Markets Daily
The US dollar recovered some of last week’s steep decline though the Aussie outperformed, returning to 0.6700. Fed Vice Chair Brainard’s comments helped cap interest rates but equities sold off into the close. Today we see RBA November minutes, Japan Q3 GDP and China October activity data.
Yesterday
The US dollar recaptured a small amount of its heavy losses of Thursday-Friday last week, as Fed Governor Waller downplayed the implications of the US October CPI report, saying the Fed had a long way to go. He did however agree that the pace of tightening could slow to 50bp in December. AUD/USD slipped from highs around 0.6720 to 0.6670/80. Weekend press reports that China was taking steps to support its beleaguered property market appeared to help Hong Kong equities but otherwise the regional mood was mostly negative. The ASX 200’s -0.2% close was better than most.
Currencies/Macro
The US dollar was either flat or higher against G10 currencies on the day. EUR/USD ranged between 1.0272 and 1.0350, steadying around 1.0330. GBP/USD chopped lower, -0.6% on the day at 1.1750. USD/JPY rose 1 yen or 0.7% to 139.85. AUD/USD ranged between 0.6663 and 0.6724 then returned to 0.6700, outperforming the G10. NZD/USD also traded ranges, either side of 0.6100. AUD/NZD is marginally higher over the day at 1.0985.
Federal Reserve Vice Chair Lael Brainard said the central bank should soon moderate the size of its interest-rate increases: “It will probably be appropriate soon to move to a slower pace of increases…but I think what’s really important to emphasize, we’ve done a lot, but we have additional work to do…there are likely to be lags, and it’s going to take some time for that cumulative tightening to flow through, so it makes sense to move to a more deliberate and a more data-dependent pace as we continue to make sure that there’s restraint that will bring inflation down over time.” On the recent CPI data, she said, “The most recent CPI inflation print suggests that maybe the core PCE measure that we really focus on might be also showing a little bit of a reduction. That would be welcome. I think the inflation data was reassuring, preliminarily, just in terms of showing a slowing in categories that I had been anticipating.”
Eurozone industrial production in September rose 0.9%m/m and 4.9%y/y (est. +0.5%m/m and +3.0%y/y).
Interest rates
US bonds range traded in a session with no major data releases. Fed official Brainard’s comments around slowing the rate hike pace added some positive risk sentiment to the bond market. 2yr government bond yields traded between 4.37% and 4.44%, and 10yr government bond yields traded between 3.85% and 3.90%.
Australian bonds largely followed the trend of US price action, while domestic markets wait for today’s RBA board minutes for further information on the RBA’s discussions regarding the policy shift, and whether a pause is likely. 3yr government bond yields (futures) traded between 3.25% and 3.32%, and 10yr government bond yields (futures) traded between 3.70% and 3.77%. Markets are pricing an 80% chance of a 25bp hike at the RBA meeting next month. The AU-US 10yr bond spread was largely unchanged, currently at -13bps.
Credit remained firm as US rates markets reopened with Main another 1.5bp tighter at 96 and CDX in half a bp to 83, however the move in CDX lagged cash spreads that played catch up to the post CPI moves with US cash 2-5bp tighter across the various sectors. Primary activity also remained solid. Europe opened the week with EUR10.25bn of supply from 9 issuers, with corporates in the market including Thermo Fisher with a dual currency offering, selling EUR1.25bn across 3-12yr and USD1.2bn of 5/10yr and a mix of covered (ING), senior (ABN) and SNP in the bank space. Westpac also mandated banks for a EUR 5yr covered deal. The US returned from the long weekend to see 10 issuers price USD9.5bn including SocGen with a USD1.5bn AT1 deal and CAT with a USD750M 2yr at T+53.
Commodities
Crude markets gave back much of the momentum seen in the previous session as optimism about an imminent easing of Covid-zero policies in China waned. The December WTI contract is down $2.99 at $85.97 while the January Brent contract is down $2.75 at $93.24. OPEC reduced its global oil demand forecasts for the fifth time, taking another 100kbpd from this and next year’s forecasts. The OPEC report also noted that oil markets were in a surplus of 200kbpd and 1.1mbpd in Q2 and Q3 this year, having been in a 300kbpd deficit in Q1.
EC President Ursula von der Leyen said the European Union is “ready to go” with a Russian oil price cap though details on the level have yet to be decided. Bloomberg vessel tracking data showed that two thirds of crude loaded onto tankers at Russian ports is now heading to Asia compared with less than two-fifths in the weeks before the invasion of Ukraine. Workers at BP Rotterdam’s oil refinery started work to rule action Monday while contractors at the Exxon Mobil Fawley refinery are due to strike from next week. The last of France’s striking refinery workers voted to return to work last week. Freeport reportedly told buyers it will likely cancel LNG shipments scheduled for November and December as work on repairs and regulatory approvals are pushed back. Freeport accounts for about 15% of US exports.
Nickel prices briefly surged by the 15% daily limit after reports of a blast at an Indonesian nickel pig iron plant hit the wires. Nickel is last up 7.5% at $28,955 while zinc is last up 3.16% at $3,120 though both aluminium and copper are down 0.9% at $2,439 and $8,415 respectively. The price for prompt copper versus the 3-month contract at the LME flipped into negative territory for the first time since August suggesting limited physical demand while the equivalent for aluminium is approaching lows back to June and has been in negative territory since mid-October.
Finally note that iron ore markets continued their gains on China property developments with the December SGX contract up another $3.20 versus the same time yesterday at $95.20 while the 62% Mysteel index is up $2.05. Iron ore futures are up circa 20% so far this month on policy easing though rebar and steel price gains have been more muted with the January rebar contract up just over 6% so far this month while spot rebar and billet prices remain well below 4,000RMB.
Day ahead
At 11:30am Syd, the RBA’s November meeting minutes will provide more colour around the Board’s 25bp rate hike decision, particularly the 25bp versus 50bp debate (if any?). However, the scope for fresh revelations is limited by what we have already seen since the last meeting, including speeches by Lowe and Bullock and the quarterly statement.
The recovery in temporary visa arrivals will continue to be of key interest in October’s Australia overseas arrivals data.
Australia Prime Minister Albanese meets with China President Xi on the sidelines of the G20 summit in Indonesia, in a further step towards thawing of diplomatic relations.
Japan: Despite the ongoing rebound in consumption, materially weaker trade will likely see GDP growth slow notably in Q3 (market f/c: 0.3%qtr). The final estimate to September’s industrial production is also due.
At 1pm Syd we see China’s October activity data. Attention will be centred on the momentum of retail sales given the importance of consumption over the period ahead (market f/c: 0.7%yr vs 2.5%yr in September). Indeed, lingering virus disruptions and a softening global economy are major headwinds, limiting the support from fixed asset investment and industrial production (market f/c: 5.9%yr ytd and 5.3%yr respectively).
Eurozone/UK: The second estimate of Q3 GDP will provide more detail around the Euro Area’s unexpected resilience (market f/c: 0.2%). However, the November ZEW survey of expectations will emphasise the intense concern over the challenging outlook ahead. The European trade deficit is also expected to remain historically wide in September (market f/c: -€45bn). Meanwhile, the UK’s ILO unemployment rate should remain near its historic lows in September (market f/c: 3.5%).
US: A further cooling in annual producer inflation is anticipated in October given the easing of supply issues (market f/c: 0.4%mth; 8.4%yr). Like other regional surveys due this week, the New York Fed’s Empire State manufacturing survey is expected to continue reflecting weak conditions in November (market f/c: -6). The Fed’s Williams, Harker, Cook and Barr are also due to speak.
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