Markets Daily
Markets were in a holding pattern ahead of tonight’s key US inflation data. The S&P500 is down 0.3%, and bond yields and most currencies are little changed.
Yesterday
RBA’s Ellis spoke on the neutral cash rate, with little market response from speech text or Q&A. China reiterated its zero-Covid policy. Regional equities were quite mixed, Korea and China higher but Japan and Taiwan slightly lower, while the ASX 200 was about flat. AUD/USD edged down as low as 0.6240 (fresh low since April 2020) before recovering to 0.6280, with some help from a Financial Times report claiming that the Bank of England may after all extend its support program for UK debt.
Currencies/Macro
Markets were in a holding pattern ahead of tonight’s key US inflation data. The S&P500 is down 0.3%, and bond yields and most currencies are little changed.
The US dollar index is unchanged on the day. EUR ranged between 0.9668 and 0.9734. The yen underperformed, helped by BoJ Kuroda’s dovish comments, and USD/JPY rose from 146.15 to 146.97 – highest since 1998.
AUD ranged between 0.6236 (a 2 ½ year low) and 0.6289. NZD ranged between 0.5560 and 0.5615. AUD/NZD slipped from 1.1200 to 1.1175.
US PPI inflation was slightly firmer than expected, at +0.4%m/m and 8.5%y/y (est. +0.2%m/m and 8.4%y/y, prior 8.7%y/y), with the core measure ex-food and energy at +0.4%m/m (as expected) and 7.2%y/y (est. 7.3%y/y).
The FOMC minutes from the September meeting were mixed, confirming their hawkish stance but also voicing concerns over the impact on the economy. Members reiterated that the costs of taking too little action are greater than taking too much action, and a number saw risks of a wage-price spiral. Others, however, saw some of the tightness in the labour markets abating. And several participants preferred to "calibrate the pace of further policy tightening with the aim of mitigating the risk of significant adverse effects on the economic outlook."
FOMC member Kashkari said the Fed is having to "walk the walk" to validate its mandate of price stability. It will be a judgement call on whether upcoming moves are 75 bps or 50 bps. There may be a housing downturn but a crash is unlikely, with household financials stronger than pre-pandemic.
Eurozone industrial production in August was firmer than expected, rising 1.5%m/m and 2.5%y/y (est. +0.7%m/m and 1.5%y/y).
ECB President Lagarde said it is normalising policy, and the discussion on quantitative tightening has begun and will continue. She also urged central banks to work together, highlighting spillovers and spillbacks. Villeroy said that once beyond neutral, the ECB should become cautious. Growth concerns and recession risks should not derail its plan to get the deposit rate to neutral, which he suggested is "a bit less than 2%. Holzmann said the ECB can get close to neutral by the end the year if it hikes by a total of 125bp at its next two meetings.
UK monthly production data was weak. GDP for August fell 0.3%m/m (est. flat) with the prior July reading lowered to +0.1%m/m from +0.2%m/m. Industrial production fell 1.8%m/m (est. -0.1m/m), with July marked down to -1.1%m/m from -0.3%m/m
The BoE confirmed that emergency bond buying will end as planned on Friday. The BoE said in a statement that the deadline has been made "absolutely clear" to banks, adding that the institutions can weather severe economic outcomes and support loans.
BoE MPC member and chief economist Pill still expects "significant monetary policy action" at the next meeting. He stressed the ongoing commitment to stabilising inflation around the 2% target.
Interest rates
US bond yields fell for the second consecutive day, and the curve bull steepened after uncertainty in UK markets continued, where the BOE was forced to deny a report that it’ll extend bond-buying into next week. The FOMC meeting minutes pointed towards a commitment to raise rates, however the importance of “calibrat[ing] the pace” of hikes to mitigate risks was also emphasised. 2yr government bond yields was volatile and traded a range between 4.27% and 4.33% before settling at 4.29%, and 10yr government bond yields fell from 3.90% to 3.88% via 3.98%.
Australian bonds followed trends from global volatility, and underperformed their US counterparts. 3yr government bond yields rose from 3.54% to 3.55% via 3.60%, and 10yr government bond yields rose from 3.99% to 4.00% via 4.04%. The AU-US 10yr bond spread widened slightly on the back of AU underperformance, currently at 10bps.
Credit indices were tighter, with Main at 133 (-2) and CDX at 103 (-1), though cash continued its move wider and primary issuance remains muted. The US had another zero deal day in primary, owing the release of stronger than expected PPI data, and issuance will likely remain muted given the upcoming CPI release. European primary issuance totalled EU2.5b as four issuers priced covered transactions, inclusive of CBA who priced a EU1.0b 3Y covered deal at MS+18 (BBSW+82).
Commodities
Crude markets saw their third day of losses as traders unwound more of last week’s OPEC+ supply cut bounce, with inflation concerns and lower crude demand forecasts the key drivers. The November WTI contract is down $2.23 at $87.12 while the December Brent contract is down $1.84 at $92.45. OPEC slashed forecasts for crude demand in the fourth quarter by 900kbd while noting that “Risks are skewed to the downside”. On the supply side, strikes in Iran appear to be spreading to major refineries in the southwest according to social media videos as protests against the country’s leadership enter their fourth week though it’s not clear how much of an impact this may have on production levels. Tropical Storm Karl has formed in the Southern Gul but is likely to turn Southwest, driving into the Mexican coast on Friday morning. Pemex shut some infrastructure as a precaution.
Gas prices weakened in the US on forecasts of an easing in cooler temperatures on the east coast next week and rising production. Germany is set to hit its November storage target of 95% three weeks ahead of schedule. And in coal markets, European prices jumped 6.5% on a warning from Transnet that strikes in South Africa since May are “lasting longer than anticipated and has started to take a serious toll on exports”.
Metals markets were quiet bar aluminium which surged on news that the Biden administration is considering a complete ban on Russian aluminium. Aluminium is last up 4.8% at $2,344 having been as much as 7.4% earlier in the session. The White House was said to be considering an outright ban, increasing tariffs or sanctioning Rusal according to sources. It’s not clear when a decision may be made.
Finally note that iron ore markets softened as hopes for fresh policy post the NPC waned. The November SGX contract is down another 90c at $93.15 while the 62% Mysteel index is down $1.05 at $95.85. Pollution shutdowns ahead of the NPC to improve air quality were cited as a driver for this week’s losses with sintering in the Hebei region being cut by as much as 50% until the 22nd of October when the Congress is due to finish.
Day ahead
Aust: MI inflation expectations will likely remain elevated in October, mirroring the actual rate of inflation.
NZ: The food price index is expected to decline in September given the seasonal drop in vegetable prices (Westpac f/c: -0.3%).
US: A further easing in annual headline CPI inflation is anticipated in September, driven by a decline in gas prices (market f/c: 0.2%mth; 8.1%yr); attention will however be centred on the core CPI measure, which is expected to lift back to a 40-year high (market f/c: 0.4%mth; 6.5%). Initial jobless claims should meanwhile remain at a low level (market f/c: 225k) and the FOMC’s Bowman is also due to speak.
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