Markets Daily
A flurry of hawkish Fed commentary boosted US yields and the US dollar and weighed on equities. AUD/USD slid to 0.6400. Today’s calendar features the RBA Financial Stability Review and the US September employment report.
Yesterday
Australia’s trade surplus was $8.3bn in August versus $9.0bn in July. Imports posted another strong gain, +4.5%, in response to rising domestic demand. Consumer goods, +$0.8bn, fuel imports, +$0.7bn, and services, +$0.3bn drove the strong August lift in imports. Exports expanded in the month, with a rise of 2.6%, +$1.4bn. Non-resources led the way, up $0.9bn, centred on rural goods and manufactures, which rose by a combined $0.77bn. Despite Wall Street’s soft lead, regional equities were mostly upbeat, though the ASX 200 closed barely higher. AUD/USD benefited from the positive risk mood, rising from 0.6490 to 0.6540 before easing a little to 0.6520.
Currencies/Macro
The US dollar rose against all G10 currencies on the day. EUR/USD fell about 90 pips to 0.9795. Sterling was even weaker, -1.4% or -1.6 cents on the day to 1.1165. USD/JPY followed US yields higher, up about 50 pips to 145.10. AUD/USD extended the late Sydney decline to 0.6390, then steadied just above 0.6400. NZD/USD traded a wide range of 0.5640 to 0.5814, ultimately down 80 pips or -1.4% at 0.5655. AUD/NZD rose about 30 pips net, to 1.1330.
US weekly initial jobless claims were close to expectations and prior levels, with initial claims at 219k (est. 204k, prior 190k) and continuing claims at 1.361m (est. 1.350m, prior 1.346m) still indicating a strong underlying labour market.
Minneapolis Fed president Kashkari stressed there is more work to be done on inflation, and believes the Fed is a long way from a pause in tightening. He does not yet see evidence that prices have peaked, although he is confident the Fed will get inflation under control. Cleveland Fed president Mester repeated that inflation is still unacceptably high. Governor Cook, one of the newest members, said price stability is going to require ongoing rate hikes, that the Fed is likely to keep policy restrictive for some time, and that it is critical that the FOMC stops inflationary psychology from taking hold.
BoC Governor Macklem said: "simply put, there is more to be done, in terms of rate hikes and monetary tightening." All signs point to an economy that is clearly in excess demand, and the labour market remains very tight. He added that additional information will be needed "before we consider moving to a more finely balanced decision by decision approach."
Eurozone retail sales in August rose -0.3%m/m as expected, but the July was revised lower from +0.3%m/m to -0.4%m/m, lowering the annual pace to -2.0%y/y (est. -1.7%y/y) and indicating a decline in regional demand.
German factory orders in August fell -2.7%m/m (est. -0.7%m/m). There was an upward revision to July related to a late report of an aerospace order but the data still points towards a material slide in orders due to supply interruptions and sliding demand.
The ECB minutes to the latest meeting did not surprise, with the majority of council members backing a 75bp rate hike, and a small number preferring a 50bp hike. Chief economist Lane warned that demand is stoking prices more than before and that price pressures are likely to persist. "
Interest rates
US bond yields rose on the back of hawkish Fedspeak, and the curve bear flattened. 2yr government bond yields rose from 4.15% to 4.23%, and 10yr government bond yields rose from 3.75% to 3.84%.
Australian bond yields took the trend from global bearishness, and the curve bear flattened on the day. 3yr government bond yields (futures) rose from 3.45% to 3.54%, and 10yr government bond yields (futures) rose from 3.82% to 3.91%. The AU-US 10yr bond spread was roughly unchanged on the day, currently at 5bps.
Credit had a mixed session, with indices moving wider as Main and CDX ended the day at 128 (+1) and 98 (+1) respectively, though cash was tighter in Europe and the US. Primary issuance continued in Europe, with 7 issuers pricing EUR4.36b, and the US saw 5 issuers price a total of USD8.15b.
Commodities
Crude continued its week-long rally, with tension over supply between the US and OPEC adding to the positive sentiment. The November WTI contract is up $1.25 at $89.01 as we write while the December Brent contract is up $1.59 at $94.96. WTI is up almost 10% over the last week. Goldman raised its Q4 forecast for Brent to $110 while Morgan Stanley said the supply cut means Brent “will find its way to $100 a barrel quicker than estimated before”. The US administration continued voicing its disappointment with the OPEC decision. US President Biden stated “we’re looking at what alternatives we may have … There’s a lot of alternatives. We haven’t made up our mind yet”. Biden’s energy advisor Hochstein said, “We’re going to take a multitude of steps with the private sector in the United States, with our allies, with the SPR, and we’re going to talk to Congress about what kind of tools we may need” while the NEC Director Deese said “What the president has directed … is to take nothing off the table”. Meanwhile European diesel continued its surge as France was forced to draw “on strategic stocks to make it possible to supply stations” according to a government spokesperson due to strike action which has halted production at almost two-thirds of the nation’s capacity. The October ARA gasoil contract is up 20% in the last week.
Meanwhile coal stockpiles in the US dropped to the lowest level on record back to 1997 due to railroad and river bottlenecks forcing thermal coal prices in the US to record highs. The Mississippi River drought is having a severe impact on navigation and the river is closed near Stack Island, causing huge bottlenecks.
Metals were mixed with copper last down 1.6% at $7,559 and aluminium down 1% at $2,328 while nickel is up 0.5% at $3,060 and zinc up 0.7 at $22,745. The LME finally released the much-discussed discussion paper on potential action covering new Russian metals. The paper did not express any preference for outcomes, but it did lay out a range of options including banning all new deliveries of Russian metals, giving members 3 weeks to respond. According to the LME, over the past decade, Russian nickel has accounted for as much as 65% of exchange inventories, aluminium as much as 74%, and copper as much as 95%.
Finally note that iron ore markets were sidelined with China still closed until Monday. The November SGX contract is up 45c at $94.20. Vale and BHP have approached Brazilian officials to try to restart talks to negotiate a settlement on the 2015 Samarco catastrophe. Prosecutors officially ended talks in September.
Day ahead
The RBA’s semi-annual Financial Stability Review is due at 11:30am Syd.
Japan: The reopening rebound will materialise as a boost in household spending in August, though virus risks remain in play (market f/c: 6.7%yr).
China foreign exchange reserves are expected to have fallen in September, from $3055bn to $2998bn. China markets remain closed until Monday. The September Caixin/S&P Global services PMI will be released on Saturday, with the August reading an upbeat 55.0.
US non-farm payrolls are expected to print a softer result in September given the weakening in other labour market indicators (Westpac and market f/c: 250k versus 315k in August). The unemployment rate should hold at its current level (Westpac and market f/c: 3.7%), supporting robust growth in average hourly earnings (Westpac and market f/c: 0.3%mth, 5.0%yr).
Higher interest rates will begin to weigh on US consumer credit over the coming year (market f/c: $25bn). The final estimate to August’s wholesale inventories is also due (market f/c: 1.3%). The FOMC’s Waller, Mester, Williams and Bostic are all due to speak at different events.
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