Markets Daily
The US dollar fell sharply Friday as the US unemployment rate rose more than expected, AUD/USD rallying to 0.6475. However the Aussie slipped to 0.6410 this morning after China reaffirmed its Covid-zero policy. Today’s light calendar includes China October trade data.
Friday
Australia real retail sales rose 0.2% in Q3. Q2 was revised down significantly, from +1.4% to +1%. The slowdown reflects a moderation in nominal spend and another big lift in retail prices. Annual growth rates are heavily affected by the delta lockdowns this time last year – while real sales are up 10% compared to this, the ‘underlying’ gains are running closer to 4.5%yr. The RBA’s quarterly Statement on Monetary Policy provided details of the forecasts which had been revealed in Tuesday’s Board statement and Lowe speech. The Bank raised its forecast for headline inflation in 2022 from 7.8% in the August SoMP to 8%. The forecast for inflation in 2023 has been lifted from 4.3% to 4.7% while 2024 has been lifted from 3% to 3.2%. AUD/USD was quiet below 0.6300 for a few hours, then kicked up to 0.6350 as equities in China and Hong Kong rallied sharply. Some claimed the catalyst was an investment bank note saying that minor loosening of Covid rules could happen within days. The ASX 200 closed up 0.5%.
Currencies/Macro
The US dollar index closed down 1.8% on Friday – the largest daily decline since 2020, albeit after +1.4% on Thursday. EUR/USD rose 2 cents to 0.9955, GBP/USD up about 2.2 cents to 1.1380. USD/JPY fell 1.6 yen or -1.1% to 146.60. AUD/USD was around 0.6370 pre-payrolls, rallying to close at 0.6470 but slipping back to 0.6410 Monday morning after weekend declarations by Chinese officials that they will “unswervingly” adhere to the current Covid policy. NZD/USD rose 1.6 cents Friday to 0.5930 but is back to 0.5875 Monday morning. AUD/NZD is a touch higher overall at 1.0915.
US non-farm payrolls in October rose 261k (est. 195k, prior revised to 315k from 263k), and average hourly earnings rose 0.4%m/m and 4.7%y/y (est. +0.3% and 4.7%y/y), indicating a still tight labour market. However, the separate household survey was not as strong, showing a rise in unemployment of 306k which took the unemployment rate to 3.7% (est. 3.6%, prior 3.5%). Underemployment also rose, to 6.8% from 6.7%.
Boston Fed president Susan Collins said further rate hikes are needed but smaller increases will often be appropriate. Echoing Chair Powell, she said the Fed should focus on how high rates should go instead of the pace of the moves. She added that the risks of overtightening will rise as the Fed tightens further and is looking for evidence of the cumulative impact to guide her policy decisions. Richmond Fed president Tom Barkin similarly said that the Fed "has more work to do", and it is conceivable that the funds rate ends up over 5%.
Canadian October employment data was strong across all major measures. Employment rose 108k (est. 10k) and unemployment remained at 5.2% (est. 5.3%), despite a further rise in participation to 64.9% (est. 64.7%).
Eurozone October services PMIs were finalised higher at 48.6 (vs flash 48.2), taking the composite index to 47.3 (from 47.1). PPI was in line with expectations, rising +1.6%m/m and a still eye-watering +41.9%y/y (prior 43.4%y/y). German factory orders in September. fell 4.0%m/m (est. -0.5%m/m) and -10.8%y/y (est. -7.2%y/y), indicating weakening demand in the region’s key capital and durable goods producer.
Interest rates
US bond yields rose initially following the strong jobs outcome, however yields retraced lower at the end of the session. 2yr government bond yields fell from 4.70% to 4.64% via 4.80%, and 10yr government bond yields range-traded but finished around 4.16%.
Australian bond yields took trend from global bond market price action, as markets wait for AOFM’s syndication of the new 2034 bond this week. 3yr government bond yields (futures) rose from 3.39% to 3.43%, and 10yr government bond yields (futures) rose from 3.85% to 3.91%. The AU-US 10yr spread became slightly more inverse on the back of US outperformance, current at -26bps.
Credit spreads reflected the positive risk environment to close the week led by a positive payrolls report in the US, with both Main and CDX closing ~4bp tighter at 109 and 90 respectively, with cash spreads also 1-2bp tighter. Primary activity remained light with the combination of CB activity earlier in the week (Fed, BoE in particular) and payrolls on Friday which saw no supply in Europe (although a number of mandates were announced) and just the 2 IG deals in the US coming from utility groups (Arizona Public Service, Public Service Enterprise) for a total of USD1.1bn.
Commodities
Crude markets closed at 2-month highs as optimism that China would soon ease zero-Covid restrictions rose to a crescendo. The December WTI contract jumped $4.44 Friday to end the day at $92.61 while the January Brent contract jumped $3.90 to $98.57. While Chinese officials denied that there will be any change in the strict adherence of the Covid-zero stance, there were suggestions that officials will soon reduce quarantine for inbound passengers and scrap a system that penalises airlines that bring Covid cases into China. Fuel markets also saw strong gains on the week helped by distillate inventory in the US crashing to multi-year lows. The premium for New York Harbour diesel is close to historic highs with the Dec contract at 5-month highs.
Copper had its best day since 2009 with a number of factors helping sentiment including rumours of China exiting zero-Covid, the plunge in the US$, the slump in inventory and ongoing disputes at the Las Bambas mine in Peru. Copper jumped 7.6% to $8,133 while zinc rose 7% to $2,910. Nickel jumped 4.4% to $23,800 and aluminium was up 3.8% to $2,350. The LMEX index rose 6.1% on the week to hit a 2-month high. Copper inventory has dropped by a third in the last two weeks, with market sources suggesting that the metal has been bound for China. Meanwhile Shanghai zinc inventory plunged 44% last week, the most since 2007, with inventory at the lowest level since December 2018.
Meanwhile iron ore also jumped on China reopening rumours. The December SGX contract is up $5.05 at $87.30 while the 62% Mysteel index jumped $4.65 to $87.75. That’s despite steel mills in the Shanxi and Henan provinces 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. Meanwhile ArcelorMittal announced another blast furnace will be idled at its Fos-sur-Mer site in France from December due to high energy costs and a slump in demand. The company will announce earnings this Thursday.
Day ahead
Aust: ANZ job ads should continue to hold at a very high level in October.
China: An increase in the already enormous trade surplus is anticipated in October, despite the slowing global economy (market f/c: US$96bn vs $85bn in September). For now, authorities are focused on yuan stability on a trade-weighted basis; hence foreign reserves are expected to remain broadly unchanged in October (US$3029.5bn).
Eur: Despite Europe’s resilience to date, Sentix investor confidence will likely remain near its historic lows in November.
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