U.S. equities surged on Wednesday with bond yields falling as traders cut bets on the peak Fed Funds rate as Jerome Powell signaled a slowdown in the pace of tightening.
United States
Speaking on Wednesday, Powell noted that “The time for moderating the pace of rate increases may come as soon as the December meeting” and that the path ahead for inflation remains uncertain, but by any standard remains too high. Powell was cautious to prompt too much optimism add that restoring price stability would require holding policy at a restrictive level for some time and “history cautions strongly against prematurely loosening”. Also adding to sentiment was weaker than expected ADP employment for November showing 127k jobs were added, well below the 200k forecast suggesting the labour market is beginning to soften, adding to the case for the Fed to proceed on a less aggressive path. Additionally, the second estimate of Q3 GDP was higher than expected, rising 2.9% on an annualised basis from 2.6% previously and modestly above estimates.
The S&P500 jumped 2.66% along with the Dow Jones 2.16%, Nasdaq Composite 4.41% and Russell 2000 2.0% with the VIX retreating -5.53% to 20.68. Bond yields were lower across the curve with the 2-year rate down -15.5 basis points along with the 10 and 30-year rates by -10.9 and -3.6 basis points respectively. Prior to Powell’s comments, traders had been pricing a peak in the Fed Funds rate of 5% in mid-2024 with expectations moved lower to 4.9% as investors continue to price rate cuts into the latter half of 2023.
Europe
European equities also gained on hopes of easing COVID curbs in China as well as recently encouraging signs of a peak in inflation. Eurozone core inflation for the 12 months to November rose 5% as forecast with headline prices rising 10% compared with estimates of 10.4% from 10.6% previously. Comments from Chinese Vice Premier Sun Chunlan on Wednesday buoyed sentiment in the first official remarks the virus is no longer as severe, offering the prospect of more easing in COVID policies. The Euro Stoxx 600 gained 0.63% along with the DAX 0.29%, CAC 1.04% and FTSE100 0.81%. Hong Kong’s Hang Seng index climbed 2.16% while China’s CSI 300 rose 0.12% with the Nasdaq Golden Dragon index surging 9.62%.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
Australia
The ASX looks set for a positive open this morning with ASX200 futures up 51 points or 0.70% to 7,360. The index rose 0.43% on Wednesday boosted by softer inflation data as well as hopes of easing restrictions in China. In the first monthly reporting of CPI data, the ABS showed headline inflation rose 6.9% over the 12 months to October while economists had forecast a rise to 7.6% from 7.3% previously. The core measure was also lower than expected, rising 5.3% compared to estimates of 5.7%. Money markets continue to price further rate hikes into 2023 with the cash rate expected to peak modestly lower at 3.7% compared to 3.8%. In response to a weaker USD overnight the Australian dollar is up 1.48% to 0.6787 while the 10-year yield declined -7.5 basis points on Wednesday to 3.53% following the softer-than-expected inflation data.
Commodities
Oil prices gained on Wednesday following a larger than expected draw in US crude oil inventories. Inventories for the week ending November 25th declined -12.581m barrels compared to estimates of -3.123m with gasoline inventories slightly above expectations at 2.77m compared to 2.25m forecast. Both WTI and Brent crude rose 2.98% and 3.07% to US$80.53 and US$86.84 a barrel respectively. Iron ore futures in Singapore were -0.14% lower on Wednesday although are 1.24% higher this morning at US$101 with copper futures climbing 4.06%. Gold climbed 1.08% to US$1,768 an oz benefiting from lower real yields and a weaker USD, silver also gained 4.31% to US$22.17 and Bitcoin climbed 3.53% to US$17,042.
Economic data:
- Australian Manufacturing PMI (MoM Nov) 09:00
- BOJ Kuroda Speech 17:00
- German Retail Sales (YoY Oct) 18:00
- Eurozone Manufacturing PMI (MoM Nov) 20:00
- Eurozone Unemployment (MoM Oct) 21:00
- US PCE Inflation (YoY Oct) 00:30
- US ISM Manufacturing PMI (MoM Nov) 02:00
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
