Morning Report

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Key themes: A blockbuster US non-farm payrolls report inflicted a sharp repricing in offshore markets on Friday night.

The strong jobs report reaffirming the US economic exceptionalism narrative and shifting the base case for the US Fed to an extended pause.

US treasury yields jumped sharply, taking the US dollar to a fresh 2-year high, while US equities pulled back as higher real rates take thier toll.

The higher US dollar pushed most of the majors to multi-month or multi-year lows with the Aussie dollar falling to 0.6140, its lowest level since lockdowns in 2020.

Crude markets jumped higher as the US ratcheted up sanctions against Russia

Crude prices are up over 6% since the start of the year, running contra to some expectations for a significant supply glut through the beginning of 2025.

Share markets: US equities sold off on Friday with the S&P 500 falling to its lowest level since late October following a 1.5% fall. Implied equity market volatility spiked to its highest level post the US Presidential election. Real rates have ascended to their highest levels since November 2023, if sustained this threatens to challenge the roaring bull run which extended through 2024.

European equities were similarly downbeat, the Euro Stoxx 50 shed 0.8%, while the UK's FTSE 100 and the German Dax closed down 0.9% and 0.5%, respectively.

The ASX 200 closed down 0.4% on Friday, trimming the weekly gain to 0.5%. Futures are trading materially lower this morning following the offshore moves after Friday's close.

Interest rates: US rates markets repriced sharply following the non-farm payrolls reports with around 60 basis points of cuts priced out of the curve for 2025. An extended Fed pause is now the base case with a 25 basis point rate cut not fully priced until October.

2-year yields leapt 12 basis points higher to 4.38% but remain relatively well-anchored in the late 2024 trading range. 10-year yields are 7 basis points higher at 4.76% and are now at their highest levels since late 2023, surpassing 2024 highs.

Aussie bond futures sold off sharply on the US repricing, retaining their tight beta to US rates. 3-year futures yields are currently up 11 basis points on Friday's close at 4.04%, while the 10-year futures yield is up 6 basis points at 4.64%.

While offshore developments have dragged Aussie rates higher, interest rate expectations are noticeably lower than at the end of last year. Swaps are currently pricing in around a 70% chance of an RBA rate cut in February with a move fully priced by April.

Foreign exchange: The US dollar traded highs since late 2022 on Friday, extending solid gains through the start of 2025. The DXY index rose from a low of 109.077 to a high of 109.97 before pulling back to around 109.65. US economic exceptionalism, supported by solid economic data, is helping push the US dollar higher with the US political and global geopolitical backdrop also supporting US dollar strength.

The Aussie dollar sank to its lowest level since the pandemic in 2020 with the AUD/USD hitting 0.6140. While the strong US dollar has left no prisoner's, the Aussie softness has been exacerbated by tariff angst, fears over economic growth in China and the repricing in domestic interest rate expectations. The weight of these forces leaves little room for a significant near-term reversal for the Aussie.

The euro has continued to edge its way towards parody with the EUR/USD touching a more than 2-year low of 1.0215 on Friday. Modest economic activity, political uncertainty across major nations and pressure for fiscal consolidation leave the European Central Bank (ECB) destined for a stable march lower in policy rates which should continue to weigh on the euro.

The Japanese Yen broke multi-month lows on Friday; the USD/JPY briefly reaching 158.87 before pulling back to around 157.70, near where it is trading early this morning. Recent economic data has supported the continued removal of accommodative policy, however, a likely cautious Bank of Japan is expected to keep the pace of normalisation gradual, somewhat limiting the upward support for the Yen from firming rate hike expectations.

Commodities: Crude markets jumped higher as the US ratcheted up sanctions against Russia. West Texas Intermediate (WTI) futures are up 3.6% at US$76.57 per barrel, the highest since October last year. Crude prices are up over 6% since the start of the year, running contra to some expectations for a significant supply glut through the beginning of 2025.

Gold continued its new year form, rising 0.8% to its highest level since mid-December. However, the shiny metal remains in an extended consolidation pattern rather than a fresh break higher.

Iron ore futures have jumped higher at the open this morning after trading largerly flat on Friday. At around US$98.85 iron ore largely continues to drift sideways just below US$100.

Australia: The monthly household spending indicator rose 0.4% in November, a relatively soft lift given the expected boost from Black Friday sales. However, the indicator measures nominal spending, i.e. the value spent. Seasonal discounting would therefore put downward pressure on the measure given lower prices. The volume of spending, which is more important for economic growth, was likely materially firmer.

United States: Nonfarm payrolls rose 256k in December, smashing expectations for a 165k rise. Some volatility and catch-up are almost certainly at play given weather related events through the December quarter. That said, payrolls averaged 170k per month through the quarter, up from almost 160k in the September quarter and near 150k in the June quarter. The trend suggesting a stabilisation and possible re-firming in labour market conditions over the back half of 2024.

This supports a well-telegraphed slowing in the pace of rate cuts from the Fed and leans in favour of an extended pause given the ongoing underlying strenghtin in the US economy.

The data from the Household survey supported this view, with employment posting the biggest monthly gain in 2024 after two negative prints, and the unemployment rate ticking back down to 4.1%, a level in line with the average over the last nine months.

Annual growth in hourly earnings eased to 3.9%, also well within the range seen through the majority of 2024.

University of Michigan consumer sentiment eased to 73.2 in January. The decline followed a sharp increase to 74.0 in the prior month following the Presidential election, and so the latest print was still the second highest in the last nine months.

Expectations of higher inflation was among the top concerns, with the 1-year inflation expectations rising to 3.3%, a level last seen in May. 5-year inflation expectations rose to the same level.

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