Markets
US president Trump is considering to cut a punitive 20% tariff over Chinese fentanyl exports to 10%. The rumour reported yesterday and confirmed by the man himself this morning encouraged the bulls and supported US stocks towards new record highs (again). The Nasdaq outperformed by eking out a 0.8% gain. The fentanyl tariff will be one of the topics presidents Trump and Xi will discuss during their meeting tomorrow. Add to the list: Nvidia’s state-of-the-art “super-duper” Blackwell chips. Trump in overnight comments said he’s open to providing China with access to it as part of a trade deal in what would be a major U turn by POTUS. China in turn is said to have bought the first US soybean cargoes in months in return as a sweetener ahead of the meeting. Everything is set for another risk-on vibe across markets today. European futures pare losses. Wall Street (though early to tell) is set for a higher open. The US dollar snaps a 5-day losing streak against the euro (EUR/USD 1.163). AUD outperforms (see below). The pound remains in the defensive after an already disastrous day yesterday. Multiple technical support zones broke, pushing EUR/GBP currently to its highest level since May 2023 just shy of 0.88. The trigger was BRC October price data showing that food inflation dropped the most since December 2020, stripping the hawks at the Bank of England from key arguments not to lower rates. The market implied probability for a BoE rate cut next week rises to 35%.
Today’s a big day for all corners in the market. Several European countries including Spain and Belgium release Q3 GDP numbers. Equities are eyeballing day one of after-market earnings from big tech including Alphabet, Meta and Microsoft. They are followed by Amazon and Apple tomorrow and, carrying around a quarter of the S&P500’s weight, could be crucial in entertaining the current risk rally. FI and FX markets are zooming in on the Fed tonight. A 25 bps rate cut is all but certain. Investors are keen to spot hints for future moves but we’re not sure whether chair Powell is in a position to give them since there’s virtually no official data rolling in. That could temper the market reaction. We don’t expect him to actively push back against markets pricing an additional move in December though. The end to QT could steal the rate cut’s thunder instead. Powell announced it two weeks ago at the NABE conference amid commercial bank reserves at the central bank dwindling to below $3tn. That’s less than 10% of GDP Fed Waller suggested as a minimum some years ago. That ballpark figure was based on the liquidity squeeze in 2019 which saw a spike in the short-term SOFR interbank rate. The level of bank reserves back then had dropped below 8% of GDP. The SOFR in recent days climbed back above the Fed’s upper bound rate again, potentially signaling growing liquidity pressures. We expect the chair to be queried about it. The current roll-off cap for Treasuries stands at $5bn per month, a limited amount anyway. MBS’s are capped at $35bn but the monthly amount in practice is often lower.
News & Views
Australian inflation quickened more than expected in Q3, rising by 1.3% Q/Q (up from +0.7% in Q2 & vs +1.1% consensus). It was the fastest quarterly pace since Q1 2023. The main contributors to the quarterly rise were housing (+2.5%), recreation and culture (+1.9%) and transport (+1.2%). The rise in electricity costs (+9%) was a significant contributor to the growth in housing inflation. Annual inflation (compared with Q3 2024) hit its highest level since Q2 2024 at 3.2% (up from 2.1% vs 3% expected). A monthly CPI report moreover pointed at an accelerating intra-quarter dynamic with inflation rising from 3% Y/Y in August to 3.5%. Stripping out for the biggest quarterly price swings, the trimmed mean CPI measure accelerated more than thought as well, from 0.7% Q/Q to 1% Q/Q and from 2.7% Y/Y to 3% Y/Y. Other details showed annual food inflation rising by 3.1% Y/Y in Q3, annual goods inflation going from 1.1% Y/Y to 3% Y/Y and annual services inflation hitting 3.5% Y/Y (from 3.3%). Today’s inflation numbers help convince markets that more RBA rate cuts are no foregone option. RBA governor Bullock recently also pushed back against the idea. The market implied probability of a 25 bps rate cut before year-end dropped from 91% just a week ago to currently 21%. The positive trade vibe between the US and China is the other thing at play. The AUD swap rate curve bear flattens with yields rising by 4.3 bps (30-yr) to 11.2 bps (2-yr). The Aussie dollar benefits, extending this week’s rally to currently AUD/USD 0.66.
Japanese consumer confidence rose from 35.3 to 35.8 in October (vs 35.5 consensus), the highest level since December 2024. Details showed a broad-based improvement with metrics like the overall livelihood, expectations for income growth and employment and willingness to purchase durable goods all hitting multi-month best levels.
