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Equities hit a new record today following solid US retail sales figures and lower-than-expected jobless claims, reinforcing the outlook for a “soft landing.” The S&P 500 rose 0.3%, while the Euro Stoxx 50 and FTSE 100 gained 0.8% and 0.7%, respectively. The yield on the US 10-year Treasury increased by 8 bps to 4.10%.
US retail sales saw stronger-than-expected growth in September, showing robust consumer spending that continues to drive the economy. This follows earlier reports of strong job growth and higher-than-expected inflation, further indicating that the economy is far from a recession. According to the Commerce Department, retail sales rose 0.4% in value, unadjusted for inflation, after a 0.1% increase in August. Sales, excluding autos and gas stations, increased by 0.7%.
Secondary data showed mixed results. Initial jobless claims unexpectedly dropped by 19k to 241k last week, though this was influenced by two hurricanes and the Boeing strike. Similarly, industrial production declined by 0.3% in September, with downward revisions. Meanwhile, the Philly Fed business outlook and the NAHB housing market index came in slightly stronger than anticipated.
■ AUD/USD edged higher overnight and is currently trading just 0.67. After yesterday’s strong Australian labour force data financial markets are pricing only about a 10% chance of an interest rate cut by the Reserve Bank of Australia by year end. Meanwhile, the other major central banks excluding Japan, are cutting rates. The relative monetary policy backdrops have caused interest rate differentials to move in favour of the AUD. See chart of the day below. However, over the week so far AUD/USD has fallen by around 0.8% as some of the exuberance around the Chinese economy has faded. Iron ore prices are back down near US$106/tonne, compared to their recent peak of US$114/tonne.
■ USD rose overnight and is currently trading near 103.8pts, its 200‑day moving average. We had flagged this level in our Weekly FX Strategy. Stronger US economic data and a dovish ECB supported USD. US retail sales rose by 0.4%/mth (0.3%/mth expected). Core retail sales, excluding auto and gas, rose by 0.7%/mth (0.3%/mth expected), with the previous month revised up a touch. The weekly initial jobless claims eased to 241k, from 260k previously. US Treasury yields rose by 3‑8bp across the curve. The S&P500 rose by 0.1%. It will likely be a quiet night tonight for currencies will no major economic data scheduled in the US or Europe.
■ AUD/EUR rose by around 20pips overnight, adding to yesterday’s post Australian labour force gains. AUD/EUR is currently trading near 0.6180. The ECB cut interest rates by 25bp last night as was widely expected. The deposit rate is now 3.25%. The post meeting statement noted downside surprises to the Eurozone economic activity data. In the post meeting press conference ECB President Lagarde said that the risks to economic growth and inflation were tilted to the downside. Financial markets are now pricing around 39bps of cuts at the December meeting, that is, around a 50% chance of a larger 50bp cut. Given the ECB are well underway will lowering interest rates, we expect them to continue to stick to 25bp moves, rather than deliver a larger cut.
■ AUD/CNH rose modestly overnight and is currently trading near 4.78. Today’s Chinese Q3 24 GDP will be unlikely to move CNH more than briefly because it is too early to see any impacts of the recent stimulus (1pm Sydney time). We expect Q3 24 GDP will expand by 1.0%/qtr, which is soft by Chinese standards. Weak consumer spending and property has weighed on the economy.
■ AUD/JPY rose above 100 overnight. Rengo, Japan’s largest labour union, will release its initial plan for the wage negotiations today. Media reports have said that Rengo are seeking another 5% wage increase, similar to last year. Another strong result for the annual Shunto wage negotiations can increase the chances of more Bank of Japan (BoJ) interest rate hikes. Interest rate expectations will be sensitive to developments in the annual wage negotiations. Japan’s CPI for September is unlikely to change market pricing for the BoJ or JPY (10.30am Sydney time). The already released Tokyo CPI suggests core inflation remained near 2%/yr in September.
Mid-market rates.
Currency Pair | Mid-market rate |
AUD/USD | 0.6696 |
AUD/NZD | 1.1057 |
AUD/JPY | 100.61 |
AUD/CNH | 4.7790 |
AUD/EUR | 0.6185 |
AUD/GBP | 0.5147 |
AUD/HKD | 5.2058 |
Chart of the day
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