The market is currently taking a sanguine view of the war underway between Israel and Hamas, with oil trading sideways, sustaining the near-4% gain yesterday, equities gaining ground and no evidence of a safe-haven bid in currencies.
Dominating the market’s focus is the seemingly coordinated message from Fed officials that the recent tightening in financial conditions is doing some of the work to support a weaker inflation trajectory, and is something the Fed is watching closely as it mulls on whether further policy tightening is required – communicated by the Fed’s Daly late last week and backed up by Logan and Jefferson earlier this week.
The market now prices just 7bps of hikes cumulatively through to December, down from 12bps at the end of last week, reducing the chance of another Fed hike this year to about 30% from near-50%. As well as the Fed’s communications, the market is also likely noting the uncertainty that renewed geopolitical risk poses for the outlook as a factor in whether the Fed will tighten again.
After the US bond market’s closure on Monday, Treasury yields opened the Asian session much lower in yield, as forewarned by pricing in the futures markets, with the 10-year rate falling 18bps to 4.62%. Some of that move faded through to the early hours of this morning, with an overnight high of 4.71%, but as we go to print, it is back down to 4.64%, little changed from the NZ close.
European yields already captured the initial market impact from the Israeli war in the previous session. Germany’s 10-year rate shows little net change for today’s session, sustaining the 11bps fall on Monday, while the UK’s 10-year rate has pushed down another 5bps.
The ”Fed might be done” narrative alongside lower US Treasury yields have supported the equity market, with the S&P500 currently up 0.8%, adding to yesterday’s 0.6% lift. The Euro Stoxx 600 index closed up a chunky 2%.
In currency markets, the safe-haven bid that was evident on Monday has disappeared. USD/JPY is flat around 148.70 and the USD itself is broadly weaker. The DXY index is down 0.3%, tentatively supporting a case that the USD might now be past its peak, with the change in market sentiment towards the Fed being a crucial factor in that view. Of course, how the war plays out in Israel, and whether Iran is drawn into the conflict, still overhangs the market.
The NZD has sustained its move above 0.60, with an overnight dip to just below 0.60 meeting support and the currency currently near 0.6030, up slightly from this time yesterday. NZD/AUD is flat around 0.94 and has fallen slightly against GBP and EUR, with those currencies seeing modest gains against the USD to 1.2270 and 1.06 respectively.
In economic news, the IMF’s latest forecasts showed little revision its global growth outlook, with GDP projected to slow from 3.5% last year to 3.0% in 2023 and 2.9% in 2024, well below the 2000-2019 average of 3.8%. There was more change to its inflation outlook, with a steady decline from 8.7% last year to 6.9% in 2023 and 5.8% in 2024, with the forecast for 2023 revised up 0.1ppt and for 2024 up a chunky 0.6ppts. Inflation is not expected to return to target to 2025 in most countries, underscoring the need of central banks to keep policy tight.
The second-tier economic releases overnight aren’t worth commenting on, but there was an interesting report on Bloomberg on the revision at the end of last month on estimates of US household savings. Revised data showed a much higher buffer than previously reported. The report noted that estimates from Citigroup, JP Morgan and UBS now put the savings buffer close to $1 trillion or more, reducing the chance of recession and playing to the soft-landing for the US economy narrative.
Bloomberg reported that China is weighing up a fresh stimulus package in the order of at least 1 trillion yuan (USD137b), that would take the budget deficit well above the 3% of GDP cap. Spending would be directed to infrastructure projects and such looser fiscal policy would mark a shift in stance by Beijing to support its economy. Earlier in the session, one of China’s largest property developers, Country Garden Holdings, warned that it was on the verge of defaulting on debt payments. USD/CNH dipped to as low as 7.27 yesterday afternoon but is back to 7.29, flat for the day.
The backdrop of lower global rates supported lower NZ rates, with NZGBs closing the day down 6-7bps and swaps down 6-9bps. There has been little net change in Australian 10-year futures overnight.
In the day ahead, NZ net migration data will be released this morning. US PPI inflation data tonight will be of interest, coming a day ahead of the key US CPI report. The market anticipates a friendly 0.2% m/m increase for the PPI ex food and energy index, seeing a tick higher in the annual increase to 2.3%. Minutes of the FOMC’s September meeting, where the Fed adopted a “hawkish hold” with two of the four previously projected rate cuts removed from the projection, will be released at 7am tomorrow.
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