The Overnight Report: All Eyes On RBA

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

US markets were softer ahead of the FOMC rates decision Wednesday afternoon stateside with the Nasdaq relatively outperforming.

After a weaker session yesterday, ASX200 futures are pointing to another soft start ahead of the RBA rates decision, expected at 2.30pm AEST.

No change is expected, but will the central bank's messaging point toward renewed tightening?

Good Morning,

The ASX200 slipped on Monday by -10pts or -0.1% to 8624 with utilities and materials leading the moves lower.

Telcos lifted the most and lithium miners outperformed.

What happened overnight, NAB Markets Today Research

Global bond yields continued to move higher, this time led by Europe; comments from ECB hawk Schnabel supported the move. 

ECB’s Schnabel was true to her hawkish form, with the most notable development a more explicit comment that the next move was likely to be up. She said she was “rather comfortable” with “market and survey participant expectations that the next move is going to be a hike, albeit not anytime soon.”…. “the decline in core inflation has stalled at a time when the economy is recovering, the output gap is closing, and fiscal policy is expanding.”

It is worth noting Schnabel is on the hawkish side of the Governing Council. It was only the end of last week you had the likes of Villeroy saying downside inflation risks are at least as significant as up and Rehn saying inflation risk is slightly tilted to the downside.

There is now about 4bp priced by the end of 2026, from essentially nothing a day earlier. German Bund 10yr yields are 6bp higher at 2.86%. The move was led by the belly, with 5yr yields 8bp higher at 2.48%. US 10yr yields followed, with 10yr yields 3bp higher at 4.17%. Pricing for a cut this week remains firm, but 2026 easing has pared a little further to below -80bp of cumulative cuts, down from -89bp a week ago.

The FOMC is in blackout period ahead of Wednesday’s decision, but that hasn’t stopped Hassett, the favourite to succeed Powell. He said it would be irresponsible to lay out 6-month rate pledge and that “I think that Chairman Powell agrees with me on this one, that we should probably continue to get the rate down some — prudently, with an eye on the data.”

German industrial production rose a much stronger than expected 1.8% mom in October, after 1.1% in September and has now retraced most of its -3.7% plunge back in August.

In China, trade data showed exports rebounded to 5.9% y/y versus 4% expected and imports disappointed at 1.9% y/y, 3.0% expected. The rise in exports was despite a fallback in US exports to -28.6% y/y from down -25.2% in October, likely as the renewed détente in US-China trade meant reduced front-loading.

Weakness in exports to the US continues to be more than offset by exports elsewhere. China’s annual trade surplus has topped US$1trn for the first time.

Also of note was the readout of the China Politburo December meeting. It contained a pledge to implement “more proactive fiscal policy” and to keep monetary policy “moderately loose.” 

It highlighted the importance of “continuously expanding domestic demand” and ensuring that domestic demand is the “main driver” of the economy. But stopped short of specific policy measures.

The meeting was ahead of the Central Economic Work Conference, usually in early to mid-December, but the readout also noted China’s annual economic goal is to be achieved successfully, suggesting little urgency.

In FX, the USD is broadly stronger but moves have been small, with the DXY up 0.1%. JPY underperformed, down -0.4% against the backdrop of higher global rates but also after reports that a 7.6 earthquake struck Japan, triggering a tsunami warning.

USD/JPY has traded up towards 156, touching an intraday high of 159.99. The AUD fell -0.3% to around 0.6623 after revisiting Friday’s intraday high of 0.6649 during our time zone yesterday. The euro was little changed at 1.1639.

US equities are down, the S&P500 is -0.35% lower after ending last week close to an all-time high. All but one sector in the S&P500 was in the red, with communication services leading losses, while IT is holding onto a small gain. The Nasdaq closed -0.14% lower. In Europe, moves were more modest, with the Euro Stoxx50 little changed and the FTSE100 down -0.2%.

The November NAB Business Survey is published ahead of the RBA rates decision at 2.30pm AEST. NAB expects the RBA to keep rates unchanged at 3.60%.

However, we anticipate a more hawkish tone in the accompanying statement and press conference. With October CPI pointing to further breadth in inflation pressures and signs of momentum in private demand, there has been a further shift in the distribution of risks to the monetary policy outlook.

The post-meeting statement may shift to a less balanced framing than November’s ‘attentive to risk on both side of the mandate’.

Focus will be on any guidance in the press conference. We would not expect Governor Bullock to provide any overt push back against markets pricing the risk of tightening next year.

Any re-introduction of messaging around a ‘low tolerance for a slower return to target’, which was a refrain ahead of the November 2023 hike, would speak to February being live.

Two reasons why Wall street rally could suffer after Fed cuts rates, Nigel Green de Vere Group extract

There are two key reasons why the current rally on Wall Street could suffer after the Federal Reserve cuts rates, as expected, this week.

Ahead of the conclusion of the US Federal Open Market Committee meeting on Wednesday, at which it is widely expected that the Fed will cut US interest rates for the third consecutive time. US stocks sit near all-time highs after a strong run. Many investors expect the rate cut to push markets higher. 

The market has already moved on the expectation of a cut, it’s well and truly priced-in and when the decision comes, the buying slows.

The first reason the rally could suffer is profit-taking. US shares have delivered solid gains this year. As the year ends, many professional investors focus on keeping those gains, not chasing more. 

Once people are up for the year, they might take new money off the table.

This matters because the rally has already used the rate cut as fuel. Investors who wanted to buy have mostly done so. When selling starts, there are fewer new buyers to take their place.

When buying fades and selling starts, prices fall. It is that simple.

This effect is often stronger near the end of the year, when trading is lighter and moves can be sharper. “A small wave of selling can quickly turn into a broader pullback.”

The second reason the rally could suffer is what the rate cut says about the US economy, especially jobs.

 Interest rates are cut because the economy is slowing and markets know that, even if they ignore it at first.

While employment remains strong by past standards, recent figures show hiring is slowing and wage growth is cooling. Investors watch where things are heading, not where they have been.

Company profits depend on people staying in work and spending. If job growth weakens, profits come under pressure.

 When stocks trade near record highs, they need good news to stay there. A rate cut meant to support the economy can raise doubts rather than confidence if investors believe it is needed to protect jobs.

 The two reasons work together. Profit-taking becomes more likely when investors start questioning economic strength. The rate cut provides both a reason to lock in gains and a reason to pause.

 When people see an excuse to sell and a reason to worry, they often act.

Of course, this doesn’t mean markets are heading for a crash. Rate cuts help over time, and longer-term trends such as AI tech investment still support wider stocks. 

 However, the expected Fed rate cut this week might not add the further fuel for stocks that many expect.

Corporate news in Australia

-Pallas Capital has secured $380m debt facility from National Australia Bank ((NAB)) to SME real estate lending.

-ASIC is questioning KPMG re employees using AI to cheat on tests.

-Blackstone has set up Ogra Bidgo to pursue a $1.65bn bid for Iress ((IRE)), though the board is looking for a higher valuation.

-Sydney startup ALL G raises $10m and partners with French dairy for synthetic milk. 

-Chinese EV maker, BYD is launching luxury Denza SUVs in Australia.

-Rio Tinto ((RIO)) and BHP Group ((BHP)) criticised for cutting decarbonisation investment.

On the calendar today:

-AU NAB Nov Business Survey

-AU RBA Cash Rate Decision

-US Oct JOLTS

-BEACON MINERALS LIMITED ((BCN)) ex-div 5c (100%)

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

The Australian share market over the past thirty days…

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