Markets Daily
Stronger US economic data prompted markets to push Fed rate expectations higher. Equities slumped while bond yields and the US dollar rose, AUD/USD sliding to 0.6200 and JPY falling to a 32-year low. Today’s economic calendar is very light, including the NY Fed October Empire State survey.
Friday
Regional equities extended Wall Street’s unexpected post-CPI rebound, many major indexes up 2% or more, the ASX 200 +1.75%. Along with the momentum from the US, there was some fresh optimism over UK financial markets as Chancellor Kwarteng departed the IMF meetings in Washington, DC ahead of schedule, presumably to attend to the expected fiscal policy backflip. AUD/USD rose 40 pips to 0.6340. China September inflation rose to a still enviable 2.8%yr while Singapore tightened monetary policy for the third time this year by raising the SGD policy band.
Currencies/Macro
The US dollar was broadly strong Friday. EUR/USD fell half a cent to 0.9730. GBP/USD fell from 1.1350 to 1.1180 as UK PM Liz Truss sacked Chancellor Kwarteng and replaced him with Jeremy Hunt. USD/JPY rose from 147.50 to 148.86, breaking the 1998 highs to reach highs since August 1990. Underperformer AUD fell from 0.6340 early London to lows just under 0.6200. NZD/USD fell from 0.5640 to 0.5560. AUD/NZD fell 20 pips to 1.1150.
US retail sales in September were flat (est. +0.2%m/m), although the prior reading was revised to +0.4%m/m from +0.3%m/m. More importantly, core control group sales were firm, rising 0.4%m/m (est. +0.3%m/m, prior flat reading revised to +0.2%m/m).
US October consumer sentiment (University of Michigan) was solid at 59.8 (est. 58.8, prior 59.6), with inflation expectations rising: 1yr ahead expectations rose to 5.1% (est. 4.6%, prior 4.7%) and 5-10yr ahead expectations rose to 2.9% (est. 2.8%, prior 2.7%).
Fed speakers George, Daly and Cook stuck with the Fed’s tightening rhetoric, looking for more work to be done against inflation and for policy rates to remain in restrictive territory next year (Daly targeting the 4.5%-5.0% area). George did also sound caution regarding the risks of moving too fast and too far. Bullard reiterated the U.S. has a serious inflation problem, and front-loading rate hikes is the correct strategy.
Eurozone trade deficit in August was -EUR47.3bn (est. -EUR45bn). German WPI in September rose +1.6%m/m and 19.9%y/y (prior 18.9%y/y), indicating the persistence of pricing pressures.
Interest rates
US bond yields continued their ascent following Thursday’s strong CPI data, the curve also became more inverse. 2yr government bond yields rose from 4.39% to 4.52%, and 10yr government bond yields rose from 3.85% to 4.03%. Markets are fully priced for a 75bp hike at the next FOMC meeting.
Australian bond yields followed global trends, but outperformed their US counterparts. 3yr government bond yields (futures) rose from 3.54% to 3.65%, and 10yr government bond yields (futures) rose from 3.96% to 4.11%. Markets are fully priced for a 25bp hike at the next RBA meeting. The AU-US 10yr bond spread narrowed on the back of AU outperformance, currently at 6bps.
Credit continues to be impacted by broader market sentiment, with indices moving wider in the US and Europe seeing tightening. CDX ended the session at 105 (+2) and Main at 132 (-2), and primary issuance remained subdued, though the US recorded its first primary transaction for the week, with Morgan Stanley pricing a USD6.5b deal. There were no primary transactions in Europe.
Commodities
Crude markets fell last week as global recession fears, fresh Chinese lockdowns and tightening financial conditions all weighed on sentiment. The November WTI contract fell $3.50 Friday to close at $85.61, down 7.6% on the week while the December Brent contract fell $2.94 to $91.63, down 6.4% on the week. The weakness came despite US President Biden warning "there will be consequences" for U.S. relations with Saudi Arabia. NSC spokesperson Kirby said, “Other OPEC nations communicated to us privately that they also disagreed with the Saudi decision, but felt coerced to support Saudi’s direction”. Discussions over the Russian oil price cap continued at the G20 meetings. Officials involved in the talks are aiming to establish and release the full price-cap plan at least a month ahead of the December Russian crude and product financing embargo deadline to give markets time to prepare for the new sanctions regime. Treasury Secretary Yellen said that Russia had sold oil for around $60 a barrel in recent history -- hinting at a possible level for the cap – though insisted she had not suggested a price in the range $60 was being actively considered.
European energy prices also fell as climate models pointed to milder winter temperatures, easing potential heating fuel demand. The Copernicus Climate Change Service, which updated its seasonal outlook Thursday, said temperatures probably will be significantly above normal during the peak heating season between December and February. The European November gasoil contract fell 2.7% Friday to be down 14% on the week while the November TTF natural gas contract fell 7.7% Friday to hit a fresh 4 month low.
Metals fell on the surging US$ and the risk of more central bank tightening to come. Copper fell 0.6% Friday to $7,531 while aluminium fell by a larger 2.9% to $2,290. That’s despite last week’s announcement that the White House is looking at banning Russian imports, raising tariffs on Russian aluminium to levels so punitive they would constitute an effective ban, as well as sanctions on Rusal. However, physical metals markets are tightening. The spot to 3m copper spread closed in on highs for the month at $114.25 while physical premiums in Europe were being quoted at record highs. German producer Aurubis will charge $228 per tonne over the London Metal Exchange (LME) cash price for term deliveries in 2023, a record high and an 85% increase on this year's premium of $123.
Finally note that iron ore markets were up modestly but slipped on the week with fresh lockdowns and steel plant closures to improve Beijing air quality weighing on sentiment. The November SGX contract is last at $92.55, up 25c from the same time previous session though it was down 3.2% on the week. The 62% Mysteel index rose $1.7 to 95.65 Friday. Steel mills in China’s top producing province of Hebei have been ordered to limit output, in a bid to ensure blue skies for the once-every-five-year Communist Party Congress that starts in Beijing Sunday, according to local media. A Finnish stainless-steel producer warned industrial companies may have to become power generators as utilities are failing at their core task of ensuring adequate supply.
Day ahead
UK: Further declines in Rightmove’s house prices is anticipated given continued policy tightening.
The New York Fed’s Empire State manufacturing survey is the first of the October round of regional business surveys. The headline index should reflect subdued conditions, as with other surveys (market f/c: -1.0).
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