Market Update 03/10/2024

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It was a mixed session overnight in commodity and stock markets. Oil prices initially strengthened but later pulled back, while European stocks drifted for much of the session before rebounding. Both the Euro Stoxx 50 and FTSE 100 ended up 0.2%, and the S&P 500 closed 0.1% higher after fluctuating between gains and losses. Meanwhile, the yield on the US 10-year Treasury increased by 5 bps to 3.78%.
 
US ADP private payrolls jumped by 143k in August, a bit higher than the 124k everyone was expecting, snapping a five-month streak of smaller gains. As for wages, they’ve cooled off as people switching jobs saw a 6.6% pay bump y/y, which is the lowest it’s been in over three years. And for those sticking with their jobs, wage growth eased to 4.7% y/y. The wage data for people switching jobs supports the findings from the JOLTS report, indicating that the labor market has stabilized and is no longer a major driver of inflation.
 
The USD strengthened due to stronger-than-expected data, while a slight risk-averse sentiment lingered in the markets following the escalating tensions in the Middle East.

■ AUD/USD spent some of the night above 0.69, but is currently trading a little lower near 0.6880. In this note, we identified two global upside risks (US soft landing and Chinese government stimulus) and two global downside risks (US election and South China sea) to AUD/USD. The next important event for AUD/USD is Friday night’s US non‑farm payrolls. We expect a solid lift in payrolls, which will keep AUD/USD supported in our view.  

■ USD made further gains overnight, mostly against JPY, and is currently trading near 101.6pts. The S&P500 was flat. US Treasury yields rose by 3‑5bp across the curve, supported by stronger US labour market data. ADP employment rose by a stronger than expected 143k in September, and there was a small upward revision to the previous month. Tonight’s weekly initial jobless claims and the ISM services index, which includes an employment component, will continue the reads on the US labour market this week (10.30pm and midnight Sydney time). A healthy US labour market can put downward pressure on the USD, which tends to be heavy when the global backdrop is improving.  

■ AUD/JPY rose by around 2% overnight and is currently trading near 100.80. USD/JPY rose by around 2½ yen and is near 146.40. The yen weakened because new Japanese prime minister Ishiba talked down the need for another Bank of Japan (BoJ) interest rate increase in the near term saying that ‘I don’t think the environment is ready for an additional hike’. Ishiba has previously been considered hawkish on interest rates. BoJ board member Noguchi is scheduled to speak today (11.30am Sydney time). The BoJ’s summary of opinions from the September meeting showed that some members were against increasing interest rates again in September because of unstable financial markets. The BoJ may want to wait until after the October election is over before raising interest rates again.  

■ AUD/NZD continued to rise overnight and is currently trading near 1.0990. AUD/NZD has been supported by a sharp narrowing in interest rate differentials (see chart of the day below). Markets are now pricing a large 95bp of interest rate cuts from the RBNZ by year end. Several NZ economists, including our colleagues at ASB, have revised their forecasts to include larger interest rate cuts at the next few RBNZ meetings.  

■ AUD/EUR traded in a narrow range near 0.6230 overnight. There were a number of ECB officials giving speeches and interviews overnight. The consensus was that the Eurozone activity has been weaker than expected and that there are growing downside risks. However, there was still some caution because services inflation is still too high. Financial markets are fully pricing two 25bps interest rate cuts from the ECB by year end. In contrast, markets are pricing only around a 70% chance of a 25bp RBA interest rate cut. CBA forecast a December RBA cut, which will pose a modest headwind for AUD/EUR if we are correct.

Mid-market rates.

Chart of the day

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