Markets Daily
The Bank of England hiked 75bp but said markets were pricing in too much tightening. US yields rose further in the wake of the FOMC meeting, hurting equities and leaving AUD/USD lower at 0.6290. Today’s calendar includes the RBA Statement on Monetary Policy and Australia Q3 retail sales, then US October employment.
Yesterday
Australia’s trade surplus rose to $12.4bn in September from $8.7bn in August. Export earnings rose by 7.0% or +$4.0bn. Coal was down by only $0.1bn despite floods disrupting shipments. Fuels (dominated by LNG) rose by $1.8bn. Metal ores rose $1.2bn, on higher volumes. Service exports had another strong showing, up by 6.3%, $0.4bn, benefiting from the national border reopening. Imports were little changed, +0.4%, +$0.2bn. While there was a fall in consumption goods imports, the fuel import bill rose and civil aircraft imports were also up. Core imports (ex fuel, ex aircraft and ex gold) fell in the month, down by 2.5%. AUD/USD remained under pressure post-FOMC, starting around 0.6350 then dipping to 0.6325 before edging up slightly. Equity sentiment did not help the Aussie’s cause, though the ASX 200’s -1.8% close was weaker than most of the region.
Currencies/Macro
The US dollar extended its post-Powell press conference rally, up against all G10 currencies on the day. EUR/USD fell from 0.9820 to 0.9750. Sterling was easily weakest in the G10, GBP/USD -2% or -2.3 cents to 1.1155, though most of the fall occurred before the Bank of England decision. USD/JPY is up 35 pips at 148.25, after a range of 147.11 to 148.45. AUD/USD fell about 60 pips or -1% to 0.6290. NZD/USD fell 45 pips to 0.5775. AUD/NZD ground slightly lower to 1.0885 – lowest since May.
The Bank of England hiked by 75bp to 3.0%, as was widely expected, but there were two dissenters in favour of a 50bp and 25bp hike. The statement indicated concerns about the risk of a prolonged recession, and inflation is seen peaking in Q4 2022 at 11% (from 13%). It indicated the policy rate would likely peak below current market pricing. Governor Bailey made this clear in the press conference, saying that if rates reached 5.25% in 2023 as priced in pre-meeting, GDP would contract -3% and inflation fall to zero over the forecast horizon.
The US ISM services index fell to 54.4 in October (est. 55.3, prior 56.7) – a two-year low. Factory orders in September rose 0.3% (est. 0.3%, prior 0.2%). Weekly initial jobless claims were little changed at 217k (est. 220k, prior 218k), with continuing claims rising to 1485k (est. 1450k, prior 1438k).
Interest rates
Bond yields in Europe were higher, with gilts leading the way as the Bank of England delivered a 75bp hike, but was dovish in their rhetoric on being cautious regarding how rate hikes will cause a recession. Yield on the 10yr gilts and 10yr bunds were up around 11bps on the day, while 10yr Italian bond yields was 12bps higher.
US bond yields rose, taking a lead from Europe as well as expectations that the Fed will hike higher for longer. 2yr government bond yields rose from 4.61% to 4.74%, and 10yr government bond yields rose from 4.10% to 4.22% before retracing to 4.12%. The 2-10yr curve has now moved to the most inverse level seen since 1982, at -58bps.
Australian bond yields took trend from global price action, but continues to outperform their US counterparts given the differing stance on rate hikes between the RBA and the Fed. 3yr government bond yields (futures) rose from 3.49% to 3.56% before retracing to 3.48%, 10yr government bond yields (futures) rose from 3.92% to 4.01% before retracing to 3.91%. The AU-US 10yr spread became slightly more inverse on the back of US outperformance, current at -23bps.
Credit moved with broader risk sentiment, extending post Fed (and BOE) weakness with Main out 2.5bp to 113.5 and CDX a further 3bp to 94 with US cash also 2-3bp wider. Primary activity remains subdued with DB the only issuer in the EUR space and going for the low beta option with its EUR1bn 5yr covered deal (MS+8), while the US saw 2 issuers including utility, SoCalEd, which priced USD1.5bn across 5/10yr and NatWest Group which completed a USD1.5bn 4nc3yr at T+285 (BBSW+288) at a NIC of ~15bp.
Commodities
Crude markets were modestly lower as the prospect of further central bank tightening into a global recession weighed on sentiment, despite further tightening in fuel markets. The December WTI contract is last down $1.84 at $88.16 while the January Brent contract is down $1.5 at $94.66. With US east coast diesel inventories at the lowest level on record, the December New York Harbour ULSD contract rose 5% to a fresh 5 month closing high while the European equivalent rose 4.6%.
Meanwhile in gas markets, Bloomberg noted that LNG tankers bound for Europe are beginning to be re-routed to Asia given the warmer weather and close to full storage. One vessel from Qatar made a U-turn in the Mediterranean late October. Natural gas prices in Europe have stabilised in recent sessions, albeit at 5-month lows and down 65% from the August highs.
Metals markets were generally lower with Powell’s “we still have some ways” to go message weighing on sentiment and the US 2/10 curve inverting further. Copper is last down 0.8% at $7,565 while zinc is last down 1.27% at $2,713 and nickel down 5.8% to $22,750. China’s top health official telling local governments to ‘resolutely adhere’ to Covid Zero policies added to the softer trend, though its worthy of note that global copper inventory has plunged 27% in the last two weeks, consistent with recent reports from Bloomberg 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 bound for Chinese buyers. MMG’s Las Bambas mine in Peru will progressively halt copper production due to road blockades. Alcoa again urged the LME to immediately delist all Russian aluminium brands, “regardless of the production date of the underlying metal”.
Finally note that iron ore didn’t really react to the Covid zero news out of China with the December SGX contract up another $1.40 versus the same time yesterday at $82.25 while the 62% Mysteel index rose 90c to $83.10. Mysteel also reported that more than 20 steel mills in China are shutting down blast furnaces and bringing forward year end maintenance due to poor demand and low margins with capacity cuts ranging from 30 to 60% and about 100kt of daily capacity removed.
Day ahead
At 11:30am Syd, the RBA’s Statement on Monetary Policy will deliver an update on the RBA’s forecasts and provide more detail surrounding their views. Tuesday’s Board statement provided the headline changes of higher inflation and lower GDP growth.
Australia real retail sales are set to slow sharply in Q3 as the spike in retail prices continues to roll through (Westpac f/c: 0.2%).
China: The current account surplus will likely weaken into year-end as cooling global demand weighs on trade.
Eur: The final estimate to October’s S&P Global services PMI is due (market f/c: 48.2).
US: A slowdown in non-farm payrolls is widely anticipated in October (Westpac f/c: 220k, market 195k) though the unemployment rate will likely remain little-changed for now (Westpac and market f/c: 3.6%), allowing for growth in average hourly earnings to remain robust (Westpac and market f/c: 0.3%mth, 4.7%yr). Boston Fed president Susan Collins is also due to speak.
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