Markets Daily
The rebound in risk sentiment continued in US trade, equities up sharply. The defensive US dollar fell broadly though the Aussie underperformed post-RBA, down slightly at 0.6500. Today’s calendar highlights are the RBNZ policy decision and the US September services ISM survey.
Yesterday
The Reserve Bank Board decided to increase the cash rate by 25 basis points to 2.60%. Most forecasters looked for another 50bp hike, while pricing was +44bp. In justifying the more moderate hike, Governor Lowe cited deterioration in the global economy and uncertainty over “how household spending in Australia responds to the tighter financial conditions.” AUD/USD dropped from 0.6505 to as low as 0.6451 initially and was choppy thereafter. The ASX 200 jumped 3.8%, its sharpest gain since June 2020. Australia dwelling approvals shot up 28.1% in August, more than reversing the 18.2% fall in July to be up 4.8% vs June. This was well above market expectations of a 9% gain. While the full rebound in unit approvals beat expectations, detached house approvals were also a big surprise, posting a solid 4.1% rise despite the pressure from higher interest rates, sharply rising costs and builders facing losses on a large backlog of fixed price contract work. Housing finance approvals were more in line with expectations, recording a 3.4% decline in Aug, slightly milder than the market expectation of a 4% fall. Investor lending again outpaced owner occupiers, recording a 4.8% drop vs a 2.7% fall.
Currencies/Macro
The US dollar fell particularly heavily against European currencies but was somewhat mixed against the rest of the G10. EUR/USD rose from 0.9825 to 0.9985, one of the strongest on the day. GBP/USD rose 1.5 cents to 1.1470. USD/JPY fell 40 pips to 144.10. The Aussie was weakest in the G10 in the wake of the dovish RBA surprise, ranging widely between 0.6451 and 0.6547 but ultimately 15 pips lower at 0.6500. NZD was also choppy, steadying around 0.5715, no doubt with some nerves ahead of the RBNZ decision. AUD/NZD trimmed its post-RBA losses to only about 25 pips, around 1.1360.
US JOLTS job openings in August slightly disappointed expectations at 10053k (est. 11088k, prior 11170k). It is the largest monthly fall since early in the pandemic, although it did make a record high in March. The quit rate was unchanged at 2.7%. Factory orders in August were flat (est. 0.0%, prior -1.0%). Durable goods orders for August were finalised unchanged and as expected at +0.3%, although the ex-transport measure was nudged higher from +0.2% to +0.3%.
San Francisco Fed president Mary Daly reiterated the FOMC's commitment to price stability and emphasised that further hikes will be needed, with rates remaining high until the job is done. She sees room to slow the labour market. Newish Fed governor Philip Jefferson emphasised that the Fed is "resolute" in bringing inflation down to 2%, echoing the stance of the rest of the Committee, adding the inflation fight will take time despite signs of progress and will likely entail below trend growth.
Interest rates
US bond yields rose as the rebound in risk sentiment continued. 2yr government bond yields rose from 3.99% to 4.11%, and 10yr government bond yields rose from 3.56% to 3.63%.
The RBA delivered a surprise 25bp hike at the board meeting yesterday, which saw yields fall sharply and the curve bull steepen. 3yr government bond yields range traded between 3.25% and 3.34%, currently at 3.31%, and 10yr government bond yields range traded between 3.67% and 3.75%, current at 3.70%. The AU-US 10yr bond spread narrowed sharply on the back of AU outperformance, currently at 6bps.
The improvement in sentiment saw credit indices and cash move tighter on the day, with Main at 124 (-9) and CDX at 99 (-5). Primary issuance remained muted in the US, with DNB Bank the only issuer to come to market, while Europe saw 6 IG issuers price transactions for an aggregate of EUR3.75b inclusive of covered deals from Bank of Montreal (4Y Covered at MS+17) and DBS (EU750m 3Y Covered at MS+17).
Commodities
With OPEC+ set to meet later today in Vienna and press suggestions that cuts could be as large as 2mb, phased in over several months, double what was previously suggested, crude continued its aggressive move higher with the November WTI contract up $2.56 at $86.19 while the December Brent contract is up $2.64 at $91.50. However, a large cut does not appear to be unanimous with UAE and Kuwait worried that cuts would damage their plans to bring in increased production from recent investment in extra capacity. And in a sign that there is still debate ahead of the meeting, the JTC meeting scheduled for October 4 was cancelled. The G7 appears to be moving closer to a Russian oil price cap, with the EU likely set to approve in two stages. The EU is preparing legislation but, reflecting concerns from member countries with large shipping sectors including Greece, will await the rest of the G7’s approval before approving its legislation. The US Treasury said the Russian price cap is set to be agreed “substantially before Dec 5”. With the European embargo on Russian refined product set to come into effect in two months, the October European diesel contract jumped a 1 month high while the prompt time spread hit its highest since July in a clear sign the product market is tightening.
Gas markets continued plunging with the UK November NBP natural gas contract falling another 6% to a fresh 4 month low as press confirmed the UK was in talks with Norway to secure a 20yr gas supply contract. Meanwhile Central Appalachian thermal coal prices in the US rose above $200, the highest on record back to 2005.
Metals markets surged on improved global market risk sentiment with aluminium up 5.7% to be last at $2,346 while nickel is up 3.6%. Zinc rose 3% to $3,052 while copper is up 2.4% to $7,687. Alcoa wrote to the LME to warn that the exchange shouldn’t be used ‘as a market of last resort for Russian metals’. The letter stated that “Alcoa would have serious concerns about any pricing mechanisms that no longer accurately reflect the fundamentals of the aluminium industry, and the demand for non-Russian-origin metal that customers require.” Russian aluminium currently is not sanctioned in the US or across Europe. Codelco August copper production slumped 30%yy.
Finally note that iron ore markets saw another modest bounce with the November SGX contract up $2.25 to $94.65 while the 62% Mysteel index rose $1.45 to $95.15. Chinese markets are closed for Golden Week, so liquidity levels are low. However, traders are optimistic that the post-holiday/ pre-NPC period will see further policy announcements to support the vast property sector in China.
Day ahead
The RBNZ policy decision is due at 12pm Syd. We have revised up our forecast for the Official Cash Rate to a peak of 4.5% (previously 4%). We expect that to be achieved with three more 50 basis point hikes at the October, November and February reviews. Recent developments point to the risks of stronger and more persistent inflation pressures than we anticipated. In particular, we now expect the New Zealand dollar to be lower for longer, adding to the pace of inflation in the year ahead. In an already–overheated economy – which is proving to be more resilient in the near term than we thought – the risks of second–round inflation pressures are greater. At today’s review, we expect the RBNZ to repeat that the OCR will continue to rise “at pace”, and to signal a higher peak for this cycle. A 50bp hike today is also very much the consensus of forecasters and market pricing.
Japan: The final estimate to September’s Nikkei services PMI is due.
Eur/UK: The final estimate to September’s S&P Global services PMI is due for both Europe and the UK (market f/c: 48.9 and 49.2 respectively).
US: The trade deficit should continue to narrow in August as weaker domestic demand weighs on imports (market f/c: -$67.7bn). The S&P Global services PMI is materially weaker than the ISM services PMI, indicating clear downside risks for the sector (market f/c: 49.2 and 56.0 respectively). Atlanta Fed president Bostic is also due to speak.
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