Fed Keeps Foot to the Floor with 75bps Hike
AUD
AUD trades mixed this morning, having faced some volatile conditions in the last 24 hours, being influenced heavily by the FOMC Cash Rate decision and statement overnight. Asian equities were mixed on Wednesday with the Nikkei flat while the Hang Seng climbed 2.4%. The ASX closed 0.15% higher with energy gaining. A mixed session for commodities, with Gold losing out -0.7%, Silver dipping -1.8%, Copper declining -1%, and Iron Ore the outlier, gaining 0.5%. Yesterday in data, we had the AIG Manufacturing Index (equivalent to Australian Manufacturing PMI), which eased slightly in October, dropping 0.6 points to a broadly stable 49.6 (readings below 50 points indicate contraction in activity, with lower results indicating a faster rate of contraction). This is the third month of flat conditions, following positive results between February and July. We also had Building Approvals m/m, the September 2022 seasonally adjusted estimate was as follows: total dwellings approved fell 5.8%, private sector houses approved fell 7.8%, while private sector dwellings excluding houses declined 1.8%. The value of non-residential building rose 3.7%, and the value of total building fell 6.9%. China may be able to maintain normal monetary policy and positive interest rates for as long as possible with its potential economic growth likely to stay within a reasonable range, its central bank governor said. The world's second-biggest economy slowed this year, weighed by strict COVID-19 restrictions, a deepening property crisis and weakening demand. Defying a global wave central bank interest rate hikes, China has implemented accommodative monetary policy to spur growth, which has raised concerns about capital flight. This morning we will see the release of Trade Balance, which is tipped to have increased by 400M. Looking ahead, tomorrow we will have RBA Monetary Policy Statement, and Retail Sales m/m.
USD
AUDUSD trades lower this morning after a short-lived rally in early trade this morning reaching almost one-week-highs of 0.6492, before falling prey to the US Fed Cash Rate decision and hawkish statement by Jerome Powell, losing the 0.64 handle and trading at 0.6351 at time of writing. Wall St closed lower on the decision with the NASDAQ -3.4%, the S&P 500 -2.5% and the Dow Jones -1.6%. U.S yields pushed higher while crude oil gained 0.9% to $89.20 a barrel. Last night we saw ADP Non-Farm Employment Change data come out of the US, reaching 239k compared to an expected 178k, indicating private payroll growth held strong in October while worker pay rose as well, particularly in the leisure and hospitality industry. The FOMC delivered the expected 75bp hike overnight and reiterated their short-term inflation concerns while stating that it’s too soon to think about pausing the hiking cycle. Macquarie Bank Strategy is expecting incoming data in coming months to support a downshift in the pace of hikes. Their baseline prediction is for 50 bps in December and 25 bps in February. This would result in an end-cycle fed funds rate range of 4.5 to 4.75%. Tonight in data, Unemployment Claims data will be released, with a forecast of 220k claims.
EUR
AUDEUR trades sideways this morning, having similarly faced some volatility before the Fed decision and reaching over 3-week-highs of 0.6510 before trickling back down to 0.6470 at time of writing. European equities closed lower with the CAC -0.8% and the DAX -0.6%. Yesterday we saw a slew of weak data points out of the Eurozone, including German Trade Balance, German Final Manufacturing PMIs, French Final Manufacturing PMIs, and Final Manufacturing PMIs for Europe. Germany published the September Trade Balance, which posted a seasonally adjusted surplus of €3.7B, better than anticipated. However, S&P Global downwardly revised manufacturing output in the European Union, with the German Manufacturing PMI confirmed at 45.1 and the Euro Area one at 46.4. Tonight, we will hear from ECB President Lagarde, which may give some clues as to the future of monetary policy out of Europe. Looking ahead, tomorrow will see another day of crowded yet insignificant data, however Lagarde will speak once again.
GBP
AUDGBP trades higher this morning, having reached over one-week-highs of 0.5610 before cooling off to trade at 0.5571 at time of writing. In equities, the FTSE lost out -0.6%. In the UK today, we expect the BoE to lock in a 75bps hike at its meeting, bringing its policy rate up to 3%. With headline CPI inflation reaccelerating to a 40-year high of 10.1% in September, committee members’ focus is likely to remain on combating inflationary pressures. However, a larger 100bps hike now seems unlikely given that the worst of the “mini budget” turmoil looks to have passed. In addition, we expect a slight shift in the BoE’s tone around the expected pace of future hiking given accumulating evidence that the UK has already slipped into recession. Recent comments from Deputy Governor Broadbent suggested as much, with Broadbent warning of the hit to economic growth if current market rate expectations come to pass (for a peak in the policy rate of ~5%). Later in the evening, BOE Gov Bailey will speak, giving some insight into the reasoning for the rate decision and what the general outlook will be for tightening moving forward.
NZD
AUDNZD continues its trend of steady decline, managing to barely hang on to the 1.0900 handle, trading at 1.0902 at time of writing. Yesterday in data, we saw the Unemployment Rate increase from 3.2% to 3.3%. Deputy governor Christian Hawkesby said there were increasing downside risks to the global economic outlook and despite New Zealand’s high level of employment it was not immune to the risks. “Rising household debt servicing costs and declining household wealth will put pressure on domestic spending in the near term, but we are confident that the financial system is well placed to support the economy,” Hawkesby said. RBNZ Gov Orr hit the wires this morning, stating “NZ banks are among the most resilient in the world.”