Market Update 25/09/2024

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Global equities rose overnight, buoyed by the announcement of China’s economic stimulus package. US stocks managed modest gains after an early decline driven by weak consumer confidence data, while bond yields dropped, particularly at the shorter end. As of this, the S&P 500 had risen 0.2%. In Europe, the Euro Stoxx 50 closed up 1.1%, and the FTSE 100 gained 0.3%. Meanwhile, the yield on the US 10-year Treasury slipped 1.5 bps to 3.73%.

Overnight, US consumer confidence saw an unexpected decline in September, marking the largest drop in three years due to concerns over the labor market and the broader economic outlook. The Conference Board’s sentiment index fell by 6.9 points to 98.7, the biggest decrease since August 2021. The measure of expectations for the next six months dropped to 81.7, while the assessment of current conditions fell to 124.3.

The US Richmond Fed manufacturing index fell for the fourth consecutive month, coming in at -21 compared to -19 last month and below the expected -12, marking its lowest point since May 2020. The employment component was notably weak, showing the sharpest decline since 2009.

Fed Governor Bowman stated that interest rates should be reduced at a “measured” pace, citing ongoing inflation risks and a labour market that has yet to show significant weakness. She emphasized concerns over price stability, particularly with the labour market near full employment, which sets her stance apart from other Fed officials. Bowman opposed last week’s 0.50% rate cut, favouring a smaller 0.25% reduction, making her the first Fed Governor to dissent since 2005.

The DXY index has fallen 0.4% to 100.5, with the USD generally weaker across the board.

■ AUD/USD temporarily fell below 0.6820 following less hawkish comments from Reserve Bank of Australia (RBA) Governor Bullock at her press conference yesterday. Governor Bullock said that a rate hike wasn’t explicitly considered despite inflation remaining persistent. However, AUD/USD subsequently reversed its losses to be near 0.6890, the highest since July 2023. AUD/USD was underpinned by stronger US equities and China’s stimulus announcement (see CNH below). The Hang Sang index closed yesterday’s session more than 4% higher. Base metals prices, especially iron ore, rose strongly. The improvement in the Chinese economic outlook will keep AUD/USD supported at least in the near term. Focus will now shift to the Australian monthly CPI indicator for August (11:30am Sydney time). Our Australian economics team expect inflation eased to 2.7%/yr mainly because of a large fall in electricity prices. We do not expect the CPI indicator to impact AUD/USD more than temporarily.

■ USD weakened against all the major currencies we monitor overnight amid positive risk sentiment. US equities ended the overnight session higher despite the Conference Board’s consumer sentiment unexpectedly fall to 98.7pts in September. US Treasury yields eased across the curve, led by the shorter end. High risk appetite will keep the USD offered in our view. The USD index can keep drifting lower below 100pts this week.  

■ AUD/NZD built on yesterday’s losses to be near 1.0870. NZD/USD was the outperformer among its G10 peers, rising by about 1.2% to near 0.6340.  NZD/USD is currently the strongest since December 2023. NZD was boosted by a slew of Chinese stimulus measures that should help lifting consumer demand. A recovery in Chinese consumer demand bodes well for NZ’s dairy exports and therefore NZD. Fonterra has announced a $NZ50 cent lift in its 2024/25 forecast Farmgate Milk Price to a range of $NZ8.25‑$NZ9.75 per kgMS.  

■ AUD/CNH unwound earlier losses to be near 4.8300. USD/CNH extended yesterday’s drop to be near 7.0100, the lowest since May 2023. The CSI300 index closed yesterday’s session more than 4% higher. Financial markets were buoyed by a slew of stimulus measures announced by Chinese authorities yesterday, including a 20bp cut to the 7‑day reverse repo rate and a 50bp cut to the reserve requirement ratio (RRR). We had forecast the 7‑day reverse repo rate and the RRR to be cut once more this quarter, but the size of cuts was double our expectations. PBoC Governor Pan Gongsheng said the 20bp cut to the 7‑day reverse repo rate would lower the one‑year Medium Term Lending Facility (MLF) rate by 30bp, and loan prime rates and deposit rates by 20‑25bp. We expect the PBoC to deliver that cut to the MLF rate today (11:20am Sydney time).  

■ That a number of supportive measures were announced at one time, rather than drip‑fed, underscores the government’s determination to restore investor confidence and support the economy. The property support measures announced will go some way towards supporting consumer spending (see Chart of the day). That said, we still consider monetary easing needs to be supplemented by more fiscal policy support in order to defend this year’s ‘around 5%’ growth target.
 

Mid-market rates.

Chart of the day

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