Xe Morning Update - Your daily market wrap

Developments in markets for Tuesday 28 October......

• Snapshot: S&P500/Nasdaq?? yields??, crude oil??, gold??US dollar??
• AUD/USD:??encounters resistance near 0.6620, retraces to start near 0.6580
• Fed cuts target rate to 3.75-4.00%, confirms QT to end on 01 December
• U.S. yields dollar surge as Powell refrains from committing to DEC. cut
• Implied odds of DEC. cut fall from near 90% to below 60%
• AUS CPI runs hot, RBA to be sidelined for the remainder of the year
• Day ahead: BoJ & ECB, megacap tech earnings, Trump/Xi trade meeting 

Each morning we bring you up to speed with the latest market news, including the events and themes that are impacting currencies and other related asset classes......

The Fed has delivered its universally expected 25-bps cut in addition to confirming that quantitative tightening will end on December 01, the latter a response to recent indications of funding friction for some U.S. banks. The key takeaways:
 

• Fed cuts the target rate by 25-bps to 3.75-4.00%
• QT to conclude on 01 December
• Two dissents: one in favour of 50-bps, one in favour of no change

 
At close to 100% priced in it was never in doubt that the committee would opt for a follow up quarter point cut, however there was uncertainty whether an end to QT would be announced at this meeting or the final meeting for the year on 10 December. Given the recent increase in U.S. repo rates as some U.S. banks stepped up borrowing from the Federal Reserve's Standing Repo Facility (SRF), signalling tightness in meeting funding obligations, the Fed decided it was time to act, announcing it would conclude QT on 01 December.  
 
The critical question for the market regarding the path for the Federal funds target rate over the latter stages of the year was: is a December rate cut a slam-dunk?
 
Chair Powell's press conference focused heavily on the likelihood of a December rate hike, with this topic dominating the Q&A session of the FOMC briefing.
 
Following a muted market reaction to the outright decision and accompanying statement at 0700, volatility stepped up as Powell concluded his prepared remarks and commenced fielding journalists' questions. Stating "a December rate cut is not a forgone conclusion…..far from it", Powell's hawkish comments (relative to market pricing and expectations) caused risk assets to plunge as the market reassessed the likelihood of a third cut for the year.
 
Further hawkishness was evident in Powell's comments on the labour market, commenting that whilst it may be premature to say it is stabilising, it's clear that the labour market is cooling at a slower rate. Powell also went on to emphasize the hawkish dissent within the committee, in reference to Governor Jeffrey Schmid opting for no cut. It came as no surprise that the recent Trump appointee, Stephen Miran, again voted for a 50-bps cut.
 
Powell's reluctance to commit to a December cut, coupled with optimism about the jobs market and strong committee debate regarding the near-term path for the policy rate, ensured the press conference leaned hawkish.
 
In the lead up to the conclusion of the October FOMC meeting, rates markets had assigned a near 90% implied probability to a quarter point cut on 10 December…..post Powell's presser, this has been reduced to around 60%.

US equity markets as at time of morning update release and may not represent session closing prices  

The market reaction to Powell's hawkishness: the yield on the benchmark 10-year note surged from below the 4.00% mark to add around 10-bps, in turn boosting the dollar, the dollar index (DXY) propelled from the 98.80's to mark intraday highs in the 99.30's, before gains were modestly pared through the concluding stages of U.S. trade. U.S. equity markets retreated, the S&P500 up close to half-a-percent early in the session to reverse to be down over half-a-percent at session lows, Losses were pared into the close, the S&P500 logging a marginal intraday loss.
 
Climbing through Asian trade following domestic CPI data, the Australian dollar extended higher to mark intraday highs a couple of pips shy of 0.6620 in the London morning. Following a circa 30-pip retracement, AUD bulls again lifted the pair near 0.6620, a level that would ultimately prove too high a hurdle. The Aussie nose-dived as Powell shared his thoughts on a December cut. Marking lows a few pips south of 0.565600, AUD/USD commences the Asia session in the 0.6570's.   
 
As the dust settles through Thursday's sessions, it would not surprise if the FOMC-induced moves are partially unwound given the base case remains for a December cut. At some point between now and 10 December, the U.S. government shutdown will end thereby resuming the release of key tier 1 data releases. Ongoing softness in labour market metrics, in particular non-farm payrolls, would see odds of a December cut rise again.
 
In other news from Wednesday, a hot domestic CPI report has shut the door on further RBA cuts for the remainder of the year, inflation in Australia peeking back above the RBA's 2-3% target range. Headline monthly inflation printed at 3.5% (vs 3.1%, expected), up from 3.0% in August marking the highest reading since July 2024. Trimmed mean CPI, the RBA's preferred inflation gauge as it smooths out more volatile items, climbed from an annualised 2.7% to 3.0%, notably printing above the RBA's forecast of 2.6%.
 
The RBA is now expected to be on hold until February - the receipt of December quarter CPI to determine the past for the cash rate in 1H 2026.
 
The Aussie extended its ascent against the Aussie, AUD/NZD marking intraday highs a couple of pips below 1.1430, circa 15-pips below the 08 October swing high, also a three-year high. Attention is fixed on the 1.1450 mark to determine if a double top materialises or the antipodean cross's pronounced uptrend continues.
 
To the day ahead, the Bank of Japan and European Central Bank both conclude monetary policy meetings, each to deliver on-hold decisions. On the data front, eurozone GDP is the sole tier 1 data release as the scheduled release of U.S. GDP is postponed due to the shutdown. Microsoft, Alphabet and Meta will release earnings after the closing bell.
 
And of course, attention will turn to South Korea where Trump and Xi are to meet, expected to deliver a trade agreement of sorts. Positive trade news flow would likely reverse much of the FOMC induced risk-off flows.
 
It's likely to be another lively 24-hours.
Stuart Talman (stuart.talman@xe.com)
Xe Corporate

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