Markets Overview
- ASX SPI 200 futures down 0.6% to 7,250.00
- Dow Average down 0.8% to 34,618.24
- Aussie little changed at 0.6442 per US$
- U.S. 10-year yield rose 4.5bps to 4.3324%
- Australia 3-year bond yield rose 0.4 bps to 3.83%
- Australia 10-year bond yield fell 1 bp to 4.10%
- Gold spot up 0.7% to $1,923.91
- Brent futures up 0.2% to $93.93/bbl
Economic Events
Stocks fell, with a massive options event amplifying volatility and traders weighing the impacts of a strike that hit Detroit automakers while sifting through economic data before the Federal Reserve decision.
Treasury yields rose. The dollar was little changed. Wall Street’s widely watched equity-volatility gauge — the VIX — climbed from the lowest level since 2020.
Piles of derivatives contracts tied to stocks, index options and futures expired Friday — compelling traders to roll over their existing positions or to start new ones. This time, it coincided with the rebalancing of benchmark indexes including the S&P 500, another catalyst for more share transactions.
US inflation expectations fell to the lowest in more than two years as consumers grew more optimistic about the economic outlook. Even so, sentiment fell to 67.7 — below the median estimate in a Bloomberg survey of economists. A measure of New York state factory activity unexpectedly expanded amid new orders. Production at factories barely rose in August, restrained by a drop in output of motor vehicles.
A resilient US economy will prompt the Fed to pencil in one more interest-rate hike this year and stay at the peak level next year for longer than previously expected, according to economists surveyed by Bloomberg News.
Equity funds saw the biggest weekly inflow in 18 months amid growing investor confidence the US economy is headed for a soft landing, according to Bank of America Corp.
Global stocks attracted $25.3 billion in the week to Sept. 13 — the most since March 2022 — according to EPFR Global data cited by BofA. But amid the renewed optimism on the US economy, strategist Michael Hartnett sees a bearish broader picture, with cash and Treasuries having attracted the bulk of inflows and both asset classes on track for a record year.
Other News
Michele Bullock beat other candidates to become Australia’s first female central bank governor in part because of her communications skills. They’re set to be tested as the Reserve Bank embarks on its biggest overhaul in decades.
As she takes over Monday, Bullock is counted on to shore up the RBA’s credibility which hit a low point with predecessor Philip Lowe restating in late 2021 his forward guidance that interest rates were unlikely to rise before 2024. Instead, they started increasing in May 2022, setting off the central bank’s most aggressive tightening campaign in more than 30 years.
Bullock, described by Treasurer Jim Chalmers as a “very effective communicator, a very clear, blunt speaker,” is tasked to implement the 51 recommendations in the RBA’s first major revamp since the 1990s.
The overhaul calls for the introduction in 2024 of press conferences after each rate decision and enabling six independent directors out of of its nine-member board to deliver speeches and interact with the media. That’s a departure from having only the governor and his deputy publicly commenting on monetary policy.
The onus is on Bullock to course correct after communications mishaps during Lowe’s term while ensuring that multiple speakers coming forward are aligned in their messaging.
“It’s important for Michele to turn around the RBA’s communications to buy credibility,” said James McIntyre at Bloomberg Economics. “Previous governors were the sole communicators of monetary policy but now you’ll have other board members running cross-currents.”
The RBA had wrong-footed economists on 43% of its policy decisions in this tightening cycle compared with just 12% by counterparts in New Zealand, Canada, Europe and the UK and zero by the Federal Reserve, according to Goldman Sachs Group Inc. During the pandemic, it staged a messy exit from its yield-target policy, leaving investors confused and with losses.
One factor in Bullock’s favor is that she’s unlikely to need to raise the cash rate much further, if at all, from the current 4.1%, meaning there will probably be less scrutiny on the RBA while she’s reorganizing how it operates.
Economists made wrong rate calls, in part because of the RBA’s limited and at times confusing communications, that may have arisen from an inherently dovish approach. The reason: most borrowers in Australia are on floating rates, meaning rate hikes rapidly impact households whereas in the US, the average borrower is on a 30-year fixed rate.
Australia’s 4 percentage points of hikes in this cycle trailed the 5.25 points in the US and New Zealand as the RBA took account of heavily-indebted households and aimed for a soft-landing in a nation where borrowing costs are dinner-time conversation.
Australia’s public debate on monetary policy is often characterized by “vitriol, personal attacks and clickbait,” Lowe said in his final speech as governor.
Su-Lin Ong at Royal Bank of Canada views Bullock’s communication style as “more engaging” and a “little more frank” than Lowe’s. Press conferences will provide greater transparency and insights, allowing the new governor the opportunity to deliver a clear and timely message, she said.
“Right now, we hear nothing from other board members ever and I don’t think that’s particularly helpful,” Ong said. “In this different structure, the whole board is accountable, they’re all signing off on the statement.”
The RBA’s latest forecasts show inflation will only return within the 2%-3% target in late 2025. And while price pressures in Australia are easing faster than anticipated, it’s too soon to declare victory. US data last week showed stronger-than-expected price pressures, cementing the case for further Fed tightening.
There are other uncertainties facing Bullock, including beginning her seven-year term without a deputy governor as the government is still speaking with candidates.
The RBA’s own resources will also come under pressure next year with two boards operating — one for policy and one to oversee management of the bank. A new chief operating officer and communications head will also be appointed while its economic research capabilities will need to be bolstered.
“That needs resources and that hasn’t really been talked about,” said Luke Hartigan, an economics lecturer at University of Sydney and ex-RBA official.
Bullock is aware of the challenges ahead. When asked recently whether rates will remain elevated for longer, she said with a laugh “I hope you’re not asking me to give forward guidance.”
(Bloomberg)
