Despite the uncertain US election outcome, market pricing consistent with “risk-on”, with stronger US equities, higher rates and a broadly weaker USD. RBA gives a reality check that inflation still too high to warrant easing

As Americans head to the polls, market pricing has been consistent with “risk-on”, with stronger US equities, higher rates and a broadly weaker USD.  The NZD and AUD have outperformed, more so the latter, following an RBA update that gave a reality check of inflation still being too high to warrant following the path of other central banks in easing monetary policy. The NZD is hovering around 0.60.

Whichever candidate wins the US presidential race inherits a robust US economy and strong equity market. The last key data print on election day continued the recent run of stronger than expected US economic data, with last Friday’s non-farm payrolls print being a rare exception to the rule over the past month or so.

The ISM services index unexpectedly rose 1.1 pts to 56.0 in October, its highest level since July 2022, while the employment component rose nearly 5pts to 53.0.  At face value the data suggest accelerating growth in the US economy, at a well above-trend rate, but the reality is that the index has been a poor predictor of the real economy of late.  The index has recently played catch-up to the services PMI index, considered inferior because of its smaller sample and less sectoral coverage but recently proving to be a better indicator.

Despite its flaws, optically the services ISM index adds to the cache of data recently released supporting a narrative that the US economy is growing quite nicely. US Treasury yields were already higher heading into the release and jumped higher after, with an eye on the 10-year auction as we go to print. Rates are up about 6bps across the curve, with the 10-year rate trading as high as 4.36%, currently 4.34%. The strong data won’t get in the way of another rate cut by the Fed at the end of the week – 25bps almost fully priced – but does raise a question mark over whether another rate cut next month is warranted (also currently well priced at -19bps) and the path of easing for 2025.

US equities opened strongly and climbed further after the data release. Strong gains have been led by the technology sector in the wake of Palantir Technologies’ stronger result after the bell yesterday, citing high demand for its AI software. In early afternoon trading the S&P500 is up over 1% and the Nasdaq index is up 1½%. Of note, on presidential election days, the S&P500 has risen nine of the last 11 times, with a median return of 0.8%.

Interestingly, while the Treasuries and equity market reactions to the stronger ISM service report has been sustained, the impact on the USD proved fleeting, and losses heading into the report have now extended, with the DXY index down 0.5% overnight.

The AUD has been the strongest performer overnight and the past 24 hours, showing a fairly steady rise to 0.6640. In addition to its support from higher risk appetite, the RBA update didn’t budge from its mildly hawkish bias, repeating the message of its previous statement – that it needs to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out.  Updated inflation projections continue to suggest that it will be some time yet before inflation is sustainably in the target range. Furthermore, the Statement noted that policy restrictiveness in Australia remained less compared to peers “despite many other central banks cutting rates multiple times”, hinting that the scope for the RBA to cut rates compared to others was lower, as rates were never hiked to the same extent.

The NZD has also been supported by higher risk appetite, trading a little over 0.60 overnight and currently near that figure. NZD/AUD has nudged down to 0.9045. With all major currencies making gains against the USD, other NZD crosses don’t show too much movement.

The overnight GDT dairy auction was a strong one, with the price index up 4.8%, with gains of 4.0% and 4.4% respectively for skim milk and whole milk powder. Cheddar also rose 4% and butter was up 8.3%. The combination of a soft NZD and strong pricing supports dairy farmer incomes for the year(s) ahead. Milk price futures for the 24/25 season closed at a fresh high of $9.55 yesterday and for the following season sits at $9.

The domestic rates market was quiet yesterday, with NZGB yields down 1bp across the curve and swap rates plus or minus just 1bp. Since the NZ close, the Australian 3 and 10-year bond futures are up about 3bps in yield terms.

In the day ahead the focus will be the US election, with the first polls closing from noon NZ time.  In terms of the battleground states, Nevada is the last to close at 4pm.  Realistically, the earliest time that media will call the presidential election winner will probably be after 5pm NZ time. Polls continue to suggest that the race is too close to call. If the race is very close, the result might not be known for days.  Expect some whippy trading conditions this afternoon as results are released.

Domestically, the focus will be on the labour market surveys. The consensus sees a 0.4% q/q fall in employment in Q3 and lower participation rate leading to the unemployment rate rising to a four-year high of 5.0%, in line with the RBNZ’s August MPS projections. An outcome in line with consensus will cement in views of another 50bps rate cut later this month.