Markets Daily
A solid US jobs report caused bond yields and the US dollar to rise further, and equities to fall. AUD/USD slipped to 0.6370. The data calendar today is nearly empty and it is a partial US holiday.
Friday
Regional equities followed Wall Street’s gloomy lead, all major bourses lower on the day (ex-China which remained closed). The ASX 200’s -0.8% decline was fairly typical. AUD/USD traded quietly, mostly in the low 0.6400s. The RBA’s semi-annual financial stability review noted increased pressure on households as income growth has fallen short of inflation, causing stress as mortgage rates and rent accelerate.
Currencies/Macro
The US dollar rose against most G10 currencies on Friday. EUR/USD fell from above 0.9800 to 0.9740. GBP/USD was 1.1210 pre-US data, then slid below 1.1100. USD/JPY drifted lower for a while, then rallied with US yields to 145.40, net +20 pips. AUD/USD fell about half a cent to 0.6370. The Kiwi underperformed, NZD/USD -0.9% to 0.5610. AUD/NZD rose 40 pips over the day to 1.1360.
US non-farm payrolls in September slightly beat expectations at +263k jobs (est.255k, back revisions +11k). More notably, the unemployment rate fell to 3.5% (est. 3.7%, prior 3.7%) and the underemployment rate fell to 6.7% from 7.0%. Average hourly earnings were solid at +0.3%m/m and +5.0%y/y (as expected, prior 5.2%y/y), with average weekly hours worked unchanged at 34.5 (as expected).
New York Fed president Williams repeated that the Fed funds rate needs to be raised to around 4.5% with the focus on getting inflation back down to 2%. He also stressed the pace and level of interest rates is data dependent. Growth is slowing, but he expects it to be positive in 2023. He expects inflation to fall significantly next year.
BoE Deputy Governor Ramsden spoke on the recent shocks hitting UK, the market dislocation after the fiscal surprises, and the BoE’s responses. The tone reflected his earlier vote for a 75bps rate hike (BoE hiked 50bps) with a bias to tighten further.
Interest rates
US bond yields rose and the curve steepened, after solid results from the US jobs report last week. All eyes are now on this week’s US CPI, which will be the crucial driver of sentiment and markets will use it to determine what the Fed may do next. 2yr government bond yields rose from 4.2% to 4.34%, and 10yr government bond yields rose from 3.82% to 3.91%.
Australian bond yields followed global impetus, as yields pushed higher and the curve bear steepened. 3yr government bond yields rose from 3.50% to 3.57%, and 10yr government bond yields (futures) rose from 3.87% to 3.96%. The AU-US 10yr bond spread widened slightly on the back of AU underperformance, currently at 5bps.
Credit indices moved wider on the change in sentiment, with Main at 132 (+5) and CDX at 102 (+4) , while cash was mixed. Europe recorded its 41st zero deal day in primary and there was also no primary issuance in the US as investors waited on the NFP release. Lipper reported that US IG funds recorded 3.6b outflows for the period, representing the 7th consecutive week of outflows (noting that the prior period saw USD10.3bn of outflows, the third largest outflows on record and the largest for the year).
Commodities
Crude markets surged Friday, helped by the negative supply outlook and stronger than expected US data. The November WTI contract surged a hefty $4.19 Friday to $92.64 and was up $13.15 or 16% on the week. The December Brent contract was up $3.5 Friday to $97.92 and 11% on the week. The OPEC+ announcement of its largest production target cut since the start of the pandemic coming on top of Russian threats that it will not sell crude to countries that adopt a price cap all added to the supply uncertainty. Diesel prices are surging around the world too, with the French refinery strike and Mississippi River drought adding to price pressures. In 2019, the second most shipped product on the Mississippi River was distillate fuel oil (59.2m shipments after soybeans). There are 2,000 barges backed up on the river at various points according to Bloomberg data. French President Macron urged the public not to panic which prompted long lines at stations with fuel. Biden and Scholz met over the weekend and discussed global energy markets and securing supplies. European gas prices fell to 2-month lows as EU leaders agreed to negotiate a “corridor for decent prices”.
Metals slumped on the threat of higher central bank rates with copper down 1.9% to $7,462 on Friday while aluminium fell a larger 2.6% to $2,286. Zinc was hit harder still falling 5% Friday to $2,965, giving back all its gains for the week. That’s despite the LME issuing a discussion paper on Russian metals which was driven by an increasing number of members giving feedback that they were unwilling to accept Russian supplies. The LME also embargoed supplies of copper and zinc from Ural Mining and Metallurgical last week too.
Iron ore markets remained stable ahead of the return of Chinese markets today. The November SGX contract was down 20c at $94.00 and largely unchanged from pre-Golden Week holiday levels. The National Party Congress is set to commence in less than a week with traders eagerly watching any and all policy announcements around the critical event.
Day ahead
China markets reopen after a week-long holiday but Japan is closed for Sports Day.
Eurozone: The dreary outlook will offer little support to Sentix investor confidence in October (market f/c: -33).
US: Columbus Day federal holiday; stock markets will remain open and bond markets will be closed. The FOMC’s Evans and Brainard are due to speak at the NABE Conference in Chicago.
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