Markets Daily
The Fed hiked by 75bp as expected, the statement hinting at a slower pace ahead, but Chair Powell’s press conference was more hawkish. Bond yields and the US dollar finished higher, AUD/USD down to 0.6350. Today’s calendar features Australia September trade balance, the BoE decision and October services PMIs in the US and China.
Yesterday
Australia housing finance approvals slumped -8.2% in September. Approvals are now -26.2% below their peak at the start of the year but are still well above their pre-COVID levels and previous peaks in 2017. The detail shows owner occupiers led the Sep fall with a very steep -9.3% decline. Investor loans were down -6%. Dwelling approvals posted a -5.8% decline in September. This follows a recent period of upside surprises and underlying resilience, indicating that dwelling approvals are beginning to respond to the numerous headwinds facing the sector and the broader economy. AUD/USD traded very quietly near 0.6400 for some hours, then flickered above 0.6420 as regional equity sentiment improved, especially longstanding underperformers HK and China. The ASX 200 was only up 0.1%.
Currencies/Macro
The US dollar seesawed on the FOMC statement and press conference, closing net higher against most of the G10. EUR/USD spiked from 0.9880 to 0.9976 in response to the statement, but then reversed to 0.9820 after Powell’s press conference. GBP/USD is net -0.8% on the day at 1.1395, reversing from a high of 1.1564. USD/JPY dropped from 147.00 to 145.68 then recovered to 147.85 as US yields rebounded. AUD/USD spiked from 0.6420 to 0.6492, then slid to 0.6355, net -40 pips. NZD/USD spiked to 0.5942 (a one-month high), and then fell to 0.5820, net -20 pips. AUD/NZD ground slightly lower to 1.0900/10 – lowest since April.
The Federal Reserve increased the funds rate by 75bp to a 3.75%-4.00% range, the highest since 2008. The vote was a unanimous 12-0. The statement reiterated September's guidance that it "anticipates that ongoing increases in the target range will be appropriate." But it added a caveat: "the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments." In his press conference, Chair Powell was resolute, saying that tightening still has some way go, the Fed will stay the course until the job is done, and it is premature to think about pausing.
Interest rates
US bond yields gyrated through the session, following the FOMC meeting overnight. 2yr government bond yields fell sharply following the FOMC statement, which signalled a sign of a slowdown, from 4.56% to 4.43%, and 10yr government bond yields fell from 4.05% to 3.97%. However, these moves were retraced towards the end of the session following Powell’s hawkish comments in the press conference following and bond yields finished slightly higher overall.
Australian bond yields were higher, following the price movements in the US, outperforming their counterparts. 3yr government bond yields (futures) rose from 3.35% to 3.49%, and 10yr government bond yields rose from 3.78% to 3.88%. The AU-US 10yr spread became less inverse on the back of US underperformance, current at -21bps.
After a stable open ahead of the Fed that saw Main close little changed at 111 with activity in cash markets also subdued, CDX has been volatile post in line with broader markets. CDX rallied immediately post the release touching a low of 87 before reversing those gains as equity sold off to close 2bp wider at 91. The US primary market was effectively closed ahead of the Fed, but we did get 3 IG deals price in Europe (ex-SSA) led by Schneider Electric’s EUR1.1bn dual tranche offering (5/10yr) to fund its Aveva acquisition, while the bank deals (Banco de Sabadell and SEB) were both green deals.
Commodities
Crude markets rose as fuel stockpiles tightened ahead of winter and coming Russian caps and bans. The December WTI contract is up $1 at $89.37 while the January Brent contract is up $1 at $95.65. The modest gains were despite Wall Street weakening into the close after Fed Chair Powell indicated “we still have some ways” to go before rates are tight enough. Crude inventory fell 3.1mb last week while gasoline inventory fell by 1.26mb to the lowest since November 2014. The east coast pressure point for gasoline stocks continues as well with seasonal inventories at the lowest in 8 years, adding to the fuel shortage, driving the price of gasoline higher. The December RBOB gasoline future jumped 3.68%.
Metals closed mixed with copper down a modest 0.16% at $7,640 while aluminium was up 0.33% at $2,250. Nickel outperformed, rising 1.7% on upbeat comments from BHP that “demand for nickel in the next 30 years will be 200% to 300% of the demand in the previous 30 years”. Canada ordered 3 Chinese firms to divest from lithium miners just days after introducing tougher rules on foreign investments in critical minerals.
Finally note that iron ore markets saw reasonable gains on optimism that Beijing might start considering easing zero covid policies even as fresh lockdowns were being announced. The December SGX contract is up $2.70 at $80.85 while the 62% Mysteel index is up $2.25 at $82.20. Citi slashed its year end forecast for iron ore to $70 from an earlier estimate of $95, forecasting a surplus of 30mt this year rising to $45mt next year.
Day ahead
At 11:30am Syd, Australia’s trade surplus should rise in September as lower import values offset a flattening in export earnings (Westpac f/c: $9.1bn versus August $8.3bn, median $8.75bn).
The RBA’s Kearns (Head of Domestic Markets) will participate in a panel discussion at an ASIC Forum in Sydney at 4pm local.
China (12:45pm Syd): The Caixin services PMI is set to weaken in October as virus risks continue to loom over the sector’s growth prospects (market f/c: 49.0 vs September 49.3).
Another 75bp rate hike is widely anticipated at the Bank of England’s policy meeting, raising the bank rate to 3.0%. Market pricing is around 70bp and had been nearer 100bp in the turmoil following former PM Truss’s proposed tax cut package. We will also see updated quarterly forecasts.
The European unemployment rate is expected to hold at a record low in September (market f/c: 6.6%). The final estimate of the UK’s October S&P Global services PMI is also due (market f/c: 47.5).
US: The trade deficit is set to widen further in September given lower import volumes on weakening domestic demand (market f/c: -$72.3bn). The ISM non-manufacturing PMI is expected to soften in October, though it will remain at a robust level, in contrast to the S&P Global services PMI (market f/c: 55.3 and 46.6 respectively). Meanwhile, initial jobless claims will likely remain at low levels for now (market f/c: 220k), while September’s factory and durable goods orders should signal a soft quarter for capital investment (market f/c: 0.3% and 0.4% respectively).
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