Markets Daily
US equities rallied sharply with help from company earnings. Bond yields rose, helping the US dollar. AUD/USD slipped back to 0.6400. Today’s data includes Australia September retail sales, China October PMIs and Eurozone Q3 GDP.
Friday
Australia Q3 producer prices rose 1.9%qtr, 6.4%yr, the fastest pace since the series began in 1998. Building construction costs were up 13.1%yr, utilities prices 10.7%yr. AUD/USD was quiet, well within the previous day’s range, trading 0.6643 to 0.6480. Regional equities were mostly weaker, especially China and Hong Kong. The ASX 200 closed -0.9%. The Bank of Japan maintained its policy settings, notably the 0% (+/-0.25%) yield target on the 10-year Japanese government bond. USD/JPY was volatile for a while but then steadied little changed, around 146.25.
Currencies/Macro
The US dollar was mixed against major currencies on Friday. EUR/USD as rangebound around 0.9950. Sterling rallied in NY trade to 1.1620 but starts the week little changed net at 1.1575. USD/JPY rose 1.5 yen to 147.75 after the BoJ maintained its dovish stance. AUD/USD chopped down about 55 pips to 0.6400. NZD/USD fell 30 pips to 0.580. AUD/NZD starts the week down 30 pips at 1.1040.
US personal income rose 0.4% in September (est. 0.4%, prior revised from 0.3 to 0.4%), while spending rose 0.6% (est. 0.4%, prior revised from 0.4% to 0.6%). The core PCE deflator rose 0.5% (est. 0.5%, prior revised from 0.6% to 0.5%), taking the annual pace from 4.9% to 5.1%.
Consumer sentiment (Univ. of Michigan) for October was finalised at 59.9 (est. 59.6, prior 59.8), with current conditions and expectations both beating expectations. The 1-year ahead inflation expectations measure slipped to 5.0% (est. 5.1%, prior 5.1%), but the 5-10 year ahead remained at 2.9% as expected.
The employment cost index for Q3 rose 1.2%, as expected, for a 5.0% annual pace (from a 32-year high of 5.1% in Q2). Labour costs have risen with the pandemic, reflecting tight markets for skilled workers in bottleneck industries.
US pending home sales fell 10.2% in September (est. -4.9%, prior -1.9%) – the largest decline since April 2020.
Germany’s CPI rose 0.9% in October (est. 0.6%, prior 1.9%), for an annual pace of 10.4% (est. 10.1%, prior 10.0%). On an EU-harmonised basis, the annual pace was 11.6%. While energy prices decelerated, food and services were stronger than expected.
Interest rates
US bond yields rose ahead of this week’s FOMC meeting, markets are expecting a 75bp hike .2yr government bond yields rose from 4.30% to 4.41%, and 10yr government bond yields rose from 3.75% to 3.78%.
Australian bond yields took trend from US price action, as uncertainties loom domestically on what the RBA’s action will be at tomorrow’s board meeting. 3yr government bond yields (futures) rose from 3.35% to 3.39%, and 10yr government bond yields (futures) rose from 3.75% to 3.78%, via 3.86%. Markets are pricing in a 35% chance of a 50bp hike at tomorrow’s RBA meeting. The AU-US 10yr spread was more inverse on the back of AU outperformance, current at -23bps.
Credit shrugged off the inflation data to close firmer on Friday with Main a bp tighter at 112 (-12 on the week) and CDX was 5.5 tighter at 87.5 (-6 for the week) as the indices joined equity in producing a positive week. Cash spreads were also off their wides with little in the way of primary to close the week. Honeywell was the only issuer in both the EUR and US market, pricing a total of EUR1bn (12yr) and USD2bn (2/5/10yr).
Commodities
Crude markets were lower Friday but gained on the week as the focus shifted to fuel shortages in Europe and the US. The December WTI contract fell $1.18 Friday to $87.90 while the December Brent contract fell $1.19 to $95.77. WTI rose 3.3% on the week while Brent rose 2.4%. The US exported a record amount of crude plus fuel in the week before last despite suppliers warning that 72hrs notice was needed for deliveries of fuels in the US Southeast so that “fuel and freight can be secured at economical levels”. The November ULSD contract jumped 5% last week to be up 19% on the week.
Meanwhile Exxon reported its biggest profit in its 152-year history amid a surge in fuel prices. US President Biden tweeted over the weekend, “Can’t believe I have to say this but giving profits to shareholders is not the same as bringing prices down for American families”. Exxon CEO said “There has been discussion in the US about our industry returning some of our profits directly to the American people. That’s exactly what we’re doing in the form of our quarterly dividend”.
And energy markets were mixed as a spell of warm weather helped the rush to prepare for the winter season. Much of Germany saw temperatures in the mid 20c on Saturday while London recorded a high of 22.9c. Despite the forecast warm weekend weather, the December Dutch TTF contract rose 2.3% Friday to be down 3.6% on the week. The Qatari energy minister Saad Al Kaabi described moves by the EU to cap gas prices as “hypocritical”. “The free market is always the best solution”.
Metals fell Friday as the US$ strengthened and pessimism about the outlook for Chinese growth increased. Copper fell 2.7% to $7,557 while zinc fell 4.1% to $2,820. Aluminium fell 2.3% to $2,234. Glencore said it would stick with buying Russian aluminium next year according to its contracts. Total global aluminium warehouse inventories have risen 50% in October so far, with many pointing to deliveries from Russian producers. Meanwhile Chilean copper production fell 2.6%yy and Codelco announced a 15% drop in Q3 production due to falling ore quality, weather and infrastructure issues. Europe’s biggest copper producer Arubis said it was hit by a cyberattack which may have been directed at the wider metals and mining industry.
Finally note that iron ore again plunged Friday, with the November SGX contract down $8.25 to $78.40 while the 62% Mysteel index fell just 45c to $81.80. Gloomy quarterly financials from steel producers highlighting rapidly weakening steel markets added to the negative sentiment, driving the contract down 14% on the week. The contract has been down 7 consecutive weeks now, on track for the longest running streak since 2014.
Day ahead
At 11:30am Syd, some slowing in the pace of Australia retail sales growth is expected in September though rising prices should still constitute the bulk of nominal gains (Westpac f/c: 0.3%). Albeit gradual, private sector credit growth should continue easing in September, likely led by housing as rising interest rates weigh on new lending (Westpac f/c: 0.7%). Meanwhile, October’s MI inflation gauge should reflect an above-target rate of inflation.
Japan: A dip in industrial production is anticipated in September due to tough weather conditions, but weakening global demand still looms as a key risk (market f/c: -0.8%).
At 12:30pm Syd, China’s official manufacturing and non-manufacturing PMIs are expected to soften in October, reflecting the impact of lingering virus risks on activity (market f/c: 49.8 and 50.1 respectively).
Eurozone: Elevated energy prices has weighed heavily on real incomes and domestic demand over Q3, likely resulting in a weak print for GDP growth (market f/c: 0.1%qtr, 2.1%yr). Indeed, energy inflation remains a key driver of headline CPI inflation, which is expected to post another lift in October (market f/c: 10.3%yr).
US: October’s Chicago PMI and Dallas Fed index should both reflect broad-based weakness across the nation (market f/c: 47.0 and -18.5 respectively).
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