Markets Daily
Markets initially reacted to stronger than expected US inflation data, but the reactions were later curiously retraced, equities rallying and AUD/USD rebounding from 0.6170 to 0.6300. Today’s calendar includes China September CPI and trade balance and US September retail sales.
Yesterday
There was no Australian data. AUD/USD traded a tight 0.6268-91 range. Japanese officials in Washington DC grumbled about FX volatility as USD/JPY hovered near highs since 1998, having recovered the ground lost when the Bank of Japan intervened last month. Regional equities remained under pressure, almost all major bourses falling, although the ASX 200 was only a fraction lower.
Currencies/Macro
The US dollar is down against all except havens Swiss franc and Japanese yen, after initially spiking higher on the CPI data. EUR/USD slid from 0.9745 to 0.9633 on the CPI data but a few hours later had recovered its losses and extended to 0.9775, up a net 0.8%. GBP/USD also recovered from a wobble, overall strongest in the G10, +2% or 2.2 cents at 1.1325, helped by media reports that the UK government could backtrack on more elements of its fiscal package.
USD/JPY rose from 146.80 to 147.67 – highest since 1998 – then steadied around 147.25. AUD/USD dropped from 0.6300 to 0.6170 (a 2 ½ year low) on CPI, later returning to 0.6300, up 20 pips on the day. NZD/USD was similar, up a net 0.6% at 0.5640 after a fall to 0.5512 (a 2 ½ year low). AUD/NZD slipped from 1.1190 to 1.1160.
US CPI in September rose 0.4%m/m and 8.2%y/y (est. +0.2%m/m and +8.1%y/y, prior 8.3%y/y). The core ex-food & energy measure rose +0.6%m/m and 6.6%y/y (est. +0.4%m/m and 6.5%y/y, prior 6.3%), the annual pace making a 40 year high. Gains were broad-based, with only a few major categories declining (energy prices, transportation costs, apparel). Notable gains were seen in housing costs, food/beverage prices, services, and medical care.
US weekly initial jobless claims of 228k and continuing claims of 1.369m were close to estimates (est. 225k and 1.365mn).
German CPI in September was finalised at its high initial level of 10.0%y/y, EU Harmonised 10.9%y/y.
Interest rates
UK bonds rallied overnight, after reports that the Liz Truss administration is preparing to abandon a key part of its tax-cutting policy, the latter which caused chaos and turmoil in UK financial markets. Yield on the 2yr gilts fell 20bps and on the 10yr gilts it fell 23bps.
US bond yields rose and the curve bear steepened after monthly US CPI data showed core CPI at 40 year highs, and markets have moved to fully price a 75bp hike at the FOMC meeting next month. 2yr government bond yields jumped from 4.26% to 4.53% before falling to 4.40%, and 10yr government bond yields jumped from 3.84% to 4.08% before falling to 3.89%.
Australian bonds followed global bearish sentiment following the strong US CPI data. 3yr government bond yields (futures) rose from 3.50% to 3.72% before finishing at 3.63%, and 10yr government bond yields (futures) rose from 3.95% to 4.15% before retracing to 4.06%. Markets are pricing in an 80% chance of a 25bp hike at the next RBA meeting. The AU-US 10yr bond spread widened slightly on the back of AU underperformance, currently at 11bps.
Credit indices moved in line with the broader market, with Main (131) and CDX (101) both ending tighter despite intraday spikes, and cash was tighter in the US. Primary issuance was muted on the day due to the CPI release, with a lone issuer pricing a covered transaction in Europe and the US recording another zero deal day (having not seen any primary issuance since last Thursday due to volatility and macro uncertainty).
Commodities
After 3 days of losses, crude markets bounced as risk sentiment improved. The November WTI contract is up $1.82 at $89.09 while the December Brent contract is up $2.15 at $94.60. The EIA inventory data was very mixed with a huge 9.88mb rise in crude inventory while distillate fell by a hefty 4.85mb. Crude production fell 100kbpd to 11.9mpb but exports slumped a massive 1.7mbpd and the SPR released 7.69mb, bringing the cumulative release since the March 31 announcement date to 169mb. And the IEA warned that the production cut from OPEC+ “increases energy security risks worldwide” with “resulting higher price levels exacerbating market volatility” and “may prove the tipping point for a global economy already on the brink of recession”.
US President Biden said, “The price of gas is still too high, and we need to keep working to bring it down” and that he will “have more to say” about plans next week. Showing how difficult it is to control fuel prices via SPR release however, the November ULS diesel contract rose 4% to a fresh 4 month high. A senior US Treasury official briefed reporters to confirm that meetings to determine the Russian price cap will take place over the next several weeks, with the focus being on setting a ceiling for crude and then considering a cap on products. The EU has banned imports of Russian oil and will also prohibit its companies from providing financing and insurance services for seaborne cargoes of Russian petroleum, starting Dec 5 for crude and Feb 5 for refined products.
Metals prices were modestly higher with copper last up 1.27% at $7,641 and aluminium up 2% at $2,352. As noted yesterday, the Biden administration is considering a ban on Russian metal supplies. The Yangshan copper premium rose to a 1yr high, reflecting tight physical markets in China and increased demand. The spread between the 1st and 2nd Shanghai copper future also widened to a 1yr high, again reflecting solid demand.
Finally note that iron ore markets fell further as hopes for fresh policy initiatives and an easing of zero-Covid policies at the upcoming CCP congress appeared to fade. The November SGX contract is last at $92.30, down 85c from the same time previous session while the 62% Mysteel index is down $1.90 at $93.95. China will report September trade data today including iron ore imports.
Day ahead
Singapore’s central bank is expected to tighten policy today by raising the SGD policy band for the third time this year, responding to global inflation pressures. The MAS only has 2 scheduled policy reviews annually. Singapore GDP is also released at 11am Syd/8am local, expected to have risen 3.5%yr.
At 12:30pm Syd, a further deceleration in China producer inflation is anticipated in September (market f/c: 1.0%yr) though the pick-up in consumer inflation is still relatively benign (market f/c: 2.9%yr). The trade balance should remain broadly unchanged in September, but the weakening global economy is a risk into year-end (market f/c: $80.3bn).
Eur: The trade deficit will likely widen in August given still elevated imports values for energy-related components (market f/c: -€45bn).
US: The University of Michigan consumer sentiment survey is expected to hold near its lows in October as inflation and rates continue to weigh on households (market f/c: 58.8); hence, another soft print for retail sales is expected in September (market f/c: 0.2%). Meanwhile import prices will continue its decline in September (market f/c: -1.1%) and the robust pace of business inventory growth should hold firm (market f/c: 0.9%). The FOMC’s George, Cook and Waller are all due to speak at different events.
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