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Market has remained cautious as ongoing tensions in the Middle East continued to impact markets. Stocks declined while bond yields rose on the back of solid US economic data. The S&P 500 fell 0.4%, the Euro Stoxx 50 dropped 0.8% and the FTSE 100 slipped by 0.1%. Meanwhile, the yield on the US 10-year Treasury climbed 5.5bps to 3.83%. Oil prices surged 4.6% to $73.3bbl (WTI) following the potential for Israel to retaliate against Iran, as well as President Biden’s comments that the US is in talks with Israel about targeting Iran’s oil facilities.
In economic news, the US ISM services index exceeded expectations, rising 3.4 points to 54.9 in September, marking its third consecutive monthly increase and the highest level since February 2023. The activity/production index jumped by 6.6 points, and new orders were up 6.4 points to 59.4. Prices paid also increased by 2.1 points to 59.4. However, employment was the weak point, dropping by 2.1 points to 48.1. The strong ISM services index suggests that US economic momentum remains solid, especially when considering last week’s upward revision to GDP data. Since services account for about 80% of the US economy, this data indicates that the risk of recession has significantly diminished.
On that note, former NY Fed President Dudley acknowledged that his prediction of a hard landing was incorrect. He now believes that while the recession risk remains higher than usual, the Fed has a good chance of reducing inflation without triggering an economic downturn. He also expects that in a soft-landing scenario, the Fed will bring policy to a neutral level rather than moving into accommodative territory, predicting that the fed funds rate will bottom out at no less than 3.50%.
Overnight, dollar index (DXY) has firmed, and USD is mildly stronger.
NZDUSD dropped to 0.6210 overnight, but the pace of its decline has slowed slightly, managing to stay above 0.6200 for now. Attention is now on the key US payroll data, due at 1:30am NZT. US data this week has suggested a more gradual slowdown rather than a sharp one, raising the possibility that US markets may scale back some of the rate cuts they’re expecting by Christmas.
NZDAUD drop below 0.9100 yesterday morning has held, with the pair now down to 0.9080 and potentially heading lower.. Meanwhile, AUDUSD is trading at 0.6835.
NZDJPY has dropped to 91.25. The selling pressure on the yen triggered by dovish comments from Japan’s new PM and BoJ Governor Ueda has paused for the moment due to weaker risk sentiment. However, selling could quickly resume once concerns over the Middle East ease.
NZDGBP reached 0.4740 overnight before retreating to 0.4733. In an interview with the Guardian, BoE Governor Bailey mentioned that the central bank might take a “bit more aggressive” and “a bit more activist” approach to cutting rates if inflation news remains positive. This appears to be a shift from his earlier comments about a gradual approach. GBPUSD dropped from 1.3250 to 1.3115, reflecting a decline of almost 1% from yesterday. The market is currently anticipating a 25bps rate cut from the BoE at the November meeting, with a possibility for another full cut at the December meeting as well.
On the economic calendar, the US employment report is the main highlight, as its results could determine whether the Fed opts for a 25bps or 50bps rate cut at its next meeting (there’s a high chance for the Fed to cut 50bps). The consensus predicts an increase of 147k in non-farm payrolls, a stable unemployment rate of 4.2%, and a modest rise of 0.3% in average hourly earnings month-over-month. The least helpful outcome would be a result that meets expectations, as it wouldn’t clarify the rates discussion.
Here are the latest mid-market rates:
Currency Pair | Mid-market rate |
NZD/USD | 0.6210 |
NZD/AUD | 0.9080 |
NZD/JPY | 91.24 |
NZD/CNY | 4.3800 |
NZD/EUR | 0.5632 |
NZD/GBP | 0.4733 |
NZD/HKD | 4.8233 |
NZD/SGD | 0.8060 |
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