As we move into November, global stock indexes swung sharply as the U.S. dollar dropped to a six-week low and benchmark 10-year U.S. Treasury yields fell to five-week lows on Friday.
The catalyst was data showed U.S. job growth slowed more than expected in October with some seeing this as meaning the Federal Reserve may be done hiking interest rates. We will see.
The Fed, Bank of England, Canada and other Central Banks have all held rates, in recent times, while continuing to underscore the drive towards their inflation targets will mean rates stay higher for longer.
U.S. two-year yields were the lowest since early September after U.S. job growth slowed in part as strikes by the United Auto Workers union against Detroit’s “Big Three” carmakers depressed manufacturing payrolls. The data also showed the increase in annual wages was the smallest in nearly 2-1/2 years, pointing to an easing in labor market conditions.
The U.S. dollar index dropped to a six-week low after the jobs data. In afternoon trading, the dollar index fell 1%, with the euro up 1.04% to $1.0730. “The good news here is that the slowdown will likely keep the Fed on the sidelines going forward,” said Brad McMillan, chief investment officer for Commonwealth Financial Network in Waltham, Massachusetts. “One of their key concerns has been an overheated economy, especially after last quarter’s GDP growth, and this suggests that problem is going away.”
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As expected, the US central bank’s policy-setting Federal Open Market Committee kept rates on hold following their latest meeting – in a target range of 5.25%-5.5%, a 22-year high. The decision is unanimous 12-0.
The S&P 500 index and Treasuries extended their rally while the dollar slipped after the announcement. Traders also marked down chances of another hike over the coming months.
Officials made minimal changes to the statement. One tweak was to upgrade their description of the pace of economic growth to “strong” from “solid” to reflect better economic data released since their September gathering.
They continue to leave the door open to another hike by repeating prior language on “determining the extent of additional policy firming that may be appropriate”.
They said the economy expanded at “strong pace in third quarter,” compared with prior description of recent “solid pace”; though job gains “have moderated since earlier in the year but remain strong,” after previously saying that hiring had slowed in recent months.
And they flagged that tighter financial and credit conditions” will likely to weigh on economy, after previously mentioning only “tighter credit conditions”; language could be seen as suggesting that the recent jump in long-term Treasury yields reduces the impetus for Fed to raise rates again. “The extent of these effects remains uncertain,” the Fed said, repeating that it “remains highly attentive to inflation risks.”
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Today’s post is brought to you by Ribbon Property Consultants.
I caught up with Queensland Senator Rennick, and discussed a range of important issues including the accountability and independence of the RBA, regional banking and the digital divide, the digital content bill, and finally, and importantly the role and effectiveness of democracy.
Gerard Rennick is an Australian politician who has been a Senator for Queensland since July 2019. He is a member of the Liberal National Party of Queensland and sits with the Liberal Party in federal parliament.
On 8 July 2023 at the LNP Annual Convention in Brisbane, Rennick lost preselection for the third position on the LNP’s senate ticket for the next federal election, after being narrowly defeated by Stuart Fraser, the party’s treasurer
This is an edited edition of our latest live discussion with Tony Locantro from Alto Capital. Tony is an Investment Manager at Alto Capital in Perth Australia. He has been an active adviser specialising in ASX small cap companies in the mining, biotech and emerging industrial sectors. He was formerly in the NSW Police Force up until November 1998.
Tony has the knack of tell things as they are, warts and all.
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DFA Live Q&A HD Replay: Tony Locantro: The Coming Storm
More from our Property Insider Edwin Almeida as we examine the latest data from the markets. Will international ructions impact the market, as sky-high migration continues? Will Canberra succeed in its latest property venture? Will agents “fix” commissions? And will Victoria be the epicentre of the next leg down?
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The prospect of another interest rate rise on Melbourne Cup day has shaken buyers’ confidence, sending auction clearance rates to their lowest level in seven months, data from CoreLogic shows.
Preliminary results show 68.5 per cent of the reported auctions across the combined capital cities were successful, which is 2.3 percentage points lower than the previous week and weaker than the average for this time of the year.
It comes as the number of homes taken to auction soared to 3383, which is the largest volume since the week before Easter last year.
Tim Lawless, CoreLogic research director, said such a large number of auctions was always going to test the depth of buyer demand. “Basically, it has not passed the test as shown by the lower clearance rates, which lines up with renewed speculation that interest rates are about to go higher once again,” he said.
And as reported in the AFR, a build-up in home listings and worsening affordability slashed the rate of house price growth by a third to 1.9 per cent across the combined capital cities during the September quarter, a new report from Domain shows.
Nicola Powell, Domain’s chief of research and economics, said the pace of price increases would moderate further amid rising supply, but the prospect of another interest rate increase was unlikely to halt the broader upswing and reverse the earlier gains. We will see!
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Financial markets are bracing for what could be another momentous week, with a Federal Reserve meeting, U.S. employment data and earnings from technology heavyweight Apple Inc possibly setting the course for stocks and bonds the rest of the year.
So far October has lived up to its reputation for volatility, as a surge in Treasury yields and geopolitical uncertainty hitting stocks. The S&P 500 index is down 3.5% for the month, adding to losses that have left it over 10% off its late-July high.
Whether the ride remains rough for the rest of 2023 may depend in large part on the bond market. The Fed’s ‘higher for longer’ stance on interest rates and rising U.S. fiscal worries pushed the benchmark 10-year Treasury yield – which moves inversely to prices – to 5% earlier this month, the highest since 2007. Higher Treasury yields are seen as a headwind to stocks, in part because they compete with equities for buyers. It was little changed at 4.838% after crossing 5% earlier in the week.
Investors worry that yields could rise further if the Fed reinforces its hawkish message at the central bank’s Nov. 1 monetary policy meeting. Strong U.S. employment data next Friday could also be a catalyst for yields to rise if it bolsters the case for keeping rates elevated to cool the economy and prevent inflation from rebounding.
Investors are playing a “waiting game of how much does each economic data point need to increase to put another rate hike back on the table,” said Alex McGrath, chief investment officer for NorthEnd Private Wealth.
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They released their annual points of presence data that showed an 11 per cent fall in bank branches nationally in 12 months. It triggered HEADLINES around Australia last week screamed out about bank closures. Channel Nine was one of many media outlets that picked up the story, reporting 424 branches had “shut their doors for the final time”.
As Dale writes, the problem is APRA never actually said that.
“The latest statistics show a further decline in bank branches in the year to 30 June 2023, with a reduction of 424 branches across Australia (11 per cent), including 122 branches (7 per cent) in regional and remote areas. This continues a trend that has seen branch numbers decline by 34 per cent in regional and remote areas, and 37 per cent overall, since the end of June 2017.”
What unsuspecting media did not pick up on was that among those 424 branches were a number of sites that had been stripped of branch status because they no longer provided the level of service required to be classified as such by law.
The doors are still very much open but they are among the growing number of banks that have no tellers and customers can only get cash from an ATM.
So we are left with what could be described as a bit of a situation, according to Dale. I think it is more deliberate, as APRA again manages to hide the real story – on this they have form, given their close alignment to the Banks. They are in my view hardly independent, nor an effective regulator.
On Melbourne Cup day we will get the next RBA cash rate decision. Michelle Bullocks testimony before the Senate this week was pretty vague – waiting for data, will update forecasts etc.
But as Christopher Joye writes in the AFR, following the material upside surprise to inflation in the September quarter, almost all economists and investors agree that the Reserve Bank of Australia should lift interest rates in November.
But participants worry that a concerted campaign to politically compromise Australia’s central bank may result in the RBA remarkably choosing not to seek to combat its existential inflation crisis.
This would be the latest in a chapter of accidents, with the RBA cutting rates too low, and stoking the economy via the Term Funding Facility, and Quantitative Easing. Their yield control attempts went wrong, and then they held rates way to low, promising no hike for years. And their forecasting is a disaster.
This is a central bank with a 4.1 per cent cash rate that is just a smidge above what it assesses to be the neutral rate of 3.8 per cent. And that is a cash rate that is 1.0 to 1.5 percentage points below peer rates in the US, Britain, Canada and New Zealand.
Even the RBA’s outgoing assistant governor Luci Ellis, who is now chief economist at Westpac, called a “hike” only days after she predicted that inflation would not be robust enough to warrant one.
In sum, we know the RBA should hike in November. Whether it actually does or not appears to now be a question of its ability to resist political interference.
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