Markets Daily
Bond yields rose as Fed rate expectations were increased, hurting equities and boosting the US dollar. AUD/USD slipped to 0.6270. Today’s data focus is Australia September employment.
Yesterday
The Westpac-Melbourne Institute Leading Index continues to point to a material loss in Australian economic momentum to a below-trend growth pace heading into 2023. The September Leading Index read is the weakest since the pandemic first hit in 2020, and, prior to that, since early 2016. Regional equities were mixed again, China and Hong Kong clearly underperforming. The ASX 200 eked out a 0.3% gain. AUD/USD traded mostly 0.6295 to 0.6325, keeping inside the previous day’s ranges.
Currencies/Macro
The US dollar is up against all G10 currencies on the day. EUR/USD fell from 0.9860 to 0.9775. Sterling underperformed most majors as UK political turmoil deepened, GBP/USD down about 1 cent to 1.1220. USD/JPY rose for an eleventh consecutive day, from 149.30 to 149.90 – a fresh high since 1990. AUD/USD fell about 40 pips over the day to 0.6270. NZD/USD is down only about 10 pips at 0.5670, trimming AUD/NZD -0.4% to 1.1055, printing two-month lows as New Zealand’s high Q3 CPI continues to support the Kiwi on crosses.
US housing starts in September fell -8.1% (est. -7.2%, prior +13.7%), while building permits rose 1.4% (est. -0.8%, prior -8.5%).
The Federal Reserve’s Beige Book of regional economic conditions reported that activity expanded "modestly on net…though conditions varied across industries and districts”. The labour market expanded at a modest to moderate rate in most areas, with some signs of cooling and hesitancy to increase payrolls given concerns of an economic downturn. Wage growth was expected to continue due to cost of living increases and the need to retain talent. Retail spending was little changed overall, with lower discretionary spending but strength in travel and tourist activity. Manufacturing was steady or expanding in most districts, with some easing in supply chain disruptions. There was an increase in demand for services.
Eurozone CPI inflation in September was finalised at 9.9%y/y (est. 10.0%, prior 9.1%). The core measure remained at 4.8%y/y. Energy prices remain the main contributor, running at 40.7%y/y, while food price inflation is 11.8%y/y.
ECB member Nagel (Germany) said he wants to reduce asset holdings soon, saying "there is a strong case to soon begin not replacing all maturing bonds".
UK CPI inflation in September rose 0.5%m/m and 10.1%y/y (est. 0.4% and 10.0%, prior 9.9%). The core measure rose 6.5%y/y (est. 6.4%, prior 6.3%).
Interest rates
US bond yields rose, as Fed officials kept up with their hawkish rhetoric, combined with Canadian CPI which came in stronger than expected. 2yr government bond yields rose from 4.45% to 4.55%, and 10yr government bond yields rose from 4.02% to 4.13%.
Australian bond yields rose, taking trend from global price action. The hawkishness of global central banks versus the RBA who has slowed down on its rate hike path earlier this month continues to see AU bonds outperform their global counterparts. 3yr government bond yields (futures) rose from 3.57% to 3.69%, and 10yr government bond yields (futures) rose from 3.96% to 4.06%. 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 -7bps.
Credit indices closed wider in line with equity with Main a bp wider at 126.5 and CDX out 3bp to 97 with cash also 1-2bp wider. Primary activity continues to pick up with Europe seeing 4 issuers price EUR5bn with the volume dominated by Tennet’s EUR3bn, 4 tranche green deal, while Permanent TSB has reportedly paid a record coupon on its PerpNC5.5yr AT1 of 13.25% and TD completed a EUR1.25bn 3.5yr covered deal at MS+18 (BBSW+74). In the US, 3 corporate issuers were in the market including Lockheed Martin’s USD4bn 5 part (3-41yr) post earnings deal that saw NICs in the 5-15bp range across tenors, and Diageo’s USD2bn 3 part offering that priced with NIC of ~5bp across the 3.5.10yr offering.
Commodities
Crude rebounded even as US President Biden confirmed the US will be releasing another 15mb of crude from the SPR though he did not announce any plans on curbing fuel exports. The November WTI contract is up $2.99 at $85.81 while the December Brent contract is up $2.23 at $92.26. The DOE also finalised a rule allowing for fixed-price forward purchase of crude to replenish the SPR at “lower prices than the barrels sold” noting that the “the fixed-price contracts can give producers the assurance to make investments today, knowing that the price they receive when they sell to the SPR will be locked in place, providing them with some protection against downward movements in the market”. According to a senior administration official, the DOE will initiate purchases when WTI is “at or below $67 to $72”. US exports of crude surged 44% to 1.26mbpd last week though production rose 100kbpd to 12mbpd. Crude inventory dropped 1.7mb.
Meanwhile natural gas prices continued their slide in Europe with waning demand, surging inventory, warmer weather and a surge in LNG deliveries all hitting prices. The front month November TTF NBP contract fell another 9.3% to be down 38% in the last 5 sessions while the European TTF equivalent is down 29%. However, European prices are in a ‘super-contango’ state at the moment with the spread between the first and second month out to a record 28.5 EUR/MWh with force majeure in Nigeria and Malaysia adding to concerns of higher prices into the winter.
Metals were modestly lower with copper down an additional 0.75% at $7,365 and aluminium down 0.14% at $2,190. Concerns over a continued slowdown in China and suspected Russian aluminium inflows weighed on sentiment with on warrant aluminium stocks rising for the 11th session to hit highs back to early March. Reuters reported that Glencore had delivered significant amounts of Russian origin aluminium to LME registered warehouses in Gwanyang, South Korea. In industry news, Alcoa reported a loss, 5 weeks after warning that it was being squeezed by higher costs and falling prices.
Finally note that iron ore prices softened with concerns over weaker activity in China weighing on sentiment. The November SGX contract is down $1.10 versus the same time yesterday while the 62% Mysteel index fell 60c to $93.70. The World Steel Association forecast that global demand for steel will fall 2.3% in 2022, with consumption in China set to drop by 4% due to the slump in the property sector.
Day ahead
At 11:30am Syd we see Australia’s September labour force survey. Illness-related absences likely continued to impact the labour market in September, with both Westpac and the market anticipating employment to lift by an underwhelming 25k. This should also weigh on participation, seeing the unemployment rate round down (Westpac f/c: 3.4%, market 3.5%).
US: Further declines in existing home sales is anticipated for September given the scale of financial tightening (market f/c: -2.2%). The Philadelphia Fed index should continue to reflect subdued conditions in October, like other regional surveys (market f/c: -5). Further weakness in the leading index is anticipated for September (market f/c: -0.3%) and initial jobless claims should remain at low levels for now (market f/c: 230k).
The FOMC’s Evans, Bullard, Harker, Jefferson, Cook and Bowman are all due to speak, ahead of the Fed’s pre-meeting media blackout period commencing Saturday.
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