Markets Daily
Bond yields rose further ahead of this week’s important Fed meeting, with stronger inflation data in the Eurozone contributing. The US dollar was mostly firmer, AUD/USD down slightly to 0.6395. Today’s calendar features the RBA policy decision and US October manufacturing ISM.
Yesterday
The US dollar and Treasury yields opened a little firmer in the wake of the weekend WSJ article arguing that the Fed could have to raise rates higher and for longer due to the strength of household and business finances. AUD/USD however dipped lower only briefly and had a very quiet day overall, ahead of the RBA and FOMC meetings this week. It traded a tight 0.6388 to 0.6428 range, mostly just above 0.6400. Regional equity markets took their cue from Wall Street’s rally, the ASX 200 closing up 1.2%, Japan’s Topix +1.6%, Singapore +1.8%. China and Hong Kong remained the exception, weakening as fresh reports of Covid lockdowns emerged.
Currencies/Macro
The US dollar rose against most G10 currencies on the day. EUR/USD fell from 0.9960 to 0.9880. Sterling underperformed, GBP/USD sliding from 1.1600 to 1.1465. USD/JPY rose from 147.50 to 148.75. AUD/USD chopped down to 0.6368, then edged back to 0.6395. NZD/USD outperformed, returning to 0.5815. AUD/NZD fell 40 pips to 1.1005.
The MNI Chicago PMI survey fell in October to 45.2 (est. 47.3, prior 45.7) – the lowest since June 2020. The Dallas Fed manufacturing survey fell in October to -19.4 (est. -17.4, prior -17.2), extending the run of negative prints to six months.
Eurozone CPI rose in October by 1.5%m/m and 10.7%y/y (est. 1.2% and 10.3%, prior 1.2% and 10.0%) – the latter a fresh record high since the euro’s launch in 1999. The core measure rose 5.0%y/y as expected, from 4.8%. Energy prices re-accelerated, and price rises were broad-based. Eurozone GDP in Q3 rose 0.2%q/q and 2.1%y/y (est. 0.1% and 2.1%, prior 0.8% and 4.1%). The stronger than expected data suggests near term recession risk has been reduced, but medium-term risk remains high.
Interest rates
US bond yields rose ahead of this week’s FOMC meeting, where markets are looking to see whether the Fed will signal a pivot in their strong hawkish stance. 2yr government bond yields rose from 4.44% to 4.49%, and 10yr government bond yields rose from 4.02% to 4.05%
Australian bond yields rose overnight, as domestic markets focus on today’s RBA board meeting, around 20% is priced in for a 50bp hike. 3yr government bond yields (futures) rose from 3.32% to 3.42%, and 10yr government bond yields (futures) rose from 3.75% to 3.85%. The AU-US 10yr spread became less inverse on the back of AU underperformance, current at -20bps.
Credit spreads were weaker to close the month with Main out 2bp to 114 and CDX 2.5 wider at 90, however both are well off their wides for the month (140 and 107.5 respectively) and indeed, close to the series lows (110.5 and 87.5) that have been recorded in recent days. Last night US cash outperformed indices to be 1-2bp firmer as it played some catch up to the move in indices despite the volatile backdrop and primary markets that saw ~USD76bn of supply in October, broadly in line with expectations. Europe saw no primary activity last night (ex-SSA), but the US has closed out October with 3 issuers pricing USD3bn with Blackstone the largest issuer on the day with its USD1.5bn (5/10yr) offering and utility, AEP, also completing a USD1bn deal across 5/10yr.
Commodities
Crude finished a positive month lower as the weaker than expected China PMI weighed on sentiment. The December WTI contract is last down $1.80 to $86.10 while the January Brent contract is last down $1.31 to $92.46. India’s oil minister Hardeep Singh Puri told Bloomberg at the Adipec energy conference in Abu Dhabi “if you raise the price from here, the only response is that the recession will be deeper and prolonged”. Diesel prices fell as Russia plans to raise diesel exports in November ahead of the EU planned ban. Diesel shipments are forecast to be up 28% on October volumes. The European November gasoil contract fell 4.6% to a 1 week low. The product ban is due to start February 5.
Metals markets were lower, hit by the weaker than expected China PMI with zinc leading the charge, down 5% to $2,682, the lowest level since March 2021. Copper fell 1.4% to $7,444 though aluminium managed a small bounce, up 0.6% to $2,225.5. Bloomberg reported that more than half of the copper in LME warehouses -- much of which was of Russian origin -- has been ordered out for delivery in the past three weeks. The buyer of much of this according to people familiar with the matter has been traders planning to deliver to Chinese buyers. The LME previously published data showing that as much as 80% of the copper in its warehouse network in recent months was of Russian origin.
Finally note that iron ore hit fresh 2 ½ year lows with the November SGX contract down a further $1.05 to $77.35 while the 62% Mysteel index fell $2.40 to $79.40. The October steel PMI fell to 44.3% while steel output fell to 38.8%, adding to negative sentiment. Weak China property sales for October at down 14%mm/ -28%yy added to the gloom. The founder and chairwoman of Longfor, the country’s 10th biggest builder, suddenly resigned, sending dollar bonds tumbling. Shares of Country Garden, China Vanke and Poly Developments all skidded circa 10%.
Day ahead
At 2:30pm Syd, Westpac anticipates that the RBA Board will lift the cash rate by 50bps to 3.10% – against consensus of a 25bp move – given the deteriorating inflation outlook and risks to entrenching strong inflationary psychology, the situation requires an urgent response. Pricing is around 30bp. The statement should include some reference to updated quarterly inflation and growth forecasts, details of which will be published in Friday’s Statement on Monetary Policy.
RBA Governor Lowe will speak at an RBA Board Dinner in Hobart at 7:20pm Syd. Meanwhile, the housing market correction should continue at pace in October, with the CoreLogic home value index set to post another strong decline (Westpac f/c: -1.2%).
Australian financial market liquidity will be poor around 3pm Syd when the Melbourne Cup will be run. Deauville Legend is favoured to win by bookies.
At 12:45pm Syd, the Caixin/S&P Global China manufacturing PMI is set to remain in weak territory in October, pointing to downside risks for smaller/mid-sized firms (market f/c: 48.5).
UK: Nationwide house prices are expected to post its first monthly decline this year, signalling a steepening correction as rate hikes continue to impact (market f/c: -0.3%). The final estimate to October S&P Global manufacturing PMI is also due (market f/c: 45.8).
US: The ISM manufacturing PMI and S&P Global manufacturing PMI are expected to post broadly similar results in October, highlighting the fragile state of the sector (market f/c: 50.0 and 49.9). Meanwhile, JOLTS job openings should continue retreating from its peak (market f/c: 9625k) and construction spending will remain under pressure from softening demand (market f/c: -0.5%).
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