Markets Daily
Hopes for the end of China’s Covid-zero policy buoyed Asian and European equities but firm US data weighed on US equities as yields rose. AUD/USD slid back to 0.6400. Today we see Australia September housing finance and building approvals data ahead of the global focus, the FOMC decision.
Yesterday
The RBA raised the cash rate by 25bp to 2.85%, in line with most forecasts and versus market pricing around 30bp. It raised its 2023 inflation forecast from 4.3% to 4.75% and repeated that it would be ‘resolute’ in returning inflation to target. Governor Lowe’s statement also pointed out that “monetary policy operates with a lag.” AUD/USD fell from session highs above 0.6440 to lows under 0.6410 but later steadied around 0.6420/30, aided by an improved risk mood. Regional equities were almost all in the green, the ASX 200 closing up 1.7%.
Currencies/Macro
The US dollar initially declined in Asia on rumours of a China Covid policy change, but then rebounded on US data. EUR/USD initially rose from 0.9885 to 0.9953 before falling to 0.9880. GBP/USD rose to 1.1560 then slid back to 1.1485. USD/JPY fell as far as 146.99 before US yields bounced, eventually steadying -0.3% over the day at 148.25. AUD/USD rallied to 0.6464 amid the China optimism but ended flat on the day at 0.6395. The Kiwi outperformed again, NZD/USD ultimately up 0.5% at 0.5845. AUD/NZD extended yesterday’s RBA reaction, from 1.0970 to 1.0926 – lowest since May.
RBA Governor Lowe spoke in Hobart, elaborating on the decision. He described inflation as ‘evil’ and said the bank would do what was required to return it to target. Lowe said further rate rises were coming which could include 50bp moves but holding steady was also an option.
US job openings (JOLTS) in September rose 437k to 10,717k (est. 9,750k, prior 10,280k). The openings rate rose to 6.5% from 6.3% (revised from 6.2%), the hiring rate fell to 4.0% from 4.1%, and the quit rate was steady at 2.7%. The report reflects a still tight labour market. Construction spending rose 0.2% in September (est. -0.6%, prior -0.6%). Residential spending was unchanged, while non-residential spending rose 0.5%.
The October ISM manufacturing survey index was close to expectations at 50.2 (est. 50.0, prior 50.9), but with mixed components. Employment and production rose, as did new orders (although they remain in contraction), while there were declines in inventories, new export orders, imports, and prices paid (lowest since May 2020).
Interest rates
US bond yields jumped following strong US economic data, with the curve flattening. 2yr government bond yields jumped from 4.40% to 4.55%, and 10yr government bond yields rose from 3.92% to 4.08%.
Australian bond yields fell yesterday after the RBA’s 25bp hike, but rose again following price action overnight in the US. 3yr government bond yields (futures) rose from 3.24% to 3.34%, and 10yr government bond yields (futures) rose from 3.92% to 4.08%. The AU-US 10yr spread became less inverse on the back of US underperformance, current at -27bps.
Credit indices moved tighter, with Main at 111 (-3) and CDX at 89 (-2), and cash also saw tightening on the day. Primary issuance was muted, with Natwest pricing the only deal out of Europe (GBP750m 5yr) and State Street the lone issuer in the US (pricing a USD1.0b dual tranche offering).
Commodities
Brent crude oil rose 2% to $94.65/bbl, WTI +2.1% to $88.35. Bloomberg estimated that US Gulf Coast crude exports rose 1.3% in October to 3.56mn barrels per day.
Base metals jumped on the reports of China exiting Covid-zero in March 2023. Comex copper jumped 2.7% after 3 straight daily losses. LME nickel, zinc, aluminium, tin and lead all closed higher.
Mysteel spot iron ore rose 0.7% to $79.95/tonne, the first daily rise since the end of the China Communist Party Congress. Despite the talk of China reopening, SGX iron ore futures were little changed around $78.
The twice-monthly GDT dairy auction resulted in an overall price fall of 3.9%, with whole milk powder down 3.4%.
Day ahead
At 11:30am Syd we see updates on Australia’s housing sector. A moderate decline in total housing finance approvals is anticipated in September (Westpac f/c: -2.5%), with the weakness in investor loans likely to continue running ahead of owner-occupier loans (Westpac f/c: -3.0% and -2.3% respectively). Dwelling approvals are also set to post a firm decline in September following the unexpected bounce in August (Westpac f/c: -5.0%).
Eur: The final estimate to October’s S&P Global manufacturing PMI is due (market f/c: 46.6).
A fourth consecutive 75bp rate hike is widely anticipated at the FOMC’s November meeting given the ongoing strength in core inflation, taking the funds rate to 3.75-4.0%. Market pricing is for 75bp with very little risk of surprise. With no quarterly forecasts at this meeting, the focus will be on any tweaks to the statement and Chair Powell’s press conference. He will no doubt be pressed on whether the FOMC is leaning towards 50bp in December and where rates might peak in 2023.
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