Markets Daily
Equity market sentiment remained upbeat in anticipation of solid company earnings reports, but currencies and bonds were contained. AUD/USD edged up to 0.6310. Today’s calendar is fairly light, including UK September CPI and the Fed’s Beige Book.
Yesterday
The minutes of the Reserve Bank Board’s October meeting contained a very detailed discussion on the decision to raise the cash rate by 25 basis points when markets and the media were convinced the move would be 50 basis points. The Board thought that “the arguments were finely balanced” but opted for 25bp given how quickly rates had been raised and the benefits of monitoring the lagged response on the economy. RBA Deputy Governor Bullock also discussed this decision in her speech and made clear that rates would continue to rise. AUD/USD extended Monday’s rally by a modest 25 pips to 0.6315 as regional equities rallied. The ASX 200 closed up 1.7%, several other regional indexes up 1% or more, China the exception, down slightly. AUD/NZD fell from 1.1160 to 1.1080 in the wake of New Zealand’s higher than expected Q3 inflation data, which caused forecasters including Westpac to pencil in an even higher cash rate – 5.0% versus our forecast for 3.6% peak for the RBA cash rate.
Currencies/Macro
The US dollar was mixed against G10 currencies on the day, with the Kiwi strongest, sterling weakest. EUR/USD ranged between 0.9813 and 0.9876, net +20 pips at 0.9860. GBP/USD chopped a little lower, -0.2% at 1.1330. USD/JPY continued to rise, from just under 149 to 149.38 – a fresh high since 1990. AUD/USD ranged between 0.6266 and 0.6340, overall up about 25 pips at 0.6310. NZD/USD ranged between 0.5650 and 0.5719, only slightly extending its bullish post-CPI reaction. AUD/NZD consolidated its decline around 1.1100.
US industrial production in September was stronger than expected at +0.4% (est. +0.1%, prior revised from -0.2% to -0.1%). Gains were mainly in manufacturing and mining, with a smaller than expected fall in utilities.
The NAHB homebuilder sentiment survey fell to 38 in September (est. 43, prior 46) the tenth consecutive monthly fall. The NAR has said that this will be the first year since 2011 that single family starts will have declined, and cautioned that 2023 is likely to remain weak given higher interest rates.
The Bank of England confirmed it will hold its first government bond sale on 1 November. The sale was initially scheduled for 6 October, but was then delayed due to instability in the financial markets.
Interest rates
US bond yields range traded on Tuesday, as markets debated the risks around higher rates and the strength of the economy. 2yr government bond yields traded between 4.40% and 4.46% and finished at 4.43%, 10yr government bond yields traded between 3.96% and 4.06% and finished at 4.01%.
Australian bonds took trend from US price action, although there was an AU outperformance versus their US counterparts. 3yr government bond yields (futures) ranged from 3.50% and 3.60%, closing at 3.55%, 10yr government bond yields (futures) ranged from 3.92% and 4.01% before closing at 3.95%. 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 -5bps.
Credit spreads remain mixed with indices in positive territory (Main in 1.5bp to 125 and CDX in 2.5bp to 96), however cash spreads remain subdued as primary activity emerges post bank reporting. Primary was dominated by financials with Europe seeing 7 issuers price EUR6.85bn which included Morgan Stanley following up its USD6.5bn 3 part deal from Friday with EUR2.75bn across a EU1bn 6nc5yr at MS+175 (BBSW+239) and a EUR1.75bn 11.25nc10.25yr at MS+200 (BBSW+272). The US saw 3 financial issuers price USD6.35bn including dual tranche deals from BNY (USD2.5bn across 5/10yr calls) and US Bancorp (USD3bn across 3/10yr calls).
Commodities
Crude prices fell as the prospect of additional SPR releases through the mid-terms weighed on sentiment. The November WTI contract is last down $2.24 at $83.22 while the December Brent contract is down $1.47 at $90.15. The White House was said to be considering a further release of 10-15mb from the SPR beyond the scheduled end of the 180mb release which is set for the end of this month. Caps on exports of fuels are also being considered too according to sources. The November RBOB gasoline contract fell 1.4% on the news while the diesel equivalent fell 2.4%.
Natural gas prices continued their plunge in Europe with the November TTF contract hitting fresh 4-month lows down 11% on the day and down 28% over the last 5 days. A surge in cargoes of LNG diverted from Asia and the US is being met with a “significant” reduction in industrial demand since August according to Enagas SA of Spain. At least seven tankers laden with LNG are moored off Spain’s southwest coast, while in the UK another two are anchored near the country’s Milford Haven terminal according to Bloomberg ship-tracking data.
Metals slid with the continued rise in aluminium inventory and China pulling economic data weighing on sentiment. Copper is last down 1.5% at $7,447 while aluminium is down 2.2% at $2,180. Global aluminium warehouse inventory has jumped 22% so far this month with traders focused on deliveries into Singapore and Malaysia possibly coming from Russia ahead of any possible LME ban.
Finally note that iron ore markets remained stable just above $90 with the November SGX contract up 35c at $92.55 while the 62% Mysteel index rose $1.05 to $94.30. Vale beat forecasts for last quarter’s production, producing 89.7mt versus 87.2m expected helped by dry weather. Rio’s production report was more sombre though noting “Fears of recession are emerging on the implementation of aggressive interest rate hikes in the US and Europe, while a weak property sector continues to weigh on China’s economy”. Q3 shipments from Rio fell 1% and it lowered guidance to the low end of the 320 to 335 range.
Day ahead
Aust: The September Westpac-MI Leading Index looks set to move further into negative territory given the broad-based weakening across commodities, equities and sentiment indicators.
The intensity of energy inflation and underlying breadth of other inflationary pressures will again feature prominently in UK September CPI. Consensus is 10.0%yr overall, 6.4%yr core rate, both up 0.1ppt on August.
The final reading on Eurozone September CPI is due, with the flash estimate 10.0%yr overall, 4.8%yr core.
US: Weakness in demand and ongoing input supply constraints should continue to weigh on housing starts and building permits in September (market f/c: -7.0% and -0.8% respectively). Meanwhile, the Federal Reserve’s Beige Book will provide an update on conditions across the regions. Minneapolis Fed president Kashkari is also due to speak and two different events.
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