Market Update 08/11/2024

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Following the strong market response to Trump’s victory, there has been some partial pullback in currency & bond markets, though this hasn’t been reflected in U.S. equities. The S&P 500 gained 0.7%, and the Euro Stoxx 50 closed up 1.1%, driven by rising expectations for an early 2025 election in Germany. Meanwhile, the FTSE 100 dipped by 0.3%. The yield on the U.S. 10-year note dropped 11 bps to 4.33%.

The US Fed this morning cuts rates by 25bps as expected and the accompanying statement with minor adjustments had minimal effect on short-term price movements.

As expected, the first question in the FOMC press conference Q&A addressed the election results and the potential impact of a second Trump presidency on Fed policy. Powell clarified there would be no immediate impact, but he outlined a hypothetical scenario where future tax law changes could prompt the Fed to reassess their economic impact and potentially adjust its policy direction accordingly.

In summary, the FOMC meeting offered no surprises or shifts in the Fed’s policy outlook. The current stance aligns with the median projections from September, where a further 25bps cut in December remains likely. Powell indicated the Fed is still moving towards a more neutral policy setting, with an additional 100bps of cuts anticipated in 2025, reflecting the recent increase in economic activity.

The USD is generally weaker, with the DXY index down 0.7% following its substantial 1.6% gain after the recent victory.

NZDUSD traded stronger overnight, reversing all losses from Wednesday’s US election impact, briefly reaching 0.6040 before pulling back. If the rally continues, resistance could be around the 0.6120 high from October 11, though a dip to August lows near 0.5850 remains possible. In the medium term, if Trump’s policies boost growth and inflation, this could lead to fewer Fed rate cuts and higher US bond yields, potentially weighing on the NZD especially if New Zealand’s economic outlook remains weak and RBNZ rate cut expectations stay high or rise further.

NZDAUD has dropped to 0.9025, as both the NZD and AUD performed well against major currencies overnight. AUDUSD is up more than 1% from yesterday, reaching 0.6678. Tonight’s fiscal stimulus announcement from China could have significant implications for both the NZD & AUD. If the Chinese government boosts spending on infrastructure and property, Australia would stand to benefit. If the focus shifts to household spending, New Zealand would gain. NZDAUD will likely be sensitive to the specifics of the stimulus plan.

NZDJPY made notable gains, reaching 92.47 before pulling back to 92.14. Japanese workers’ base salaries experienced their largest increase in over 30 years, reinforcing the Bank of Japan’s view that the economy is on the path to recovery and strengthening the case for a rate hike in the coming months. The pace of base pay growth accelerated to 2.6% y/y in September, compared to 2.4% in August.

NZDGBP is slightly higher, trading at 0.4645. The GBP was largely unaffected by the BoE rate cut, where the Bank of England voted 8-1 to reduce the benchmark interest rate by 0.25bps to 4.75%, with Catherine Mann, an external official, being the only dissenter. This move was widely expected by economists. However, the BoE refrained from suggesting more aggressive easing, cautioning that last week’s budget could raise inflation by up to 0.5%.

There are no local economic data releases scheduled for today. Tonight, we’ll see the release of Canadian employment figures and the University of Michigan consumer survey. In China, the 5-day National People’s Congress Standing Committee meeting concludes today, and inflation data will be released on Saturday.

Here are the latest mid-market rates: