The Overnight Report: Calm Before The Cut

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US markets went on the back foot last night, tracking flat to slightly weaker ahead of the Fed's rate decision tomorrow.

After a positive day yesterday, Australian futures are pointing to a weak start, pre both the Fed meeting and tomorrow's August labour data.

Good Morning,

The Australian share market recouped Monday’s losses yesterday, gaining 24.7pts of 0.28% to 8877.7.

Resource stocks moved higher on firmer commodity prices and CSL ((CSL)) shares fell briefly below $200 for the first time since 2019. 

What happened overnight, NAB Markets Today Research extract

The US Senate confirmed Stephen Miran to the Fed Board just in time for the current FOMC meeting, while a US appeals court allowed Governor Cook to retain her seat, blocking President Trump’s attempt to remove her. Miran’s refusal to resign his White House post has raised questions about Fed independence. 

Meanwhile, Miran’s reference to a “third mandate”, moderate long-term interest rates, has sparked debate about the Fed’s future direction, with some analysts concerned about potential interventions in the long end of the curve and the risk to central bank independence.

US retail sales rose 0.6% MoM in August, beating consensus, with broad-based gains across categories (nine out of 13 categories posted increases). An uptick in Auto sales to 0.4% contributed to the upside surprise relative to the consensus, but Control group sales and ex-autos rose by 0.7%, also beating expectations with most Control components seeing solid gains. 

Of note, non-store sales leapt by 2.0%, despite Amazon’s Prime Day occurring in July. Industrial production was another solid US data release, surprising to the upside, up 0.1% m/m, with manufacturing output up 0.2%. The data suggest Q3 consumption is tracking at a 2% pace, with the Atlanta Fed GDPNow estimate ticking up to 3.4%.

US equities were little changed, with the S&P 500 and Nasdaq both down -0.1%. Oracle shares rallied on news of its role in the TikTok deal. In Europe, the Euro Stoxx 600 fell -1.1% (euro strength not helpful) while Asian indices were mixed. Market sentiment remains cautious ahead of the Fed, with valuations elevated and investors overweight equities according to recent surveys.

Gold continued its record-breaking run, piercing US$3,700. Oil prices rose, with WTI up 1.8% and Brent up 1.4%. Base metals were mixed, with aluminium and zinc higher, while iron ore and coal were little changed.

US Treasuries rallied, with yields 2-3bps lower across the curve. The 10-year yield traded at 4.02%, outperforming bunds and gilts. A solid 20-year auction and demand for curve steepeners supported the move. In Europe, Bund and Gilt yields were little changed to slightly higher. Australian and NZ yields also fell, with NZGBs at fresh cycle lows.

The USD weakened ahead of the Fed, with the DXY and Bloomberg Dollar Spot Index both down over -0.5% on the day. The euro rose to a four-year high just under 1.1880, while GBP lagged, up to 1.3660. 

UK labour market data were broadly in line, with private sector wages still trending lower but above the BoE’s inflation target. The key private sector wages figure excluding bonuses eased one-tenth to 4.7% YoY for the three months to July, still trending lower, but inconsistent with a 2% inflation target. The market currently doesn’t see another -25bps BoE cut before April next year.

Yesterday during our day, JPY led the gains vs the USD following news Minister Koizumi confirmed a bid for LDP leadership, seen as supportive for BoJ policy normalisation. 

CAD was steady after headline CPI rose less than expected, supporting the case for a Bank of Canada rate cut. AUD and NZD both hit fresh highs, the AUD traded to an overnight high of 0.6688 and starts the new day at 0.6681. 

Speaking at a fireside chat yesterday, RBA Assistant Governor Sarah Hunter noted Australia’s central bank is “pretty close” to achieving its inflation and jobs targets, with the economy near full employment and households largely past the worst of the cost-of-living squeeze. 

Hunter highlighted a nascent recovery in consumer demand and signalled the RBA Board is likely to keep rates unchanged at 3.6% at its upcoming meeting, while monitoring data closely. 

Meanwhile, Deputy Governor Andrew Hauser discussed the substantial expected growth in Australia’s pension fund FX hedge books, projecting the total could double over the next decade as super funds expand and shift towards fixed income. Hauser emphasised that, despite the increase, predictions of the US dollar’s demise are premature and that super funds will need to diversify hedge providers and manage liquidity risks as their offshore exposure rise.

In other news, US President Trump spoke with Indian PM Modi as the two countries resumed trade talks, aiming to ease tensions over tariffs and energy imports. The discussions were described as positive, though challenges remain over Russian oil purchases and broader trade issue.

Benoit Anne, MFS Investment Management

And Cut! The Fed is widely expected to resume its policy easing this week, with a -25bp cut. The signals sent by the Fed Chair at the Jackson Hole symposium were already quite clear and it is now virtually a done deal. 

Global investors will now be looking for signs about what happens next but they may be disappointed. Indeed, we do not anticipate the Fed Chair will provide strong forward guidance at this juncture. Being data dependent and providing forward guidance do not work that well together. 

There is no broad consensus over the new Fed dots, the internal Fed interest forecasts, on whether they will signal one more rate cut until year-end or two in addition to expected September move. In any case, the bar is high to produce a dovish surprise, given how much easing has already been priced in by the rates market. Looking beyond this week’s FOMC, what ultimately is going to matter is the pace of easing and where the Fed will pause. 

At this juncture, the broad consensus is for the Fed to go back to 3% over the next quarters. We will not find that out any time soon, however. In our view, a more dovish Fed is broadly supportive of being long duration in the US, at least from a tactical standpoint, although it is important to realize that the market has moved a lot already when it comes to pricing in future Fed cuts.  

The easing impulse. Irrespective of what the Fed will do, it is important to highlight that the market has already carried out a lot of the easing itself. 

Following recent softer labor data, US Treasury yields have broken to the downside after being rangebound for so many months. The market catalyst seems to have been the weak JOLTs report on September 3.

More importantly, the rate rally has extended to other lending rates, thereby creating an easier financing environment. For instance, the US 30-year national average mortgage rate, as tracked by Bankrate.com, has fallen to 6.54%, its lowest since February 2023.  

Meanwhile, early delinquency rates on consumer products like credit cards and auto loans have also declined from their late-2024 peaks. On the lenders’ side, the Fed’s senior loan officer survey has now signaled several consecutive quarters of easing lending standards following the previous period of abrupt tightening.

This broad easing appears to be confirmed by the financial condition indices. Looking at the Goldman Sachs financial conditions index, the index is at its lowest since April 2022 and well off its peak from during the hiking cycle.

As the Fed is now about to resume its policy easing, Market Insights anticipates that broad financial conditions will remain supportive in the period ahead. This is an important consideration even if we may start observing some cracks in the macro data. 

Corporate news in Australia

-CSL ((CSL)) partners with Dutch biotech VarmX in a $760m deal to develop first-in-classs coagulation treatment targeting a 2029 launch.

-National Australia Bank ((NAB)) has emerged as the favourite bidder for HSBC’s Australian $52bn retail sale.

-Ratings house Zenith Investment Partners reaffirmed its ratings on 10 Metrics ((PNI)) funds, including three funds downgraded by Lonsec last week.

-Paladin Energy ((PDN)) has confirmed a $300m equity capital raising at $7.25 per share, an -8% discount to the last close.

-Sigma Healthcare ((SIG)) announced ex JB Hi-FI CEO Richard Murray as the new CFO.

On the calendar today:

-NZ 2Q BoP

-JP Aug Trade Bal

-EZ Aug CPI

-UK Aug CPI

-US Aug Building permits

-US Aug Housing starts

-US Sept NAHB Housing index

-AUCKLAND INTERNATIONAL AIRPORT LIMITED ((AIA)) ex-div 6.3c

-COUNT LIMITED ((CUP)) ex-div 2.75c (100%)

-FLIGHT CENTRE TRAVEL GROUP LIMITED ((FLT)) ex-div 29.00c (100%)

-INGHAMS GROUP LIMITED ((ING)) ex-div 8.00c (100%)

-MAAS GROUP HOLDINGS LIMITED ((MGH)) ex-div 3.50c (100%)

-SUPPLY NETWORK LIMITED ((SNL)) ex-div 38c (100%)

-SERVICE STREAM LIMITED ((SSM)) ex-div 3.00c (100%)

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

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