Markets Daily
Despite an interim lift in sentiment after BoJ intervened against USD strength (first time since 1998), sentiment faltered after a series of Central Bank policy hikes.
Yesterday
Regional markets were on the defensive in the wake of the Fed’s very hawkish 75bp hike (NKY: -0.6%, Hang Seng -1.6% and Shanghai -0.3%). Australian markets were closed Thursday for a public holiday. The risk averse mood saw AUD slide from 0.6635 to 0.6575. USD/JPY traded up from around 144 to just shy of 146 amid the BoJ’s decision to remain on hold, widening its policy divergence with major central banks, before BoJ intervention in the Asian/European session crossover triggered a sharp reversal to toward 141.
Currencies/Macro
Despite an interim lift in sentiment after BoJ intervened against USD strength (first time since 1998), sentiment faltered after a series of Central Bank policy hikes. The BoE raised +50bps to 2.25% and signalled further hikes ahead: Norges Bank +50bps (more hikes into 2023), SNB +75bps, SARB +75bps. Several Asian Central Banks also raised rates into European trading hours. Global bond yields rose sharply, with UK Gilts and US Treasury yields both up 18bps. The USD unwound some effects of JPY intervention to be little changed on the day.
The US Dollar (BBDXY) index flipped from a +0.6% gain prior to BoJ intervention to -0.5%, before settling around unchanged on the day.
USD/JPY was off its 140.35-40 low (from a high of 145.90) with JPY +1.25% at 142.30. EUR (0.9845), GBP (1.1265), AUD (0.6635) and NZD (0.5845) were relatively unchanged after sharp gyrations. CHF notably softened post SNB’s policy move to trade at 0.9805 (-1.45%). AUD/NZD firmed +0.3% to 1.1360.
BoE hiked 50bps to 2.25% with a split in votes (5 for 50bps, 3 for 75bps, 1 for 25bps) and clear high uncertainty over the impacts of Govt. Energy plans and tomorrow’s Fiscal Update. The BoE remains in a tightening cycle and confirmed its previously outlined start to QT.
US weekly jobless claims remained low implying tight labour markets: initial claims 213k (est. 217k), continuous claims 1.38mn (est. 1.42mn).
US August leading index slipped -0.3%m/ (est. -0.1%m/m, prior -0.4%m/m).
US Sept. Kansas Fed Manufacturing survey dipped to 1 (est. 3, prior 5).
Eurozone Sept. Consumer Confidence slipped to a record low of -28.8 (est. -25.5, prior -25.0).
Interest rates
Bond yields across Europe soared, after the Bank of England delivered a 50bp hike as expected and the curve extended a broad bear steepening trend. Yield on the 10yr gilts surged 18.1bps, while 10yr bund yields rose 7.2bps.
US bond yields surged too, a day after the FOMC hiked 75bps, as markets continued to digest global central bank hikes and their hawkish stance in the battle against inflation. 2yr government bond yields rose 7.4bps while 10yr government bond yields jumped 18.4bps.
Australian bond yields continued to follow global price action, but outperformed their US counterparts. 3yr government bond yields (futures) rose to 3.64%, and 10yr government bond yields rose to 3.86%. The AU-US 10yr bond spread narrowed on the back of AU outperformance, we now see the spread at 17bps.
Credit markets were also weaker with Main out 3bp to 125.5, CDX another 2bp wider (3.5bp total post the Fed) at 102.5 (roll to S39 at 8.2), with cash spreads also 1-2bp wider. Euro primary markets were quiet ahead of the BoE with just a single SSA coming to market, however we did see some activity in the US where 5 IG deals were priced for a total of USD5.1bn.
Commodities
Brent managed to cling onto the $90 mark even as central bankers ratcheted rates sharply higher and Fed Chair Powell warned there was “no painless way to do this”. The November WTI contract is up 58c at $83.52 while the November Brent contract is up 56c at $90.39. A key supporting factor appears to be OPEC’s willingness to cut output further if prices fall with the Nigerian oil minister telling Bloomberg that OPEC was prepared to “cut production if prices go too low”. EIA inventory data released yesterday showed builds across most products with crude inventory up 1.1mb, gasoline up 1.5mb and distillate up 1.2mb. Measures of US gasoline and diesel demand also fell to the lowest level in a decade. However, JP Morgan expects crude to retest $100 in Q4 as SPR releases end and sanctions on Russian oil bite. Meanwhile US natural gas prices fell to 2-month lows as inventory build beat forecasts. Traders were also watching a series of hurricanes and tropical storms developing in the Gulf and Atlantic which may shut in US gas production and exports. The October Henry Hub contract slumped almost 9% to $7.07/mmbtu. The UK announced an end to a moratorium on fracking in England with Energy Secretary Jacob Rees-Mogg stating “it's right that we've lifted the pause to realise any potential sources of domestic gas”.
Metals shrugged off aggressive monetary policy moves, with copper unchanged at $7,684, stuck in a $7,500 to $8,000 range though nickel fell 2.3% to $24,365 trading just below $25,000. Head of metals analysis at Trafigura said that “there is a non-zero probability that we’ll need to see very hefty industrial shutdowns” at a conference in Barcelona, hitting demand for metals including copper. Freeport-McMoran shelved a $2bn copper and gold project in Peru due to prices being “insufficient” to support new business even as the CEO argued that the “short-term situation is contributing to the stronger outlook longer term because it's having an impact on supply development”.
Finally note that iron ore markets clung to $100 with the October SGX contract up 74c at $99.00 and the 62% Mysteel index up $2.90 to $98.60. Signs of construction starting at stalled projects in China helped lift the mood with China Evergrande confirming that only 38 of 706 pre-sold projects had yet to re-commence.
Day ahead
Eur/UK: Eurozone Sept. S&P Global manufacturing and services PMIs should remain under pressure as weak demand begins to crystalise (market f/c: 48.8 and 49.1 respectively)
UK S&P Global PMIs face similar risks (market f/c: 47.5 and 50.0 respectively), alongside historically weak consumer confidence (market f/c: -42).
UK’s new Govt. announces its Growth Plan (mini-Budget) with markets concerned about the funding of the already detailed fiscal expansion and tax cuts.
US: In contrast to the ISMs, the S&P Global manufacturing and services PMIS will likely continue pointing to substantially weaker conditions, indicating heightened pressure on smaller/mid-sized firms (market f/c: 51.0 and 45.5 respectively).
FOMC Chair Powell opens a Fed Listens event and speaks along side Fed’s Brainard and Bowman.
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