Markets Daily
Bond yields and the US dollar fell amid continued speculation that the Fed will slow its tightening pace, encouraged by the Bank of Canada’s smaller than expected 50bp hike. AUD/USD bounced to 3-week highs at 0.65. Today’s calendar highlights are the ECB policy decision and US Q3 GDP.
Yesterday
Australia’s Q3 headline CPI rose 1.8%qtr, 7.3%yr, with the RBA’s preferred core inflation rate the trimmed mean up 1.8%qt, 6.1%yr. Consensus was 1.6%qtr headline, 1.5%qtr trimmed mean. The most significant contributions came from new dwellings (+3.7%, 0.31ppt), gas (+10.9%; 0.10ppt) and furniture (+6.6 %, 0.09ppt). Rates markets continued to place a high probability on the RBA raising the cash rate 25bp next week but yields rose for later dates, such as the May 2023 contract, up from 3.88% to 3.95% and above 3% in mid-2023. AUD/USD was around 0.6380 pre-data, popped up 20 pips then returned to trade for some hours around 0.6375-95 before pushing up to 0.6420. The late rally coincided with a bounce in the Chinese yuan, with Reuters reporting that China’s central bank supported it yesterday. Most regional equity markets rose, though the ASX 200 was a muted +0.2%.
Currencies/Macro
The US dollar fell heavily for a second consecutive day. EUR/USD rose from 0.9960 to 1.0080, printing six-week highs. GBP/USD rallied 1.5 cents to 1.1620. USD/JPY fell from above 148.00 to 146.35. AUD/USD rose 1 cent over the day to 0.6495. NZD/USD rose almost 1 cent to 0.5835. AUD/NZD starts Thursday trade down about 25 pips over the day, at 1.1125.
Bank of Canada surprised markets with a 50bp rate hike to 3.75% (75bp was expected), despite strong CPI inflation data and previous emphasis from Governor Macklem on inflation over growth. Previous hikes were 75bp in September and 100bp in July. BoC stated it expects to continue tightening policy as it still believes the economy has "excess demand," while core inflation measures are showing no "meaningful evidence" of slowing. Against that, the statement noted the impact of global tightening, that global growth was slowing, and that a technical recession in Canada is just as likely as modest growth. It cut its 2022 growth forecast to 3.3% from 3.5%, and for 2023 to 0.9% from 1.8%.
US new home sales fell -10.9% in September (est. -15.3%, prior +24.7%). Sales have been volatile this year amid surging mortgage rates. The median sales price rose 8.0% to $470,600 following August's 9.2% decline to $435,800, for an annual pace of 13.9% (prior7.8%).
Interest rates
US bond yields fell as risk sentiment deteriorated, despite continued speculation that the Fed will slow its tightening pace. US corporate earnings season has been difficult. 2yr government bond yields fell from 4.46% to 4.40%, and 10yr government bond yields fell from 4.09% to 4.00%.
Australian bond yields fell, following US market trends, and the bull steepened overnight. 3yr government bond yields (futures) fell from 3.62% to 3.48%, and 10yr government bond yields (futures) fell from 3.98% to 3.88%. Markets are fully priced for a 25bp hike, and pricing in a 20% chance of a 50bp hike at the RBA meeting next week. The AU-US 10yr bond spread widened on the back of US outperformance, currently at -11bps.
Credit indices were firmer again with Main another 2.5bp tighter at 113.5 to join CDX at its tights for the current series, while CDX in half a bp to 92.5, however cash spreads continue to lag the move in rates. Primary activity was a little more subdued in Europe with just 2 IG issuers in the market ahead of the ECB led by Suez with its EUR1.7bn dual tranche offering. The US saw USD11bn priced across 5 issuers with HSBC’s USD6bn 3 tranche post earnings deal the largest The deal included both senior in the form of a USD1.75bn 4NC3yr at T+295 and a USD2.25bn 6NC5yr at T+320 and Tier 2 USD2bn 11NC10yr T+410.
Commodities
Record US crude exports and plunging distillate stocks drove crude and refined products higher. The December WTI contract is up $2.81 at $88.13 while the December Brent contract is up $2.41 at $95.93. While US crude stocks rose 2.589mb, US exports of crude plus fuels hit a record 11.4mb. Gasoline stocks fell by 1.478mb while crude production remained flat at 12mb. Mansfield Energy is now requiring 72hrs notice for deliveries of fuels in the US Southeast so that “fuel and freight can be secured at economical levels”. The US November ULSD contract jumped 4.4% to the highest close since June while the European equivalent jumped 4.3%.
Meanwhile energy markets in Europe rose as traders fretted over whether price caps will be in place before the winter season kicks in. European energy commissioner Kadri Simson said that “we can introduce [the cap] this winter already if we get the mandate”. The November NBP contract rose 6.6% while the Dutch TTF contract rose 4.5%. Germany said it is prepared to double financial aid to Uniper to €60bn after Uniper reported an adjusted net loss of €3.2bn for the first 9 months of the year. The German Senate will need to approve a new law on Friday for the support package to go into effect next week.
Metals jumped on the slump in the US$ and Chinese banks reportedly selling the US currency versus Chinese yuan. Copper jumped 3.3% to $7,769 while aluminium jumped by 5.2%. Chile proposed a cut in the planned copper sales tax from 4% to 1% after heavy industry lobbying. The Mining and Energy Committee was scheduled to meet Wednesday to review the proposed changes. San Antonio Port workers in Chile set up barriers as workers protested the lack of progress on pensions. And the LME will meet to discuss market feedback on the possibility of restrictions on Russian supplies while the US government is also considering a range of potential curbs on aluminium from Russia. The skew for calls versus puts on aluminium hit 6-month highs on the LME suggesting traders are trying to position for possible bans. Norsk Hydro noted that “There is a paradox that a number of producers have been self-sanctioning in terms of Russian metal, while there are others that are buying Russian metal and are gaining from the war in many ways”.
Finally note the slump in iron ore prices continued with Baosteel highlighting rapidly weakening steel markets driving a 3.4%yy cut in production in Q3 earnings. The November SGX contract is down $3.30 from the same time a day ago at $86.35 while the 62% Mysteel index fell $2.3 to $87.65. US based Cleveland-Cliffs reported Q3 Ebitda about 50% below analyst estimates.
Day ahead
Australia: Growing concerns over global growth has seen commodity prices ease recently, likely resulting in a strong decline in the export price index for Q3 (Westpac f/c: -7.0%). Similarly, cooling gasoline prices will also put downward pressure on the import price index, but price increases among non-fuel components may act as an offset (Westpac f/c: 0.8%).
China: Virus risks will continue to loom over industrial profit growth into year-end.
Another 75bp rate hike is widely anticipated at the ECB policy meeting, bringing the key deposit rate to 1.5% and the main refinancing rate to 2.0%. There may well be changes in the existing cheap funding system available for banks that increase lending to non-financial borrowers. In the press conference, President Lagarde will no doubt be asked about quantitative tightening but should be non-committal on timing.
US: Despite the current weakness in domestic demand, strength from trade and inventory accrual should see GDP growth print a solid gain in Q3 (Westpac f/c: 2.1% annualised; market f/c: 2.4% annualised). Meanwhile, initial jobless claims should remain at low levels (market f/c: 220k); durable goods orders are expected to post a decent gain (market f/c: 0.6%); and the Kansas City Fed index should signal a further slowing in activity (market f/c: -2).
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