Reuters: Asian shares rallied for a fourth straight session on Monday after markets priced in earlier rate cuts in the United States and Europe, bullish wagers that will be tested by a swarm of central bank speakers this week.
Global Markets: Asian shares rallied
Battered bond markets also enjoyed a welcome recovery as a benign U.S. payrolls report and upbeat productivity numbers suggested the labour market was cooling enough to obviate the need for further rate increases from the Federal Reserve. “This year’s better-than-expected U.S. supply-side performance raises hopes for a soft landing,” said Bruce Kasman, head of economic research at JPMorgan. “By encouraging disinflation, strong productivity and labour supply gains might allow for job growth and low inflation to coexist,” he added. “This, in turn, would open the path for early Fed easing.”
Futures markets swung to imply a 90% chance the Fed was done raising rates, and an 86% chance the first policy easing would come as soon as June. Markets also imply about an 80% probability the European Central Bank will cut rates by April, while the Bank of England is seen easing in August. Central bankers have their own chance to weigh in on this dovish outlook, with at least nine Fed members speaking this week, including Chair Jerome Powell. Also on the docket are speakers from the BoE and ECB.
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An odd man out is Australia’s central bank, which is considered likely to resume raising rates at a policy meeting on Tuesday as inflation stays stubbornly high. The Bank of Japan is also on the road to tightening, albeit at a glacial pace. The head of the central bank on Monday said they were closer to achieving their inflation target, but it was still not enough to end ultra-loose policy. Elsewhere, hopes for lower borrowing costs helped MSCI’s broadest index of Asia-Pacific shares outside Japan gain 2.0%, having already rallied 2.8% last week and away from one-year lows.
Japan’s Nikkei rose another 2.4%, after jumping 3.1% last week, while South Korea climbed 4.3% as authorities re-imposed a ban on short-selling to mid-2024. Chinese blue chips gained 1.3%, ahead of data on trade and inflation due this week. S&P 500 futures and Nasdaq futures were both flat. EUROSTOXX 50 futures were also little moved, while FTSE futures inched up 0.1%. Two-year Treasury yields paused at 4.86%, after falling 17 basis points last week. Yields on 10-year notes stood at 4.586%, some way from October’s painful peak of 5.021%.
“Our view remains that rate cuts from the Fed, ECB and BoE will come a little sooner than is priced by markets and, in the initial phases, is likely to be bolder in terms of size,” analysts at NatWest Markets wrote in a note. “We look for the Fed Funds rate to fall to 3-3.25%, the ECB depo rate to 3% and BoE Bank Rate to 4.25% by end-2024.” The retreat in Treasury yields pulled the rug out from under the dollar, which was pinned at 105.080 having slid 1.3% last week to the lowest since late September. The euro was firm at $1.0735, having surged 1% on Friday to its highest in two months. The dollar even lost ground to the ailing yen to stand at 149.52, some way from its recent top of 151.74.
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The drop in the dollar and yields helped underpin gold at $1,983, within striking distance of the recent five-month peak of $2,009. Oil prices edged higher, after shedding 6% last week, drawing support from confirmation Saudi Arabia and Russia would continue their additional voluntary oil output cuts. In the Middle East, Israel on Sunday rejected growing calls for a ceasefire in Gaza, with military specialists saying that forces are set to intensify their operations against Palestinian Islamist group Hamas. Brent added 43 cents to $85.32 a barrel, while U.S. crude climbed 54 cents to $81.05 per barrel.
South African Rand
Reuters: The South African rand extended gains on Friday as U.S. Treasury yields fell and data out of the U.S. showed fewer than expected jobs had been created in October, boosting hopes the Federal Reserve is done raising interest rates. At 1513 GMT, the rand traded at 18.2475 against the dollar, about 1% stronger than its previous close. The dollar last traded around 0.95% weaker against a basket of global currencies. U.S. Treasury yields extended losses this week after the Fed held off on an interest rate hike on Wednesday and non-farm payrolls increased by less than expected in October, said Danny Greeff, co-head of Africa at ETM Analytics.
Like other risk-sensitive currencies, the rand often takes cues from global factors like U.S. monetary policy. “Given how overvalued the USD is, the prospect of rate cuts in the coming quarters could trigger a deeper correction through the months ahead, and the ZAR is poised to capitalise,” Greeff added. Locally, South African private sector activity fell in October after holding steady in September, hurt by weak customer demand and high fuel prices, a survey showed on Friday.
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On the Johannesburg Stock Exchange, the blue-chip Top-40 index closed up 2.26%, while the broader all-share index ended 2.06% higher. South Africa’s benchmark 2030 government bond was stronger, the yield down 7 basis points to 10.295%.
U.S. Dollar
Reuters: The dollar fell to a six-week low on Friday after data showed the world’s largest economy created fewer jobs than expected last month, reinforcing expectations the Federal Reserve is likely to hold interest rates steady again at its December meeting. The dollar index, a gauge of the greenback’s value against six major currencies, dropped 1.1% to 105.03, after earlier sinking to 104.93, its lowest since Sept. 20. The index was on track for its largest one-day fall since July. For the week, the greenback was down 1.4%, on pace for its worst weekly performance since July as well. Data showed nonfarm payrolls increased by 150,000 jobs last month. The numbers for September were revised lower to show 297,000 jobs created instead of 336,000 as previously reported.
“From my view, the Fed rate hike cycle is over and this reaffirms the view that the Fed should not hike rates again,” said Ronald Temple, chief market strategist at Lazard in New York. “If you look at the new jobs, 150,000 versus 180,000 expected – that is still a strong jobs-creation number, but more in line with what the U.S. economy needs relative to population growth and the stable unemployment rates. That is a Goldilocks number,” he said, suggesting it was ideal for the economy.
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Against the yen, the dollar fell to a two-week low of 149.18, and was last down 0.8% at 149.315 yen, capping a whirlwind week, in which the Japanese currency touched a one-year low against the dollar and 15-year trough against the euro. On the week, the dollar was down 0.2% versus the yen, its biggest weekly loss since late July. The drop in the yen earlier in the week came after the Bank of Japan tweaked its yield curve control policy on Tuesday, but not by as much as markets had expected.
Kazuo Ueda, the central bank’s governor, will continue to dismantle its ultra-loose monetary policy and look to exit the decade-long accommodative regime next year, Reuters reported on Thursday, according to six sources familiar with the central bank’s thinking. Another piece of economic data released on Friday also depicted a slowing economy. The U.S. services sector slowed for a second straight month in October, according to the Institute for Supply Management. Its non-manufacturing PMI dropped to a five-month low of 51.8 from 53.6 in September. The Services PMI has been declining since August, when it rose to the highest level in six months.
In other currencies, the euro was last up 1.1% at $1.0735, and thanks to gains earlier in the week was headed for a weekly gain of 1.6%, the largest in four months. Sterling rose 1.5% versus the dollar to $1.2381, after earlier hitting a six-week high of $1.2389. The British pound posted its best daily performance since January. It is also set for a weekly gain of 2.4%, the biggest since November 2022. The dollar’s fall mirrors a decline in U.S. Treasury yields. The benchmark U.S. 10-year yield slid to a five-week low of 4.484% , and headed for a more than 30 basis-point retreat, its most since March 2020.
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This week’s fall was sparked by a combination of the U.S. Treasury Department announcing smaller-than-expected increases in longer-dated Treasury supply, and Fed Chair Jerome Powell seemingly less hawkish than markets expected at his press conference after the Fed’s Wednesday meeting. He did, however, leave the door open to a further increase in borrowing costs in a nod to the economy’s resilience. Post-jobs and services sector data, markets are now pricing in a less than 5% chance of a rate increase in December, compared with nearly 20% late on Thursday, according to the CME’s FedWatch tool.
British Pound
Reuters: The pound rose against a weakening dollar on Friday and was set for the biggest weekly gain in almost four months, after the Bank of England held interest rates at a 15-year high and stressed that it did not intend to cut them any time soon. Sterling picked up ground against the dollar also after data showing U.S. job growth slowed more than expected in October as strikes by the United Auto Workers union against Detroit’s “Big Three” car makers depressed manufacturing payrolls, while wage inflation cooled, pointing to an easing in labour market conditions. Sterling surged 1% to $1.2327, its highest level in three weeks, putting it on course for its biggest weekly gain since mid July. Against the strengthening euro , the pound edged 0.13 higher at 86.92 pence.
The BoE left borrowing costs unchanged at 5.25% this week and published forecasts showing the British economy was likely to skirt close to a recession and flat-line in the coming years. The latest projections of the Monetary Policy Committee, which voted 6-3 to keep the Bank Rate on hold, indicate that monetary policy is likely to need to be restrictive for an extended period of time, the BoE said. BoE Governor Andrew Bailey also said interest rates would probably need to stay high for some time to tackle inflation. “BoE left the Bank Rate unchanged yesterday in line with expectations. We still think BoE is already done with rate hikes as GDP growth is set to slow down and the unemployment rate could continue to edge higher,” said Antti Ilvonen, analyst at Danske Bank.
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“Governor Bailey tried to push back against markets pricing in rate cuts for next year.” A survey indicated on Friday that Britain’s services businesses suffered a loss of momentum for a third month in a row in October, adding to signs the economy is making a weak finish to 2023 as high interest rates and cost of living pressures weigh on demand. British finance minister Jeremy Hunt said on Friday that the government would carry on working with the BoE over the central bank’s sales of its massive bond-buying purchases, which represent a big cost for the government.
Published by the Mercury Team on 6 November 2023
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