Market Update 04/09/2024

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Stock markets dropped significantly, and fixed income markets gained on weak August ISM data, poor July US construction spending, and low trading volumes ahead of the closely watched US August labor market report (due early Saturday morning NZT). The S&P 500 fell 2.0%, the Euro Stoxx 50 declined by 1.2%, and the FTSE 100 dropped 0.8%. Meanwhile, the yield on the US 10-year decreased by 6.9 bps to 3.83%.
 
The US ISM manufacturing index increased by 0.4 points to 47.2, indicating ongoing challenges in the manufacturing sector. A value above 50 generally indicates expansion, but since it’s still below 50, the sector is considered to be contracting. The index has been below 50 for 21 of the last 22 months indicates that the manufacturing sector has been struggling for a prolonged period. In August, new orders dropped by 2.8 points to 44.6, their lowest since May 2023, and new export orders decreased by 0.4 points to 48.6. However, not all metrics were negative, the backlog of orders increased by 1.9 points to 43.6, and employment rose by 2.6 points to 46, though both remained well below 50. Manufacturing is sensitive to interest rates because consumers often finance large purchases like cars and electronics. If interest rates are high, borrowing costs increase, which can reduce consumer spending on these items, further hurting the manufacturing sector. Manufacturers are hoping for a cycle of interest rate cuts to begin soon, as lower rates would make borrowing cheaper, potentially boosting consumer spending and helping the manufacturing sector recover.
 
The USD gained strength against most G10 currencies in a volatile offshore trading session, with the dollar index (DXY) bouncing back by over 1% from its late August lows.
 
NZDUSD traded mostly sideways overnight and dipped to 0.6182 because of a general sense of caution in the market. NZD’s future movement is expected to be influenced by the upcoming U.S. jobs report (NFP) on Friday. Depending on the results, it could either suggest a “soft landing” for the economy, which would be good for New Zealand importers, or indicate a “hard landing,” which would benefit exporters. The report will also play a key role in whether the U.S. Federal Reserve decides to cut interest rates by 25 bps (which is fully expected) or by a larger 50 bps (which is considered less likely).
 
NZDAUD has climbed back above 0.9200. The AUD weakened yesterday afternoon due to a drop in iron ore futures and a larger-than-expected Australian current account deficit. Additionally, risk assets saw broad declines as Asian investors remained cautious at the start of what could be a pivotal month. The AUD appears uncertain ahead of today’s Australian GDP release.
 
NZDJPY has dropped to 90.00 as the yen gained strength following Bank of Japan (BoJ) Governor Ueda’s submission of a document to a government panel. The document indicated that further interest rate hikes are likely if the economy and inflation meet the central bank’s expectations. It also highlighted that the BoJ still views its policy as accommodative, given that real interest rates remain deeply negative.
 
Today’s economic calendar is centered on Australia’s Q2 GDP data, due at 1:30 pm. Later this evening, the Bank of Canada is anticipated to reduce rates by another 25bps, marking its third cut in this easing cycle and bringing the policy rate down to 4.25%. In the US, attention will be on job openings (JOLTS), expected to stay around 8.1 million, ahead of Friday’s labor market data.

 
Here are the latest mid-market rates: