Prospects of a US recession continue to dissipate

Bets on a US recession or the Fed having to reverse course on rate hikes are quickly coming out of the market in the wake of the much stronger than expected ISM Manufacturing PMI.

US
Source: Bloomberg

We have seen an immense risk-on rally over the past 24 hours of trade, and a lot of this does look to be underpinned by the stability that oil has found above the US$30 level over the past two weeks. China announced cuts to the RRR this week and markets are looking to the upcoming European Central Bank and Bank of Japan meetings for signs of further global monetary stimulus. With the US Services PMI and Non-Farm Payrolls still yet to come this week, market pricing for a rate rise by the Fed in 2H looks set to rise (WIRP pricing for a rate hike by December now sits at 63.3%). One of the bigger losers from such a scenario this week is likely to be the lofty gold price, which trades inversely to the US yield curve.

The US ISM Manufacturing PMI saw a very strong bounce from 48.2 to 49.5, and the production component rebounded strongly to 52.8. New orders also continued steadily in expansionary territory at 51.5. Clearly, the moderation in US dollar strength since the beginning of the year will have helped the externally focussed manufacturing sector. However, US dollar strength has been affecting the manufacturing sector since late-2014 so there is a case to be made that US manufacturing has also begun to adapt. This PMI does look to be steadily reflecting a turning point.

The growing repricing of Fed rate hike expectations saw US financials rally 3.4% overnight, as rate increases will help increase net interest rate margins at US banks. This increased optimism around financials globally is likely to help lift Aussie banks today. But the much-battered Macquarie, in particular, looks set to have a very decent day considering it trades far more like a foreign bank than an Australian bank. But with the prospect of further solid US economic data this week, US financials could be set to continue this rally and some of that buying in the sector is likely to spill over to Australia.

Aussie gold miners are likely in for some pain today as the gold spot price dived 0.6% overnight on rising rate hike expectations.

Iron ore jumped 1.8% overnight, while BHP and RIO both gained over 1% in London. Boding well for the materials space ex-gold miners.

OPEC oil output declined last month led by Iraq and Nigeria, which provided further upside to the oil price overnight.

The main risk to the outlook for the ASX today are the Australian 4Q GDP numbers. The market is expecting a 0.4% quarter-on-quarter increase and a 2.5% year-on-year increase, but given the poor flow of 4Q data of late the risks to those estimates appear to be on the downside. And despite the global risk-on rally, this could see the Aussie dollar lose its 0.6% gain overnight if we do see a miss in the GDP numbers today.

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