Market Headlines
The US Federal Reserve delivered a moderate hawkish surprise to markets, projecting more rate hikes than were expected. The S&P500 shrugged off the result and is currently up 0.2%, while the US dollar and bond yields are slightly higher. The US dollar index is up 0.3% on the day. EUR fell from 1.1275 to 1.1222. USD/JPY rose from 113.63 to 114.24. AUD fell from 0.7120 to 0.7093. NZD fell from 0.6760 to 0.6702. AUD/NZD rose from 1.0560 to 1.0598.
US 2yr treasury yields rose from 0.65% to 0.72%, while the 10yr yield rose from 1.42% to 1.47%. Markets fully price the first Fed funds rate hike to be in May 2022. Australian 3yr government bond yields (futures) rose to 1.25%, while the 10yr yield rose to 1.68%. Markets fully price the first RBA rate hike to be in July 2022.
Commodities, Brent crude oil futures fell 0.1% to $74, copper fell 1.8%, gold fell 0.3%, and iron ore rose 0.9% to $109.
Overnight Currency Range
AUD/USD 0.7132 0.7182
EUR/USD 1.1266 1.1324
GBP/USD 1.3188 1.3276
USD/JPY 113.22 113.79
NZD/USD 0.6771 0.6806
USD/CAD 1.2680 1.2739
USD/CNH 6.3647 6.3892
AUD/JPY 80.80 81.55
AUD/NZD 1.0504 1.0563
AUD Thoughts
Australian labour force data for November is expected to show a big bounce in employment as lockdowns were listed in October. Markets expect labour force employment to have increased by ~260k m/m in November and for the unemployment rate to have fallen to 5.0% from 5.2% in October.
RBA Governor Lowe will also give a speech for the last time this year today. His speech provides an opportunity to emphasise that it’s the economy, not the calendar that will determine when the cash rate increases.
The BoE and ECB will also hold meetings tonight. With uncertainty surrounding the severity of the new Omicron variant, we suspect the BoE will opt to keep rates on hold next week. ECB’s Legarde has promised to clarify precisely what will happen when the pandemic bond purchase programme ends in March. To avoid a cliff-edge and to preserve favourable financial conditions, the ECB is likely to beef up the original PSPP which still is still running parallel in the background.
AUD/USD whipped around in a 0.7092/0.7163 range overnight but the order book remains mostly unchanged. Demand is expected in the low 0.7000 region while offers are staggered above 0.7170.
Event Risk Data Today
Australia: Solid momentum through October, as indicated by the lift in payrolls, suggests a robust gain for employment in November (f/c:200k); but higher participation may see a lift in the unemployment rate (f/c 5.3%). The 2021/22 Federal MYEFO is expected to report a deterioration in the deficit owing to the cost of responding to delta; although a stronger starting point and higher commodity prices will buffer (f/c: -$117bn). RBA Head of Financial Stability Kearns will speak at the UNSW Australasian Finance and Banking Conference at 10:00am. RBA Governor Lowe will then address the CPA Australia Riverina Business Conference at 10:30am.
NZ: Q3 GDP will be released. Although economic activity was hit hard by the delta lockdowns, the resilience of recent data suggests that businesses were better prepared to operate under health restrictions in Q3.
Eur/UK: Both the Euro Area and UK Markit PMIs are expected to point towards continued growth in services and manufacturing in December, though covid, inflation and supply issues remain as headwinds. Europe’s trade surplus is anticipated to narrow further in October (market f/c: €5.8bn). The ECB is then expected to announce a continuation of asset purchases materially above the APP’s €20bn per month following the February PEPP expiration. The emergence of omicron and tightening of health restrictions will see the Bank of England remain on hold in December, leaving the decision on rates to 2022.
US: Initial jobless claims should remain near historic lows for the foreseeable future (market f/c: 200k). Housing starts are meanwhile expected to lift in November given robust underlying demand (market f/c: 3.1%). Despite this strength in demand, growth in building permits will be hit by rising costs and labour shortages (market f/c: 0.6%). November’s industrial production will continue to reflect supply chain issues (market f/c: 0.6%) and the December Phily Fed and Kansas City Fed indexes are also due.