Westpac Banking : Morning Report

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Key themes: Voting got underway for the US Presidential race early this morning, but a likely close race will mean it could be some time before a result is called. Still, markets are likely to be volatile and reactive to headlines on the progress of votes.

A firm reading for the October ISM services purchasing managers' index (PMI) reaffirmed that the US economy remains robust, giving markets plenty to consider with a Fed policy meeting looming early Friday morning (AEDT).

US equities rallied with the S&P 500 notching up its largest daily gain in almost seven weeks.

Treasury yields were flat to higher across the 2-10-year curve with longer tenors outperforming. The 10-30-year yield curve continued to flatten sharply.

The US dollar was softer and is now down a big figure since October's high.

Share markets: US equties rallied with the S&P 500 notching up its largest one day gain in almost seven weeks. The S&P 500 gained 1.1%, while the NASDAQ and the Dow Jones were up 1.4% and 1.0%, respectively. Strong services activity data in the US supported the case for earnings growth to remain resilient, a crucial assumption underpinning current valuations.

Stocks were also up in Europe. The Euro Stoxx 50 gained 0.4%, while the German Dax gained 0.6%. The UK's FTSE 100 bucked the trend, edging 0.1% lower.

There was a decent risk-on mood across Asian equity markets yesterday, though the ASX 200 missed the memo slipping 0.4%. ASX futures were up 0.7% overnight. In China, the Hang Seng and the CSI 300 gained 2.1% and 2.5%, respectively while shares were up 1.1% in Japan.

Interest rates: Treasury yields were flat to higher across the 2-10-year curve with longer tenors outperforming. The 2-year yield was 4 basis points higher at the time of writing at 4.20%, while the 10-year yield was flat at 4.29%. The 10-30-year yield curve continued to flatten sharply and is around 20 basis points below September's highs.

The odds of a Fed rate cut on Friday morning are currently sitting around 90%, while a follow up move in December is around 50% priced in.

Soft demand for a 10-year bond auction in the UK saw Gilts underperform with yields up 8 and 7 basis points in the 2-an-10-year tenors, respectively.

Aussie bond futures were impervious to the offshore sell-off and were little changed as of this morning. However, this followed a sell-off in physical yields yesterday which saw the 10-year yield hit a fresh high since November 2023. The 3-year futures yield was flat at 4.08%, while the 10-year was 1 basis point lower at 4.57%.

Expectations for RBA rate cuts continued to get pushed out following the Board's meeting and unchanged guidance yesterday. A February 2025 cut is now just 30% priced in, while a May cut is only just fully priced in.

Foreign exchange: The US dollar continued to soften against most G-10 peers despite US yields remaining buoyant. The DXY index fell from a high of 103.96 to a 3-week low of 103.37 and is currently trading around 103.44. The DXY is now a full big figure off October's highs and is likely to swing sharply over the next few days alongside US election headlines.

The Aussie dollar has bounced solidly off its base around 0.6540 and took on fresh ground above 66 cents yesterday, a level it has struggled to pierce over the last few sessions. The AUD/USD rose from a low of 0.6579 to a high of 0.6642 and is currently trading only slightly off the day's high. Few signs the RBA is looking to sway from it current patient approach is giving the Aussie a very solid yield foundation, but this is being capped by US election risk and angst around policy support from China. Once these known, unknowns crystallise the near term directional impetus will become more clear.

The euro and the Japanese Yen also continued to strengthen, though the latter more modestly. The euro rose from a low of 1.0873 to a 3-week high of 1.0937 and is now trading around 1.0926. The USD/JPY pushed through 152 to an intra-day low of 151.34 and is currently trading around 151.49.

Commodities: Crude markets extended the gains of the last few days, with the focus on the US election and the approach of Tropical Storm Rafael which forced Chevron and Shell to shut in production in the Gulf. West Texas Intermediate (WTI) futures are up 0.8% at US$72.06.

Bloomberg forecast that the path of Rafael could impact as much as 1.7m barrels per day of oil and 1.8b cubic feet per day of gas production in the Gulf based on the probable path of the storm.

Metals also gained on hopes for the Chinese stimulus announcement due after the US election results. Copper is up another 0.3% to US$9,623 while aluminium jumped 1.5% to US$2,659 and zinc is up 2.5% at US$3,110.

Iron ore markets pushed higher above US$105 helped by optimism on the Chinese stimulus announcement. Futures are up 1.4% at US$105.35.

Australia: The RBA left the cash rate on hold yesterday, surprising nobody. However, the RBA did remain steadfast in their guidance that they are not ruling anything in or out. This is despite revisions to their forecasts marginally lowering the underlying inflation profile and tweaking up the unemployment outlook.

All-in-all the message was pretty clear, the RBA is going to wait until they are entirely confident inflation is on a sustainable path towards the centre of their inflation target before withdrawing policy restriction. And for the time being, they don't yet have that confidence. Meanwhile, the resilient labour market is giving them the scope to remain patient.

China: The Caixin services purchasing managers' index (PMI) came in firmer than expected in October, lifting to 52.0 from 50.3 in September. This was against expectations for a reading of 50.5 and was the strongest reading in three months. The Caixin measure, which is skewed towards smaller businesses, was stronger than the official PMI measure in October which printed at 50.2, though this outperformance has been persistent through the back half of this year. The bounce in services activity could be an early sign recent policy announcements are turning the tide on sentiment, but it's much too early to conclude for sure.

United States: The ISM services PMI jumped to its highest level since July 2022 in October, continuing to reflect underlying strength in the US economy. The headline index rose to 56.0 in October from 54.9 previously. The employment component bounced back from below neutral to 53.0, its highest level since August last year. The new orders component was down after a spike in the previous month but remained at a high level. The prices paid index also eased moderately but remained above the threshold of 50, suggesting more than half of the businesses surveyed experienced an increase in input costs of some magnitude. However, the prices paid index was in line with the average in 2024 so far.

The trade deficit widened by almost $14bn in September to $84.4bn, the highest since April 2022. The widening deficit was driven mostly by higher goods imports, which were up by 4.0% in the month and 9.3% over the year, pointing to strong domestic demand. Meanwhile, exports were 1.8% lower compared to August, but broadly flat on an annual basis.