against these policies which corporatise the housing market and give up on home ownership.”
Home prices in Australia are rising even with interest rates at a 12-year high, reflecting demand that’s outstripping supply. On the other side, rental vacancies fell in August to just 1.39%, close to the February low of 1.09%, according to PropTrack.
The Labor government is caught in a political pincer movement as its policy proposals to help overcome the housing crisis come under concerted attack from both the center-right Liberal-National opposition and the left-wing Greens Party.
The Greens are calling for a cap on rents to help lower-income families deal with a national cost-of-living crisis, while the Liberal Nationals want deep cuts to migration following a post-Covid spike. Despite their ideological differences, the two parties teamed up on Wednesday to block the government’s bill.
Housing is shaping up as a significant issue at the next election which is due by May. The Liberal-National coalition is expected to double-down on a policy it took to the last election that would see first-home buyers able to tap into their pension savings — known locally as superannuation — to buy a home.
Some funds in Australia’s A$3.9 trillion ($2.6 trillion) pension system have begun rallying against this “Super for Housing” policy. A report released Thursday, commissioned by industry body the Super Members Council, said the Liberal-National plan would only make housing even more expensive. The report was written by veteran independent economist Saul Eslake.
“History tells you unambiguously and unequivocally that the main effect of this will be to boost house prices,” Eslake said in an interview. “Super for housing will primarily help people who could have bought a house and would’ve bought a house anyway just to buy more expensive ones.”
A separate Australian housing program, backed by some of the nation’s biggest pension funds, is showing early results. More than 13,000 homes had been approved to be built under the plan.
(Bloomberg)
