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The Australian share market was poised to open at its highest since early May after the head of the US Federal Reserve said the central bank could slow its aggressive interest rate campaign as soon as this month.
The S&P/ASX 200 will open 51 points or 0.7 per cent ahead this morning, according to futures action. A rise of that scale would propel the Australian benchmark above 7300 for the first time in almost seven months.
US stocks surged after Fed Chair Jerome Powell indicated the central bank may opt for a smaller rate hike when it meets this month.
The greenback and treasury yields slumped, boosting gold and other US dollar-denominated commodities. The Australian dollar surged more than 1.5 per cent, nearing 68 US cents.
Wall Street
Fed Chair Powell ignited a frantic afternoon rally in US stocks with news the market has waited months to hear: this year’s aggressive rates cycle may finally slow down.
“It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” Powell said in a speech at the Brookings Institution think tank in Washington. “The time for moderating the pace of rate increases may come as soon as the December meeting.”
The S&P 500 surged out of the red to a gain of 122 points or 3.09 per cent. The Dow Jones Industrial Average put on 737 points or 2.18 per cent. The Nasdaq Composite soared 484 points or 4.41 per cent.
Wall Street slumped into a bear market earlier this year as the Fed hiked benchmark rates from near zero to 3.75-4 per cent. Last month’s meeting marked a sixth consecutive rate hike and a fourth straight increase of 75 basis points.
Wall Street greeted last night’s speech as a welcome turning point in this rates cycle. Market pricing on a 50 bp rate hike this month climbed to 75 per cent.
The US Dollar Index slid almost 0.9 per cent. The yield on ten-year US treasuries dropped five basis points, back under 3.7 per cent.
Powell warned that a slowdown in rate hikes did not mean the war on inflation was over. The “terminal rate” or top in interest rates would likely be “somewhat higher” than the 4.6 per cent projected in the Fed’s September briefing. A half-percentage point hike this month would raise the target federal funds rate to 4.25-4.5 per cent.
The Fed Chair also said defeating inflation “will require holding policy at a restrictive level for some time”.
“We will stay the course until the job is done,” Powell said. “We have a long way to go in restoring price stability… Despite the tighter policy and slower growth over the past year, we have not seen clear progress on slowing inflation.”
The night’s economic data appeared to confirm this year’s rate hikes have sapped some of the heat from the economy. Private employers added 127,000 new jobs last month, well short of the 200,000 expected by economists. Job openings declined by 353,000 in October to 10.3 million.
However, gross domestic product was revised higher, indicating the economy continued to expand at a healthy rate. Third-quarter GDP was revised to an annualised 2.9 per cent from an initial estimate of 2.6 per cent.
Australian outlook
The S&P/ASX 200 looks set to test heights last seen in early May following a buoyant night on Wall Street. A hawkish Fed finally threw market bulls a bone, triggering a wild rally in the US.
To paraphrase Churchill, this is not the end of the war on inflation, but it might be the end of the beginning. Buying interest in stocks should sharpen now much of the heavy lifting in rates has been done.
The ASX is much further along the road to recovery than Wall Street and therefore has less lost ground to regain. Today’s rally promises to bring the benchmark to within a couple of hundred points of last year’s record high.
The Australian dollar popped 1.59 per cent to 67.9 US cents as forex traders revised their expectations for the greenback.
Unsurprisingly, the most interest rate-sensitive sectors spearheaded the US rally. Two of the three sectors dominated by Big Tech (I.T., communication services) gained around 5 per cent. The third (consumer discretionary) added 3.5 per cent.
No sector was left behind. Materials advanced 2.4 per cent, industrials 1.6 per cent and financials 1.65 per cent. Energy brought up the rear with a gain of 0.55 per cent.
On the domestic economic calendar today are November manufacturing data (8.30 am AEDT) and Q1 private-capital expenditure (11.30 am). China releases a manufacturing gauge at 12.45 pm.
Technology One and Pendal Group trade ex-dividend.
Commodities
Gold and silver surged after the head of the US central bank flagged a slowdown in rate hikes, triggering a dive in the US dollar. Gold for February delivery was lately up $US19.80 or 1.1 per cent at US$1,783.50 an ounce. Earlier, the yellow metal settled US$3.80 or 0.2 per cent lower at US$1,759.90 before Powell’s speech was released.
Silver settled 34 US cents or 1.6 per cent ahead at US$21.781 per ounce and has since risen to US$22.375, a gain of more than 4.2 per cent. The NYSE Arca Gold Bugs Index climbed 2.99 per cent.
US-traded copper also took flight. Copper for March delivery rallied 4 per cent in recent trade to US$3.785 per ounce on Comex.
On the London Metal Exchange, benchmark copper rose 3.08 per cent to US$8,285 a tonne. Aluminium jumped 4.43 per cent, lead 2.08 per cent, zinc 3.51 per cent and tin 0.84 per cent. Nickel dropped 0.5 per cent.
Oil was lifted by a third straight weekly decline in US crude stockpiles. The Energy Information Administration said US inventories dropped by 12.6 million barrels last week.
Brent crude settled US$2.40 or 2.9 per cent higher at US$85.43 a barrel. The January contract lost 9.9 per cent for the month, Brent’s fifth monthly loss in the last six.
Iron ore dropped yesterday after a report showed activity in China’s manufacturing and services sectors fell to a seven-month low amid tight Covid restrictions and rising infections.
The most-traded January ore on the Dalian Commodity Exchange declined 0.3 per cent to 769 yuan (US$107.65) a tonne.
BHP‘s US-traded depositary receipts advanced 3.25 per cent, surpassing a 2.33 per cent rise in the UK listing. Rio Tinto firmed 1.12 per cent in the US and 0.4 per cent in the UK.
