Markets Overview
- ASX SPI 200 futures little changed at 8,320.00
- Dow Average down 0.8% to 43,363.93
- Aussie down 0.5% to 0.6336 per US$
- US 10-year yield fell 1.3bps to 4.3849%
- Australia 3-year bond yield fell 2.9 bps to 3.84%
- Australia 10-year bond yield fell 2.1 bps to 4.30%
- Gold spot down 0.3% to $2,645.63
- Brent futures down 0.8% to $73.29/bbl
Economic Events
- 11:00: (AU) Australia to Sell A$800 Million 2.75% 2035 Bonds
US stocks declined as traders braced for the Federal Reserve’s widely anticipated rate decision and its forecast for next year.
The S&P 500 and the Nasdaq 100 slid 0.4%. The Dow Jones Industrial Average posted its longest losing streak since 1978. The yield on 10-year Treasuries was little changed at 4.40%. Bloomberg’s dollar gauge fluctuated for most of the session.
Earlier, data showed that US retail sales increased at a firm pace in November, highlighting consumer resilience. While the report didn’t seem to change expectations for a rate cut by the Fed this week, there is an understanding that the central bank will prepare the market for a pause early next year, said Ian Lyngen of BMO Capital Markets. Industrial production data also came in Tuesday, unexpectedly declining for a third month in November.
Traders are now turning to the Fed’s last rate decision of the year due Wednesday. A quarter-point cut is widely expected, but what happens in the following months is less clear. While the US economy is resilient, the prospect of inflationary import tariffs proposed by the incoming administration of Donald Trump may give Fed officials pause about the pace of further moves.
Bank of America Corp. sees the Fed lowering interest rates to the 3.75% level — or three more cuts from where they are, CEO Brian Moynihan said on Bloomberg Television.
“They need to bring it down a little bit, they just have to be more careful because the economy is stronger than we thought three months ago, six months ago but still has potential weaknesses” he said. “We haven’t even talked about what is going on outside the United States that could affect it — not tariffs but wars.”
On the other hand, Chris Larkin, managing director, trading and investing, E*Trade from Morgan Stanley, says more strong economic data like retail sales could bolster the case for the Fed to pause in January.
In either case, what happens to stocks and bonds will be determined by what the Fed says about cuts in 2025 instead of the central bank’s decision tomorrow, wrote Tom Essaye, president and founder of Sevens Report and a former Merrill Lynch trader.
In Canada, inflation dropped below the central bank’s target for the second time in three months. The data is expected to give Bank of Canada officials confidence that their rapid rate cuts didn’t derail their efforts to keep price gains at the 2% target. However, persisting political discord in Canada pushed the loonie to a Covid-era low.
Concerns over Brazil’s ballooning debt and deficits pushed the real to all-time lows. To stem the slide in the currency, its central bank sold over $3 billion in local markets in back-to-back auctions — its fourth intervention in three days.
In Chile, its central bank cut rates by a quarter point for the third meeting.
Elsewhere, money markets continued to trim wagers on Bank of England interest-rate cuts as attention turns to Wednesday’s UK November inflation figures. Traders place the chance of a third quarter-point reduction next year at 25%, down from 90% on Monday. Gilt yields rose.
Earlier, index of Asian currencies fell to the lowest in more than two years amid pessimism over China’s economic outlook and expectations that Trump policies will drive gains in the greenback.
Among other notable currencies, the yen snapped a six-day losing streak. The yen’s rapid decline in the past week had strategists warning that further weakness may trigger verbal intervention from authorities and add pressure on the Bank of Japan to hike rates.
Meanwhile, oil fell for a second day after Chinese economic data stoked concerns about demand and equity markets slipped.
Other News
The great run in European government bonds is coming to an end, according to a portfolio manager at J.P. Morgan Asset Management, who is now betting Australia will be the next market to outperform.
Kim Crawford said there is little room for further gains in Europe compared to peers given swap markets are fairly pricing the amount of interest-rate cuts the European Central Bank will likely deliver. Meanwhile, a dovish pivot from the Reserve Bank of Australia — which has yet to lower borrowing costs in this cycle — is setting up Aussie debt for a rally relative to other developed markets.
“A lot of the Europe story has played out,” said Crawford, a global rates manager at J.P. Morgan Asset, which oversees $3.5 trillion in assets. “Australian government bonds are the ones that probably are most attractive to us right now. That’s a more interesting near-term divergence story for us.”
European government bonds have outperformed US peers for more than a year amid expectations the ECB will cut rates more aggressively than the Federal Reserve to support the bloc’s economy. That has driven the spread between 10-year German and US notes to 215 basis points, close to the widest levels seen over the past five years.
Australian bonds, meanwhile, have been trading in a narrow range for much of the past 18 months as the central bank held rates unchanged amid persistent concerns about price pressures. Last week however, the RBA said that it’s “gaining some confidence” inflation is moving sustainably toward target.
Markets now favor three quarter-point cuts from the RBA in 2025, according to swaps, compared to two expected from the Fed. The ECB is seen delivering as many as five, but Crawford said positioning is already stretched. The long trade on short-dated European notes is one of the most crowded in bond markets, she added.
For the ECB to deliver more easing than what’s priced by markets, there would need to be a big hit in investments or consumption, according to the London-based portfolio manager. But the expectation that Germany will loosen its fiscal policy next year makes it unlikely that will happen.
“Near-term, I think Europe is a little bit harder to see significant outperformance,” she said.
(Bloomberg)
