The Overnight Report: Dec Rate Cut Hopes Rise

This story features BHP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: BHP
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

Nasdaq posted its best day since May as Alphabet continued to power the AI trade.

S&P500 followed with the Dow Jones lagging.

After a strong performance yesterday, ASX200 futures are pointing to another positive start, up over 0.4%.

Good Morning,

The ASX200 rebounded from a six month low on Monday, rising 1.3% or 108pts.

Ten out of eleven sectors rose with broad gains. Energy was the only sector to fall, moving in sync with lower oil prices.

What happened overnight, NAB Markets Today Research

US equities rallied, building on Friday’s gain. The S&P500 is on track for a 1.5% gain. The move was led by semiconductor companies and big tech.

Semiconductor companies Broadcom, Advanced Micro Devices and Micron were among big gainers and Tesla and Alphabet each rose more than 5%.

Across sectors, Communication Services, IT, and Consumer discretionary led gains, while consumer staples and energy are tracking in the red. The Nasdaq is 2.5% higher.

European equities fared less well, the euro Stoxx50 added 0.25%. In Japan, the Nikkei fell 2.4%, reversing Friday’s surge.

The rebound in US equities didn’t extend to currency markets, with modest moves across currencies. The US dollar is little changed on the DXY and the yen was the largest mover among G109 currencies, down 0.3%.

The AUD’s characteristic sensitivity to swings in risk sentiment was on full display last week but got no evident boost from Monday’s equity rally. The AUD is up just 0.1% against the USD at 0.6460. Patience is needed before favourable domestic dynamics reassert themselves.

Fed Governor Waller added fuel to the market’s rethink of December cut prospects. He said “My concern is mainly labor market, in terms of our dual mandate. So I’m advocating for a rate cut at the next meeting.”

He added “Inflation isn’t a big problem going forward. It’s going to start pulling back.” That is true to form, with Waller having been on the more dovish side of the committee, but confirms he remains comfortable with a December cut despite the data fog.

Even so, he said “you may see a more of a meeting-by-meeting approach once you get to January.”

Speaking in the last hour, San Francisco’s Daly said she sees a sudden deterioration in the labour market as more likely and harder to manage than an inflation flare up and backed a December cut. She is not a voter this year, but the WSJ’s Timiraos points out her views are significant because she has rarely deviated publicly from the position of Chair Jerome Powell.

December cut pricing moved above 60% with the Fed’s William’s on Friday, and now sits around 74%, after having moved below 30% last week.

Moves in Treasury yields were modest even as December pricing firmed a little further. 2yr yields were little changed at 3.50% and 10yr yields were 3bp lower at 4.03%.

Not particularly market moving, but other news of note was the outcome of talks on the US peace plan for Ukraine and a phone call between Trump and Xi. 

The US and Ukraine have drafted a new 19-point peace plan that a Ukrainian official described as bearing little resemblance to the earlier 28 point plan developed by US and Russian officials.

The most contentious points, including territorial issues and relations between Nato, Russia and the US, were left for Trump and Zelenskyy to decide.

US President Trump and Chinese President Xi held their first talks since agreeing to a tariff truce last month, discussing trade, Taiwan and Russia’s invasion of Ukraine. The US president said he agreed to visit Beijing in April, and that he had invited Xi for a state visit next year.

Trump called the call ‘very good’ and said “Our relationship with China is extremely strong!”

The German IFO survey fell to 88.1 from 88.4, against consensus for a one tenth rise. The fall was driven by the expectations component, which fell to 90.6 from 91.6.

The report noted Manufacturing order books were lower despite slightly better current conditions, that service conditions were more positive and weaker expectations in transport and logistics were offset by more tourism optimism.

December Fed rate cut is back, Chris Weston, Pepperstone

There is an intense focus on the stance of each respective Fed voter and their views on a December rate cut. This makes sense given that the market (and the Fed) have not received the data that would typically influence their decision on policy.

With most Fed voters having spoken out recently, we can form a rough sense of how the Fed’s 12-member voting split may look like. Perhaps the biggest unknown is the view of Jay Powell himself, but on balance one could assume he would vote for a December rate cut.

This assumption is reinforced by San Francisco Fed Governor Mary Daly, while a non-voter in 2025, she has a long history of voting in parallel with the Fed Chair.

With Powell one of the few who hasn’t spoken publicly about his stance on December policy, his views remain less known to the market. Subsequently, we can reasonably extrapolate that he is likely to vote for a cut in December, which would take the potential split to 7 voters in favour of a cut, 5 opposed.

US interest-rate swaps now imply a 92% probability of a December rate cut; a strong shift from the 35% probability priced by US swaps last Thursday, following the Fed minutes and the rescheduling of NFP and CPI data.

Whether the market should place this much weight on a single -25bp cut is debatable, and whether it justifies piling back into risk is another matter.

However, if the Fed does cut in December, it would symbolically support the relative ease towards the market’s perceived terminal Fed funds rate of 3%. Mary Daly also highlighted the rising risks to the US labour market, and if these risks remain pressing, a cut keeps the “Fed put” firmly in place.

Holding rates steady in December —at a time when the labour market is fragile and both short- and long-term US inflation expectations are falling— would be a disconnect that likely wouldn’t sit well with the market. This was presumably the message behind much of last week’s negative price action.

With US rates now pricing in a near-certainty of a December cut, traders have pared back their volatility hedges and rotated aggressively into the MAG7, with Alphabet leading the charge (up 6.3% and breaking to new highs).

Tesla has also been a trader-preferred play, with strong buying flows and interest in retesting and breaking the 50-day moving average at US$433.

Flows into MAG7 and the broader tech complex have been notable, however, overall index breadth remains poor, and on a day when the S&P500 gained 1.6%, only 52% of stocks in the index rallied.

US Market Desk: Approaching Oversold, Franklin Templeton extract

Readers of this newsletter should not be surprised by the recent equity volatility. In our recent paper, “How US equities and US fixed income performed with a resumption of Fed easing,” we pointed out that historically, returns one year out from a resumption of rate cuts have been positive (+17% for the S&P 500).

Prior periods have exhibited heightened volatility, with the market on average falling -5% to -10% within the first three to six months of the resumption.

The S&P500 is -5% off the all-time highs achieved on October 29. More speculative areas of the market are in corrections or even bear markets (bitcoin is down -30% since October 29).

Market narrative has focused on uncertainty around 1) the amount of Fed rate cuts, 2) concerns on artificial intelligence (AI) capex sustainability and 3) private credit.

During this recent downturn, fundamentals have beaten expectations. According to Yardeni Research, analysts were expecting 6.5% earnings growth for Q3. With the season all but wrapped up, S&P 500 companies are tracking a near 15% earnings-per-share growth rate, well above expectations.

Forward earnings expectations are also increasing, and they are doing so with strong breadth. This is supportive of our case for a broadening in equity markets.

Valuations have come in as markets have sold off and earnings have increased. The trailing price-to-earnings multiple on the S&P 500 is 24.3x, down from 26.4x a few weeks ago, but still above its 10-year median of 19.7x. The forward multiple has come down to a more reasonable 21.6x, slightly above the 19x multiple that represents the median of the past 30 years.

We believe markets are now approaching, but not at, oversold levels. The Relative Strength Index (RSI) for the S&P500 hit a low of 35 after Thursday’s selloff, still above 30, which typically signals oversold.

The Russell 2000 Index hit 32. NVIDIA’s strong earnings beat (and guidance raise) initially seemed to soothe markets on Thursday, but the selling pressure kept markets in the red.

With the RSI approaching oversold levels, the market may reach selling exhaustion soon. As investors, we think dollar-cost-averaging approach make sense; don’t chase, use weakness.

With earnings coming in strong and forward earnings increasing, we remain bullish on the fundamentals.

The nearly straight-line move higher from April was unsustainable, and we know historically markets are volatile around Fed interest-rate cuts resuming.

The fog of limited economic data and an uncertain Fed has led to changing expectations. We favor buying on weakness and prefer having exposure to the broadening of markets.

Corporate news in Australia

-Anglo American has rejected BHP Group’s ((BHP)) revised reported offer. BHP has given up on the idea.

-Omega Oil & Gas ((OMA)) is acquiring a strategic stake in Elixir Energy ((EXR)).

-MA Financial ((MAF)) has contracted to buy Hyperdrome Town Centre shopping centre for -$678.7m.

-TikTok wins naming rights to a 9,000-capacity Darling Harbour venue, a world first.

-Corporate Travel Management ((CTD)) is likely to miss November accounts deadline after audit errors.

-Oroton (no longer listed) is targeting a doubling of sales as earnings rise on expanded clothes and accessories.

-Blackbird has reported Canva is apparently ready for a 2026 IPO.

-Santos’ ((STO)) Narrabri gas project is facing a four-month court delay after judge recusal.

-Monash IVF ((MVF)) has rejected an 80c takeover bid after it was viewed as insufficient.

On the calendar today:

-US Advance Sept Mfg

-US Advance Sept Retail Sales

-US Sept PPI

-AURA ENERGY LIMITED ((AEE)) AGM

-ARISTOCRAT LEISURE LIMITED ((ALL)) ex-div 49c

-AROA BIOSURGERY LIMITED ((ARX)) 1H26 Earnings/Call

-ASTRON LIMITED ((ATR)) AGM

-ANTIPA MINERALS LIMITED ((AZY)) AGM

-CANYON RESOURCES LIMITED ((CAY)) AGM

-CONTACT ENERGY LIMITED ((CEN)) investor briefing

-CAPRICORN METALS LIMITED ((CMM)) AGM

-CARNABY RESOURCES LIMITED ((CNB)) AGM

-CLARITY PHARMACEUTICALS LIMITED ((CU6)) AGM

-ELDERS LIMITED ((ELD)) ex-div 18c (100%)

-EMBARK EARLY EDUCATION LIMITED ((EVO)) ex-div 1.5c (100%)

-HILLGROVE RESOURCES LIMITED ((HGO)) AGM

-IPD GROUP LIMITED ((IPG)) AGM

-MATRIX COMPOSITES & ENGINEERING LIMITED ((MCE)) AGM

-MONADELPHOUS GROUP LIMITED ((MND)) AGM

-MESOBLAST LIMITED ((MSB)) AGM

-NEWMONT CORPORATION REGISTERED ((NEM)) ex-div 25c

-PILBARA MINERALS LIMITED ((PLS)) AGM

-PROSPECT RESOURCES LIMITED ((PSC)) AGM

-RAMSAY HEALTH CARE LIMITED ((RHC)) AGM

-RAMELIUS RESOURCES LIMITED ((RMS)) AGM

-STAR ENTERTAINMENT GROUP LIMITED ((SGR)) AGM

-SYMAL GROUP LIMITED ((SYL)) AGM

-TITOMIC LIMITED ((TTT)) AGM

-WEB TRAVEL GROUP LIMITED ((WEB)) 1H26 Earnings

-WISR LIMITED ((WZR)) AGM

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.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author’s and not by association FNArena’s – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts on the website and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms