Morning Wrap (03.10.2023)

• Wall Street indices continued to edge lower yesterday as the new week began with a weak mood, driven by rising interest rates and USD appreciation.

• The USD continued its ascent on Tuesday, with EURUSD reaching new lows around 1.0464.

• In Asia-Pacific, indices traded mostly lower, following declines on Wall Street. The S&P/ASX 200 traded flat, the Nifty 50 declined by 0.70%, while the Nikkei traded 1.64% lower.

• Trading resumed following a holiday in China, and Chinese indices traded with more significant discounts, declining between 2.9% to 3.3%.

• Asian markets and sovereign bonds fell, likely due to the lower performance of Wall Street and hawkish signals from Federal Reserve members, sparking concerns about rising interest rates.

• India's manufacturing sector continues to perform relatively well compared to other economies. Today's Manufacturing PMI came in lower than expected but still significantly above 50, with the Indian S&P Manufacturing PMI at 57.5 (Forecast -, Previous 58.6).

• The Reserve Bank of Australia did not change the interest rate level, keeping the current RBA Cash Rate at 4.1% (Forecast 4.1%, Previous 4.10%). The RBA noted that higher interest rates are working to establish a more sustainable balance between supply and demand in the economy. Inflation in Australia has passed its peak but remains high and will likely stay that way for some time, with potential further tightening of monetary policy.

• The RBA's central forecast is for CPI inflation to continue declining and return to the 2–3 per cent target range in late 2025.

• Japanese Finance Minister Shunichi Suzuki mentioned that currency intervention on the Japanese Yen is determined by volatility and not targeting specific FX levels.

• Mester from the Fed stated that higher rates are necessary to ensure the disinflation process continues. The Fed plans to keep rates restrictive to bring down inflation, considering it "too high," but they see encouraging signs of progress in reducing price pressures.

The dollar continues to rise for another week. After today's and yesterday's hawkish comments by Fed members, investors are reasserting their belief that interest rates will actually be kept higher, for a longer period of time. EURUSD is at its lowest level since December 2022.