Markets Daily
The Bank of England surprised markets by buying bonds. Global bond yields fell in response and risk sentiment rose, equities bouncing and the US dollar finally retreating. AUD/USD rose to 0.6520. Today’s second-tier data calendar includes Australia’s new monthly CPI.
Yesterday
The ABS preliminary estimates of Australia retail sales showed a 0.6% rise in Aug, coming in slightly above expectations and following July’s surprisingly strong 1.3% gain. Annual growth hit 19.2%yr, the second-fastest pace on record but heavily impacted by delta lockdowns this time a year ago. The limited detail available for August showed the rise centred on a solid 1.1%mth gain for the large basic food store type and a 1.3%mth rise for cafes & restaurants. Performances were much more mixed for non-food categories. Risk appetite was poor again, all major regional bourses down on the day. The ASX 200’s -0.5% close was less weak than most. AUD/USD chopped down to 0.6390, with a low of 0.6363, a low since April 2020.
Currencies/Macro
The US dollar index (DXY) is down 1.2% on the day, reversing from a 20-year high and its first daily decline since 19 September. The largest component of DXY, the euro, rallied from a 20-year low of 0.9536 to 0.9740, net +1.5% on the day. GBP/USD rebounded from a low of 1.0541 to 1.0885, net +1.4%. USD/JPY fell 65 pips to 144.10 as US yields tumbled. AUD/USD also gained against the US dollar, ultimately up 85 pips or 1.3% on the day at 0.6520. NZD/USD rose from a 2.5 year low of 0.5565 to 0.5730. AUD/NZD is about 30 pips lower net, at 1.1385.
The Bank of England announced it will carry out temporary purchases of long-dated UK government bonds from 28 September to restore orderly market conditions. “The purchases will be carried out on whatever scale is necessary to effect this outcome,” BoE said in its statement.
US pending home sales in August fell -2.0% for an annual pace of -22.5% (prior -22.2%). Wholesale inventories in August rose 1.3% (est. +0.4%, prior +0.6%).
Interest rates
The Bank of England stepped in overnight by buying long end bonds to defend against market dysfunction. Yield on the 2yr gilts fell 40.1bps while yield on the 10yr gilts fell 49.8bps. This began a global bonds rally which also saw US 2yr government bond yields fall from 4.30% to 4.10%, and 10yr government bond yields fell from 4.01% to 3.73%.
Australian bonds took trend from global price action but underperformed their global counterparts. 3yr government bond yields (futures) fell from 3.88% to 3.67%, and 10yr government bond yields fell from 4.18% to 3.94%. Markets are 95% priced for a 50bp hike at the October meeting next week. The AU-US 10yr bond spread narrowed once again on the back of AU underperformance, currently at 20bps.
Credit continues to be moved around by the significant volatility in rates markets with indices tighter last night (Main in 3.5bp to 135 and CDX 5bp tighter at 106) post the rally in bonds, however EUR cash was weaker while the US saw some stability after the significant move wider the previous evening. Primary activity remains somewhere between light and non-existent (as you would expect) with no supply in the US, and Euro issuance dominated by SSAs (including a UK tap of the Jul-53 Gilt that was launched prior to and priced after the BOE’s announcement discussed above) with just the one IG corporate deal from SFIL SA (EUR500M 10yr).
Commodities
Crude markets saw a decent bounce helped by the dramatic BoE gilt market intervention and signs of regional fuel stockpile shortages in the US. The November WTI contract is last up $3.68 at $82.18 while the November Brent contract is last up $3.07 at $89.34. EIA crude inventory declined 213kb, the first decline in 3 weeks, while gasoline inventory fell 2.4mb, distillate by 2.9mb and jet kerosene fell by 2.4mb. Crude production fell 100kbpd while exports rose by a massive 1.1mbpd. Gasoline stocks on the West Coast hit decade lows and distillate stocks in New England fell to the lowest level for this time of year on record. About 11% of the Gulf’s total production was shut in due to the approach of the massive Hurricane Ian. The EU proposed a new round of Russian sanctions Wednesday including a price cap on Russian oil exports. France’s largest oil refinery in Normandy halted production due to a strike. The move means almost two-thirds of the France’s oil processing is now either fully offline or severely impacted by strikes or a recent fire.
And in energy markets, confirmation that the leaks at Nord Stream 1 and 2 were due to sabotage saw natural gas prices in Europe jump. The UK October NBP contract jumped 26% while the EU equivalent rose 11%. Russia warned that flows through Ukraine were at risk over transit payments. Meanwhile gas prices in the US lagged due to Hurricane Ian shutting in some Gulf production and onshore demand being impacted. The Centre for Research on Energy and Clean Air and Global Energy Monitor released a new report focused on China’s power industry noting a $32bn increase in spending in the first half of this year on coal power and steel production threatens China’s climate goals and could end up as wasted investment due to coal-fired power generation being “steeply loss making since early 2021”.
Metals markets saw a modest bounce after sharp declines in recent sessions. Copper is last up 1.7% at $7,479 while nickel is up 1.3% at $22,135. That still leaves nickel down 11.3% in the last 5 sessions with steep contango pricing weighing on sentiment. Aluminium made a fresh 19 month low before a modest 1% rebound to $2,135. There was little fresh industry news though the head of minerals Americas at BHP said “The [regulatory] uncertainties are easing [in Chile]” at a conference in Peru after the recent rejection of a proposed new constitution.
Finally note that iron ore markets lost some modest ground with the October SGX contract down 60c at $96.20 while the 62% Mysteel index down $1.90 to $95.70. The National People’s Congress is due to commence October 16, with expectations that strict zero-Covid policies will be maintained at least until the NPC concludes.
Day ahead
Australia: The ACCI–Westpac business survey for the September quarter will provide a timely update on manufacturing and insights into economy wide trends. Momentum in the manufacturing sector started to build in Q2, after being affected by omicron and weather-related disruptions in Q1. The reopening - which will be a key dynamic in the September quarter - should continue to facilitate a lift in activity. It is the pace of this recovery which is of keen interest.
The ABS will release its new monthly CPI indicator for July and August. Caution will be needed in interpreting the data, with the coverage of prices in the basket only partial. Q3 CPI is due 26 October. We will also see the ABS’s quarterly job vacancies series, for August.
NZ: ANZ business confidence nudged higher for a second month in August. Nevertheless, New Zealand businesses remain deeply pessimistic about the economic outlook. Businesses have been grappling with shortages of staff, strong cost pressures, and the rise in interest rates. We expect those factors will continue to weigh on confidence in the September survey. RBNZ Governor Orr will participate in a BIS panel discussion on “Maintaining central bank independence in the face of fiscal dominance risks, expanding central bank mandates, and other challenges”.
Germany’s CPI inflation for September is expected to be 1.5% m/m and 9.5% y/y – both higher than August’s pace.
US GDP for Q2 in its third update is expected to have fallen 0.6%, for an annual pace of +1.5% - both unchanged from the previous readings.
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