Markets Daily
Equities reversed the previous day’s gains amid hawkish Fedspeak, solid US activity data, and high German inflation. The US dollar lost momentum, AUD recovering to 0.6500. Today’s data includes Australia August private credit and US August personal spending.
Yesterday
The ABS published annual rates of growth for the Australia monthly CPI Indicator and some of the components. In the year to June, July and August the monthly CPI rose 6.8%yr, 7.0%yr and 6.8%yr. In the month, the CPI rose 0.7% in June, 0.5% in July and 0.2% in August. Regional equity sentiment was very mixed, with the ASX 200’s 1.4% gain top of the range. AUD/USD gave up about half of the rally sparked Wednesday by the Bank of England’s bond intervention, slipping from 0.6520 to 0.6455.
Currencies/Macro
The US dollar was quite mixed against major currencies. EUR/USD fell to 0.9636 in the London morning, but then began a steady rally to 0.9815, up 0.9% net. Sterling was strongest in the G10 despite renewed pressure on UK bonds, GBP/USD up 2.6% to 1.1170, almost back to levels prevailing before the UK mini-budget speech. USD/JPY is a touch higher at 144.80. AUD/USD fell as far as 0.6436, but then followed the broad softer US$ trend, recovering to 0.6510. NZD/USD also rebounded, overall a fraction higher over the day at 0.5740, leaving AUD/NZD down 50 pips at 1.1330.
US Q2 GDP, in its third and final estimate, was unchanged at -0.6%q/q, but there was a rise in the price index to 9.0% (from 8.9%) and core PCE was revised to 4.7% (from 4.4%). Personal consumption was revised higher at 2.0%q/q (initially 1.5%q/q), offset by lower investment and net trade. Weekly initial jobless claims were low at 193k (est. 215k), with continuing claims at 1.347m (est. 1.385m), indicating a strong labour market.
Fedspeak from Bullard and Mester was hawkish. Bullard said the dot plot’s 4.4% median for year-end suggests 125bp in further hikes. He said there remains still quite a bit of inflation in the system, and the just printed jobless claims numbers were "super-low" and reflected an extremely tight labour market. Mester said the Fed must remain diligent in getting inflation down, is concerned about the persistence of inflation, and that rates still are not in restrictive territory so it is premature to talk about a pause.
German CPI in September rose 1.9%m/m and 10.0%y/y (est. +1.5%m/m and 9.5%y/y), with EU harmonised CPI at +2.2%m/m and 10.9%y/y (est. 1.5%m/m and 10.2%y/y). The headline rate reached double figures for the first time in life of the Eurozone.
Eurozone economic confidence fell to 93.7 in September (est. 95.0, prior 97.3). Industrial confidence at -0.4 was not as weak as expected (est. -0.7, prior 1.0) but services confidence fell to 4.9 (est. 7.0, prior 8.1 revised from 8.7).
BoE’s Pill reiterated that their actions were to ensure orderly markets and not to fund the government. He said that significant fiscal measures would boost demand and would result in a policy reaction.
Interest rates
US bonds fell earlier in the session, taking a bearish lead from Europe after German CPI printed 10% yoy, but rebounded later in the session following weakness in equities and concerns on growth. 2yr government bond yields rose from 4.15% to 4.24% before retracing and closing at 4.19%, 10yr government bond yields rose from 3.75% to 3.86% and finished at 3.79%.
Australian bond market price action continues to be influenced by global sentiment. 3yr government bond yields (futures) rose from 3.68% to 3.78% before finishing at 3.71%, and 10yr government bond yields (futures) rose from 3.92% to 4.05% before closing at 3.98%. Markets are 90% priced for a 50bp hike at the October meeting next week. The AU-US 10yr bond spread was unchanged following overnight movements which saw AU bonds trace US bond market movements at a similar pace.
Credit performance reflected the risk off tone in the broader market with indices moving wider again (Main 3.5bp wider at 138 and CDX out 1bp to 107.5) and cash struggling to find a level as we look like closing September on ytd wides. Primary activity was nowhere to be seen and Lipper reported that US IG funds recorded USD10.3bn of outflows in the last week, the largest weekly outflow of the year.
Commodities
Crude markets were surprisingly quite even in the face of tropical storm Ian set to continue its lethal path through the northeast Florida coast and into Georgia and South Carolina Friday. The November WTI contract is down 92c at $81.23 while the November Brent contract is down 46c at $88.86. The general risk off tone weighed on prices, though with OPEC+ tabling production cuts next week, the end of the SPR release approaching, a fourth leak on the Nord Stream pipeline discovered and the EU Russian sanction package approaching, product and physical markets are tightening. Premiums for European diesel have reached 2-month highs as French refineries close. The French Ministry for Energy Transition is moving to refill its SPR in October and November after releasing fuel in June as part of the globally coordinated release. France recently signed an MOU with UAE to identify common investment projects in hydrogen, renewable and nuclear energy as well as an agreement to supply diesel as it seeks to cut Russian supply. Gas markets eased as the ICE cut margin rates by 25%.
Metals markets jumped with copper last up 1.2% to $7,515, nickel up 2.8% to $22,410 and aluminium up a hefty 5% to $2,232. The jump in aluminium was put down to a Bloomberg report that the LME was taking the first steps towards a possible Russian metal ban with a discussion paper possibly being launched by the exchange. At one point, aluminium was up 8.5% on the LME, its biggest intraday jump on record. The LME confirmed the existence of the paper “with the aim of eliciting market views as to the ongoing acceptability of Russian metal in the broader physical market” though no decision has yet been taken on whether to release it.
Finally note that iron ore markets saw a modest jump on confirmation that China will seek to front load next year’s government bond quota following a fourth quarter works promotion meeting presided over by Premier Li Keqiang. The October SGX contract is up 30c from the same time previous session while the 62% Mysteel index is up 10c at $95.80. China will release manufacturing later PMIs today.
Day ahead
Australia: Private sector credit growth is set to slow further in August, led by housing (Westpac f/c: 0.6%).
Japan: A down-trend in industrial production is likely to develop into year-end as global demand cools (market f/c: 0.2%).
China: Ongoing COVID-19 risks are set to continue impacting the official manufacturing and services PMI in September (market f/c: 49.7 and 52.4 respectively). The Caixin manufacturing PMI should confirm the broad-spread nature of the slowdown (market f/c: 49.5).
Eur/UK: European consumer inflation is expected to post another broad-based gain in September (market f/c: 9.7%yr) and the unemployment rate should hold at its lows (market f/c: 6.6%). The final estimate for the UK’s Q2 GDP will provide more detail around the weakness in consumption (market f/c: -0.1%). UK Nationwide house price growth is also set to cool further in September (market f/c: 9.9%yr).
US: The August upside inflation surprise is expected to also be apparent in the PCE deflator (market f/c: 0.1%mth headline; 0.5%mth core). Consequently, households’ personal spending will remain at risk through this year as inflation continues to erode personal income (market f/c: 0.2% and 0.3% respectively). The September Chicago PMI should continue to reflect weakening conditions (market f/c: 51.8). The FOMC’s Barkin, Brainard, Bowman and Williams are all due to speak at different events.
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