Westpac Banking : Morning Report

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Key themes: US equities continue to show signs of fatigue following the post-election rally. European stocks outperformed on positive earnings reports and solid economic data.

US bond yields were higher at the shorter end of the curve amid Fed officials signalling a cautious approach to easing rates, with rate cut expectations also trimmed.

The Greenback continues to make gains breaking through the 107.00 mark for the first time in more than a year. The Aussie was lower against the Greenback, also weighed lower by softer commodity prices.

Iron ore is now trading below US$100 a tonne while oil was slightly higher.

Share markets: US equities continue to show signs of fatigue following the post-election rally. More hawkish than expected comments from Fed officials, including Fed Chair Powell, saw yields increase, also weighing on equities.

The broad-based S&P 500 fell 0.6%, the tech-heavy Nasdaq closed 0.7% lower, and the Dow Jones was 0.5% lower.

European stocks outperformed on positive earnings reports and solid economic data. The Euro Stoxx 50 closed 2.0% in the green. The DAX was 1.4% higher and the FTSE 100 finished 0.5% higher.

Asian markets were generally lower with the Nikkei (-0.5%) and the Hang Seng (-2.0%) both lower.

The ASX200 index started closed 0.4% in the green. Eight of the eleven sectors finished in green, led by financial stocks. Futures are pointing to a solid open this morning.

Interest rates: Yields at the short end of the curve spiked following comments from Fed Chair Powell which noted the economy's performance has been 'remarkably good,' leaving room for a cautious approach to easing. Rate cut expectations were also trimmed.

The US 2-year bond yield increased 5 basis points to 4.34%, after reaching a low of 4.29% during the session. The 10-year bond yield increased by 1 basis point to 4.44%.

The chances of a rate cut in December are sitting at around 55% - from 80% in the previous session.

Australian yields were lower following yesterday's labour force read. The 3-year futures yield was 2 basis points lower at 4.19%, while the 10-year futures yield was 4 basis points lower at 4.67%. The first full rate cut is now expected by August 2025, with around 42 basis points of cuts expected over 2025.

Foreign exchange: The king dollar continued to rise breaking through the 107.00 mark to reach its highest level since October 2023. Yield support and higher growth and inflation expected under a Trump administration are supporting the US dollar index. A higher near-term range in forming at around 105-108 levels.

The Aussie fell to its lowest level since August against the Greenback, reaching a session low of 0.6441 - not far from the lows recorded in August of 0.6350. The AUD/USD was hit hard following Fed Chair Powell's comments, with the pair falling from 0.6475 to the session low (0.6441). Near term the Aussie remains susceptible given the rise of the Greenback. However, potential for ongoing China stimulus and the RBA's continued hawkish guidance is likely to provide the Aussie with support.

The euro continued its slide falling 0.4% to 1.0520. The euro broke through the 1.0500 mark during the session falling to a low of 1.0497 before receiving some support. Downside risk remain given political uncertainty in Europe and the bloc's relative economic performance.

The Japanese Yen was lower, with the USD/JPY (0.6%) trading at around 156.25 per US dollar.

Commodities: Oil markets had mixed influences from a positive EIA inventory report to warnings from the IEA about potential crude oversupply next year. The EIA reported an increase in crude inventory by 2.09 million barrels, though distillate stocks decreased by 1.39 million barrels and gasoline stocks fell by 4.4 million barrels, reaching the lowest level in two years. The West Texas Intermediate (WTI) is trading 0.2% higher at US$68.57 per barrel.

Industrial metals were down amid signs of weaker Chinese demand. Copper was 1.1% lower, Zinc fell by 1.6%, marking a new four-year low, and tin decreased by 2.5%.

Iron ore fell below USD100 a tonne, influenced by record Australian iron ore exports affecting sentiment. Futures are trading at around US$98.25 a tonne in Singapore.

Australia: Consumer inflation expectations fell to 3.8% in November, from 4.0% in October. This was the lowest reading since October 2021 and likely reflects the fall we have seen in headline inflation, which is sitting back within the RBA's target band.

Employment rose by +15.9k (0.1%), slightly below Westpac's forecast of +20k and under the market consensus forecast of +25k. This was the softest monthly increase in employment since May.

The participation rate fell by just 0.04ppt, but it was enough for it to round down from 67.2% to 67.1% (from 67.18% to 67.14%).

The tick-down in participation saw the labour force expand by +24.2k, more than the increase in employment recorded in the month, therefore implying a slight increase in the level of unemployment (+8.3k). Overall, this was not enough to see the unemployment rate budge from its current level of 4.1%, as it has done for the past three consecutive months.

Growth in monthly hours worked rose 0.1%mth in October and 2.2%yr on a three-month average basis, matching the increase in employment and therefore implying no change to average hours worked.

Eurozone: GDP growth was confirmed at 0.4% in Q3 in the second estimate. Together with a 0.3% gain in Q1 and 0.2% increase in Q2, growth through 2024-to-date has broadly been in line with trend, a material step up from 2023's near-zero result. Employment growth was also robust in Q3 at 0.2%, and up 1.0% over the year.

United States: Producer prices were as expected in October, the headline series gaining 0.2% and, ex food and energy, 0.3%. On an annual basis, the headline PPI is up 2.4%yr and the core series 3.1%yr. Both pulses are broadly consistent with headline CPI inflation at target.

Initial jobless claims edged lower last week from 221k to 217k. The deceleration in jobs evident in the employment report continues to be driven by softer demand not job shedding.

FOMC member Barkin said the central bank has made "great progress" on inflation but emphasized officials can't declare victory, highlighting the labour market: "I think we're at that point where you don't really know whether it's going to go back to a higher hiring environment or it's going to go to a higher firing environment".

Kugler said: "This combination of a continued but slowing trend in disinflation and cooling labour markets means that we need to continue paying attention to both sides of our mandate. If any risks arise that stall progress or reaccelerate inflation, it would be appropriate to pause our policy rate cuts. But if the labour market slows down suddenly, it would be appropriate to continue to gradually reduce the policy rate."

FOMC Chair Powell again said the economy's performance has been "remarkably good," playing down the need for an aggressive rate cutting cycle. He said "We are confident that with an appropriate recalibration of our policy stance, strength in the economy and the labor market can be maintained, with inflation moving sustainably down to 2 percent. We see the risks to achieving our employment and inflation goals as being roughly in balance, and we are attentive to the risks to both sides. We know that reducing policy restraint too quickly could hinder progress on inflation. At the same time, reducing policy restraint too slowly could unduly weaken economic activity and employment." Neutral is the target for policy. "We are moving policy over time to a more neutral setting. But the path for getting there is not preset. In considering additional adjustments to the target range for the federal funds rate, we will carefully assess incoming data, the evolving outlook, and the balance of risks."