Markets Daily
The US dollar fell in sympathy with bond yields. Equities gyrated on crypto turbulence but closed higher. AUD/USD rose to 0.6500. Today’s calendar features early US midterm election results and a speech by RBA Deputy Governor Bullock.
Yesterday
The Westpac Melbourne Institute Consumer Sentiment Index fell by 6.9%, from 83.7 in October to 78.0 in November. This is now below the low point of the GFC (79.0) and only slightly higher than when the COVID pandemic first hit in April 2020 (75.6). Prior to that, we need to go back to the deep recession in the early 1990s to find a weaker read. The October NAB business survey was a lot more upbeat, albeit weaker over the month. The business conditions index slipped 1pt to +22, still way above the long term average around +6. Business confidence however fell 5pts to 0. AUD/USD flickered up to 0.6490 but was back to 0.6450 in late trade. This may have been related to a souring in Hong Kong and China equities, contrasting to the gains in Japan, Korea and Taiwan. The ASX 200 managed a 0.4% rise.
Currencies/Macro
The US dollar softened against most G10 currencies on the day, as yields fell and equities rallied. EUR/USD rose 0.5% to 1.0075. GBP/USD was choppy, ultimately up only 0.2% at 1.1535. USD/JPY fell from 146.70 to 145.60. AUD/USD rose a net 25 pips to 0.6505, with a high of 0.6551, a marginal new high since 23 September. NZD/USD rose 20 pips to 0.5960. AUD/NZD is little changed at 1.0915.
US small business optimism survey (NFIB) fell to 91.3 in October - a tenth consecutive month below the 48-year average of 98. Weakness was broad-based, with seven of the 10 indicators declining.
Eurozone retail sales were in line with expectations, rising 0.4%m/m (as expected) and -0.6%y/y (est. -1.0%y/y).
BoE Chief Economist Pill reiterated that the MPC has further tightening to do, but also noted the likelihood of a prolonged recession and recent surge in mortgage rates, underscoring the less hawkish stance delivered by Governor Bailey at the MPC last week.
Interest rates
US bonds rallied, ahead of the US midterm election results, and yields bull flattened as a result. 2yr government bond yields fell from 4.73% to 4.65%, while 10yr bond yields fell from 4.24% to 4.12%.
Australian bond yields followed the price action in the US bond markets, but outperformed their US counterparts. 3yr government bond yields (futures) fell from 3.57% to 3.50%, and 10yr government bond yields (futures) fell from 4.06% to 3.96%. Markets are 95% priced in for a 25bp hike for the Dec RBA meeting. The AU-US 10yr spread became less inverse on the back of US underperformance, current at -17bps.
Credit spreads remain firm with Main another 2bp tighter at 105 and CDX just half a bp wider at 89 (series tight 87.5), while cash credit was well supported in the short end but remained tougher further out the curve as primary markets remained active for a second session. Europe saw 10 issuers price ~EUR12.5bn (ex-SSA) with Booking Holdings the largest issuer with its EUR3.5bn deal across 4/7/9/12yr and bank supply spanned the capital structure with covered, SNP and Tier 2 in the mix including a Swedbank’s GBP400M 10nc5yr Tier2 at UKT+380. The US saw 6 IG issuers price USD6.6bn with StanChart’s USD2bn shorter dated deal the largest, pricing USD1bn of 3nc2yr at T+310 and USD1bn of 6nc5yr at T+345.
Commodities
Crude markets gave back the rest of the gains seen Friday, with concerns about rising Covid cases in China hitting sentiment. The December WTI contract is last down $2.59 at $89.20 while the January Brent contract is last down $2.29 at $95.63. The EIA revised down its forecast for US crude production in 2023 to 12.31mbpd, down from 12.36mbpd and revised down US petroleum demand to 20.48mbpd versus 20.54 forecast in October. The revision follows Biden’s “no more drilling” comments at a rally in New York. Clarkson Research forecast a record surge in haulage ton miles for gasoline and diesel vessels ahead of the sanctions on Russian products which will come into effect from February 5. Goldman argued that China is ramping up crude imports in preparation for an eventual reopening, which it sees in Q2 2023.
Meanwhile US gas prices gave back Monday’s gains as concerns that the Freeport LNG plant restart may be delayed until December. The plant accounts for 15% of US exports. And South Africa’s Transnet Freight Rail said it will meet with community leaders and police in an effort to end disruptions to a key export line for coal. Thermal coal prices have tumbled in recent sessions with the European Rotterdam December benchmark hitting lows back to late Feb, down 41% so far this quarter. The Australian Newcastle equivalent is down 23% so far this quarter.
Metals rose as the falling US$ lifted sentiment. Copper is last up 1.8% at $8,054 while nickel rose 1.9% to $23,830. There was little fresh news though Codelco was reported as raising the China copper premium to a decade plus high according to SMM. Gold jumped to a one month high on the US$ slide, with the slide in bitcoin also cited as a positive factor.
Finally note that iron ore markets saw further modest gains with the December SGX contract up another $1.55 from the same time yesterday at $88.30 while the 62% Mysteel index rose $1.50 to $89.20. Rio Tinto and BHP confirmed they had signed MOUs with China Mineral Resources Group to develop sustainable iron ore supply chains.
Day ahead
Australia’s data calendar is mostly quiet for the rest of the week. RBA Deputy Governor Bullock will speak on the economic outlook at the 2022 ABE Annual Dinner in Sydney at 8:05pm Syd.
US midterm election results will filter through during Sydney trade today, mostly from early afternoon. Historically it is very common for the party of a new president to suffer heavy losses 2 years later in midterms and so it is expected to be this time, with election models such as The Economist and FiveThirtyEight placing around 75-85% chance of Republicans retaking control of the House. The Senate is currently 50 seats each and only 35 seats are being contested. Models estimate around 55-60% chance of Republicans winning a majority. Many Senate races appear to be very tight so while we could well see forecasters calling the House for Republicans this afternoon, the Senate is likely to remain unclear for some time, perhaps days. Control of the House is most important for markets as any fiscal measures would need to be bipartisan.
Japan: A moderate increase in the current account surplus is anticipated in September, though weakness in developed-world demand still looms as a risk (market f/c: ¥250bn).
China: Producer inflation is expected to continue decelerating appreciably in October (market f/c: -1.5%yr) with consumer inflation set to remain relatively benign (market f/c: 2.4%yr). Encouragement from authorities should see strength in new loans and M2 money supply growth moving forward (market f/c: CNY800bn and 12.0%yr respectively). Note the M2 and loan data are due 9-15 November.
US: The final estimate to September’s wholesale inventories is due (market f/c: 0.8%). The FOMC’s Williams and Barkin are also due to speak at different events.
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