Markets Daily
US October inflation data was not as strong as feared, causing equities to surge and bond yields and the US dollar to fall sharply. AUD/USD jumped 2 cents to 0.6620. Today’s calendar is light, including UK Q3 GDP, while US bond markets are closed for Veterans Day.
Yesterday
RBA’s Bullock and Kent appeared before the Senate Estimates committee, taking many questions from the senators. Bullock’s response to one question on interest rates stoked a sharp fall in yields. She said that after sharp increases in the cash rate, the RBA was getting closer to a point where it might wait a while. Regional equity markets were mostly quite negative, taking their cue from Wall Street. AUD/USD traded tight ranges just above 0.6400, unfazed by the RBA headlines.
Currencies/Macro
The US dollar fell very heavily against all G10 currencies after the CPI data. EUR/USD surged from 0.9965 to 1.0190, GBP/USD from 1.1410 to 1.1710. The yield-sensitive Japanese yen was strongest of all, USD/JPY collapsing fell from 146.10 pre-data to 141.25 late NY/Sydney morning. AUD/USD rose from 0.6415 to above 0.6620, printing highs since 23 September. NZD/USD rose from 0.5865 to 0.6035. AUD/NZD rose about 0.4% to 1.0980.
US CPI in October rose 0.4%m/m and 7.7%y/y (est. +0.6%m/m and 7.9%y/y, prior 8.2%y/y). Core CPI (ex food & energy) rose 0.3%m/m and 6.3%y/y (est. +0.5%m/m and 6.5%y/y, prior 6.6%y/y). The larger than expected deceleration strengthened a market view that peak inflation has passed and the Fed may start to slow the pace of tightening.
FOMC member Daly said that the CPI report is "one piece of positive information” but “very limited relief,” and "far from a victory". The FOMC must be resolute on bringing inflation back down to 2% and will continue adjusting rates until the inflation job is fully done. She said the current discussion is about stepping down, not pausing, and there is a lot of uncertainty over what is a "sufficiently restrictive rate." Logan said the CPI report is a "welcome relief” but emphasised that the FOMC's policy focus must remain on quickly restoring price stability, the actions to slow the economy are appropriate, and that there is still a long way to go. However, she said it may soon be appropriate to start slowing the pace of tightening. Harker echoed Chair Powell's message that given the cumulative tightening in place, rate hikes are expected to be slower in coming months.
Interest rates
A weaker than expected CPI outcome showed inflation eased last month, in combination with more dovish Fedspeak from Logan and Harker suggesting tightening could slow to 50bp in December. 2yr government bond yields fell 24.7bps to 4.33%, and 10yr government bond yields fell 25.2bps to 3.82%.
Australian bond markets were shaken yesterday by Michele Bullock’s comments in her testimony to the Senate, when she said there may be an opportunity to “sit and wait” to see what is going to happen next. Bonds rallied yesterday towards the end of the session, and rallied even further following US CPI. 3yr government bond yields (futures) fell from 3.34% to 3.12%, and 10yr government bond yields (futures) fell from 3.79% to 3.59%. The AU-US 10yr bond spread was at -35bps after the rally following Bullock comments yesterday, but became less inverse overnight on the back of global price action and US outperformance, the spread is currently at -25bps.
Credit markets reflected the significant move in risk markets post CPI. Indices were sharply tighter with Main in 8bp to 99.5 as it closed sub 100 for the first time in the this series and CDX was 8.5bp tighter at 83.5. US cash spreads were also notionally 5-8bp tighter across the various sectors. Primary activity was muted ahead of the CPI print as expected with the US effectively closed (and Veterans Day tomorrow will keep it that way) which saw supply limited to just the 2 EUR covered deals.
Commodities
Crude markets rallied as global risk sentiment improved though gains were muted in comparison to the surge in equities. The December WTI contract is up $54c at $86.37 while the January Brent contract is up 87c at $93.52. Tropical storm Nicole lashed the Florida Panhandle, leaving thousands without power and about 1,200 flights cancelled out of Orlando. The storm is set to turn northeast drenching Tennessee, Ohio, and Kentucky before turning on the Mid-Atlantic, New York and New England. Occidental said it plans to keep oil production flat in 2023. Devon Energy said output growth next year will now be at the lower end of a previously stated 0%-5% guidance range. ConocoPhillips said its US tight oil breakeven rate is in the $60-70bbl range. The December US natural gas contract rose back above $6 as attention turns to colder weather forecast across much of the lower 48 states next week.
Metals surged on the weaker than expected US CPI with nickel leading the charge higher, last up 5.8% at $26,130. Copper is up a more muted 1.96% at $8,263, though it’s up 9.3% over the last week. Nickel briefly traded above $26,000 for the first time since mid-June. Focus remains on the continued drop in LME inventory which is at 14yr lows.
Finally note that iron ore markets were mixed with the December SGX iron ore contract last up $2.45 versus the same time yesterday at $88.30 though the 62% Mysteel index is down $1.85 at $87.65. The January Dalian contract is close to a 4-week closing high despite a Standing Committee meeting chaired by President Xi calling for “more decisive” measures to curb the spread of the virus.
Day ahead
UK: The first estimate of Q3 GDP will mark the first quarter of negative growth that is likely to be sustained for the period ahead (market f/c: -0.5%). The trade deficit is also set to remain wide in September (market f/c: £7bn).
US: A downward revision is anticipated in the final estimate of November’s University of Michigan consumer sentiment survey (market f/c: 59.5). US bonds markets are closed for Veterans Day but the NYSE is open.
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