Markets Daily
US markets were mixed as they absorbed the unexpectedly inconclusive mid-term election results. Long-term bond yields rose and equities fell, with some earnings disappointments and further turmoil in crypto markets. AUD/USD slipped to 0.6430. Today’s calendar is dominated by US October CPI.
Yesterday
AUD/USD traded a muted 0.6485 to 0.6518 range, with no local data. US midterm election results were less favourable than expected for the Republicans but still on track to produce the expected change of House leadership which will stall President Biden’s fiscal plans. Regional equities were mixed but mostly weaker, in which context the ASX 200’s 0.6% gain was a clear outperformance.
Currencies/Macro
The US dollar rose against all G10 currencies except fellow haven Swiss franc. EUR/USD fell 60 pips to 1.0010. GBP/USD sank 2 cents to 1.1350, -1.7%. USD/JPY rose 0.6% to 146.55. AUD/USD chopped down 80 pips, -1.2%, to 0.6430. NZD/USD also fell -1.2%, to 0.5885, returning AUD/NZD to 1.0925.
RBA Deputy Governor Bullock said that inflation is still too high and increasingly broad based, adding that there are good reasons to think that we are approaching the peak of the current inflation cycle. The size and timing of future rate hikes will depend on the data. The RBA "would raise faster" if officials thought "inflation was not coming down as expected", although a "scorched earth" policy to get inflation under control would not be the best outcome.
US wholesale inventories in September rose 0.6% (est. 0.8%), while trade sales rose 0.4% (est. 0.5%, prior 0.0%).
Interest rates
US bond yields bull steepened, as US midterm election results disappointed those in markets expecting a major shift in the power dynamics of US policy makers. 2yr government bond yields fell from 4.67% to 4.63% via 4.69%, and 10yr government bond yields fell from 4.12% to 4.06%.
Australian bond yields followed the price action in the US bond markets, but underperformed their US counterparts. 3yr government bond yields (futures) fell from 3.57% to 3.40%, and 10yr government bond yields fell from 3.93% to 3.84$. Markets are 90% priced in for a 25bp hike for the Dec RBA meeting. The AU-US 10yr spread became more inverse on the back of AU underperformance, current at -25bps.
The softer risk sentiment flowed through to credit with indices backing off their recent tight levels with Main out 2bp to 107 and CDX 3bp wider at 91.5, with cash also 1-2 wider as supply continued, including the return of Credit Suisse. Europe was dominated by financials with 9 fins issuers raising EUR8.8bn, while the US saw 7 issuers price USD18.2bn (taking the week to USD45bn). Credit Suisse’ foray back into the senior market dominated proceedings on both sides of the Atlantic with a large EUR3bn long 6nc5yr deal priced at MS+495 (BBSW+575) and a USD2bn (WNG) 11nc10yr that priced at T+485 (BBSW+527) as the issuer paid up to re-enter markets. Europe also saw SocGen price its EUR2.25bn Senior Pref offer across a EUR1bn 5yr at MS+115 (BBSW+181) and a EUR1.25bn 10yr at MS+140 (BBSW+220). The US saw a more diversified list of issuers with corps led by GE Healthcare’s debut USD benchmark, pricing USD8.25bn across 6 tranches from 2-30yr. In fins, Citi completed a USD2.75bn 11nc10yr at T+210 and BNP priced its USD1bn PerpNC5yr (9.25%), while on the local front, Westpac raised USD2.5bn split evenly across a 2yr (T+82) and 5yr (T+122). After a solid 3 days of supply we now have CPI in the US this evening ahead of Veterans Day on Friday (bond markets closed) suggesting a quieter end to the week.
Commodities
Crude fell for the third straight session as US crude inventory rose and concerns about the Chinese demand outlook increased. The December WTI contract is last down $3.08 at $92.67 while the January Brent contract is down $2.69 at $92.67. The EIA reported a hefty 3.9mb rise in crude inventory though production rose 200kbpd while imports rose 248kbpd and exports fell 404kbpd. IEA head Fatih Birol told COP27 in Egypt that “The recent decision of OPEC+ to cut the production by 2 million barrels a day was definitely not helpful”. Wood Mackenzie forecast that North-West Europe diesel supplies will hit the lowest in at least 12 years at the start of spring after the Russian product ban comes into effect February 2023. The December US Henry Hub natural gas contract fell another 4% on speculation that the Freeport LNG terminal will not restart until December. As of Monday, Freeport had yet to submit its restart plan to FERC.
Metals were mixed with copper still above $8,000 though last down 0.4% on the day at $8,081 while aluminium is last down by 2.7% to $2,308. Nickel is last up 3% at $24,750. LME nickel inventory fell to a fresh 14yr low while cancelled warrants fell to fresh decade lows.
Finally note that iron ore markets turned mixed as PPI in China turned negative. The December SGX contract is last down $2.45 versus the same time yesterday at $85.85 while the 62% Mysteel index actually rose 30c to $89.50. There was little fresh news, though Covid cases in Beijing hit 5-month highs adding to concerns about fresh lockdowns.
Day ahead
Australia: MI inflation expectations are set to remain elevated and well above the RBA’s target band in November.
US: Close attention will be paid to the October CPI release, particularly on any signs of slowing momentum within the core measure given the upside surprises in recent months and its implications on the Fed’s policy stance (Westpac f/c: 0.7%m/m, market 0.5%m/m and 7.9%y/y). Initial jobless claims are expected to remain at low levels for now (market f/c: 220k). There will also be a raft of Fedspeak overnight, with the FOMC’s Kashkari, Waller, Harker, Logan, Daly, Mester and George all due to speak at different events.
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