Markets Daily
In a volatile session, the US dollar initially fell further following softer producer inflation data, although mixed Fedspeak and news of missiles reaching Poland caused a retracement. Equities closed higher, AUD up to 0.6760. Today’s calendar features Australia Q3 wages, UK October CPI and US October retail sales.
Yesterday
The RBA November minutes elaborated on the 25bp versus 50bp discussion, giving the impression that another 50bp hike is a lot less likely than a period of unchanged rates. AUD/USD paid little attention, trading quietly either side of 0.6700. China’s October activity data printed below expectations, industrial production 5.0%yr versus 6.3%yr in September and retail sales -0.5%yr after +2.5%yr in September. Regional equities were mostly positive, mostly outperforming the ASX 200’s near-flat close.
Currencies/Macro
The US dollar fell notably against most G10 currencies on the day. EUR/USD rose as high as 1.0479 following the US PPI data, before retracing to 1.0280 following Bostic’s comments and news of Russian missiles reaching Poland, eventually steadying around 1.0365, up a net 40 pips. GBP/USD is up about 1.15 cents or 1% at 1.1870, after a wide range of 1.1741 to 1.2028. USD/JPY fell as low as 137.68 before retracing to 139.00, net -0.6% on the day. AUD/USD rose 1.1% or 70 pips over the day to 0.6770, with a high of 0.6797, its highest point since 13 September. NZD/USD rose 1.2% to 0.6170, including a high of 0.6203, its first trade above 0.6200 since 26 August. This left AUD/NZD a touch lower at 1.0980.
US PPI inflation in October was softer than forecast at +0.2%m/m and 8.0%y/y (est. +0.4%m/m and 8.3%y/y, prior +0.2%m/m and 8.4%y/y). The ex-food and energy measure was flat m/m and 6.7%y/y (est. +0.3%m/m and 7.2%y/y).
Philadelphia Fed president Harker adopted a less hawkish tone, saying that the pace of hikes should slow in coming months as they approach restrictive settings, while still seeking to control inflation without unnecessary damage to the labour market. Atlanta Fed president Bostic saw “glimmers of hope” that inflation may be easing, although he also wants to see services prices slowing and so far that has not happened. The Fed needs to maintain a restrictive policy stance to tame inflation until there is convincing evidence that inflation is firmly on track toward the 2% objective.
Eurozone November ZEW surveys beat forecasts. German expectations rose to -36.7 (est. -51.0, prior -59.2) and current conditions rose to -64.5 (est. -69.3, prior -72.2). Eurozone expectations rose to -38.7 (prior -59.7) and current conditions rose to -65.1 (prior -70.6).
UK unemployment in September rose to 3.6% (est. unch. at 3.5%). However, October payrolls rose +74k (est. +44k, prior revised to +94k from +69k) to a record 29.8 million. Average weekly earnings in September rose 6.0%y/y (est. 5.9%, prior 6.1%).
Interest rates
US bond yields were lower on the day, and the curve bull flattened following Fed officials’ rhetoric around the timing of slowing down rate hikes. 2yr government bond yields fell from 4.40% to 4.32% before rebounding to 4.37%, and 10yr government bond yields (futures) fell from 3.80% to 3.68% before rebounding to 3.77%.
Australian bonds followed the trend of US price action, but underperformed their US counterparts. 3yr government bond yields (futures) fell from 3.36% to 3.25%, and 10yr government bond yields (futures) fell from 3.80% to 3.68%. Markets are pricing an 80% chance of a 25bp hike at the RBA meeting next month. The AU-US 10yr bond spread widened significantly following the AU underperformance overnight, the spread currently at -5bps.
Credit continued to push tighter with Main another 3bp tighter to 93 and CDX in a bp to 82.5 as cash spreads also retained post CPI momentum. Primary activity continued with Europe seeing 13 issuers (ex-SSA) price ~EUR12.5bn with Vonovia (EUR1.5bn 4.5/8yr) and Iberdrola (EUR1.5bn 6/10yr) leading the way for corporates, while in fins we saw WSTP complete its 5yr EUR750M covered deal at MS+35 (BBSW+90), Lloyds completed a 5yr covered deal in GBP at SONIA+65 (also ~BBSW+90) and MS was in the GBP market with a GBP1.25bn 11nc10yr deal at UKT+240. The US saw 9 issuers price USD13.35bn with supply dominated by Philip Morris’ USD6bn 5 part deal (2-10yr).
Commodities
Crude is up as we write on news that stray Russian missiles killed 2 people in Poland and the Druzhba pipeline was halted after a power outage. The December WTI contract is up 86c at $86.73 while the January Brent contract is up 53c at $93.67. The Druzhba pipeline is important as it is due to keep supplying Russian oil to Eastern Europe under a carve-out negotiated by states including Hungary even though Germany and Poland plan to stop receiving Russian crude by end of the year. It’s not clear how long the pipeline will be out of action. The IEA warned that supplies of diesel are “exceptionally tight” and that the “approaching EU embargoes on Russian crude and oil products, and a ban on maritime services, will add further pressure on global oil balances”.
Meanwhile gas markets in Europe again jumped on weekend news that the Freeport terminal will likely extend an outage that began in June this year through to the end of the year. The December Dutch TTF contract was up another 9% Tuesday, taking gains for the week so far to 25%. However, about 40 LNG vessels are acting as floating storage, waiting for prices to rise into the winter according to Bloomberg vessel tracking. And Germany completed the jetty in Wilhelmshaven that will allow LNG to flow from a floating terminal. The facility will deliver up to 7.5bcmpa, (circa 8.5% of Germany’s consumption) with commissioning expected mid-December.
Metals were softer though nickel was again the star performer up 2.4% at $29,540 after hitting a 7-month high at $31,275. Copper is last all but unchanged at $8,385 while aluminium is last down 0.6% at $2,437. Cash to three-month spreads for both copper and aluminium hit 3-month plus lows suggesting soft physical demand. The focus in the nickel market was again on plant outages with the Goro mine in New Caledonia cutting production due to a leak of “salt-laden liquid” from its tailings dam after heavy rains in August, adding to a slew of recent supply concerns.
Finally note that iron ore markets continued modest gains, helped by recent policy announcements in China and better than expected Chinese steel production in October. The December SGX contract is up 90c versus the same time yesterday at $96.10 while the 62% Mysteel index is up 95c at $95.30. China reported crude steel production for October at 79.76mt, up 11%yy and 10%3myy. However, versus the average year to date over the last 5 years, steel production is up by just 5%, highlighting that the underlying trend is till towards slowing as the property crunch impacts demand.
Day ahead
At 11:30am Syd, Australia’s Q3 wage price index will provide a crucial update on the pace of wages growth. A sizeable lift is widely anticipated given the outsized minimum wage increase (Westpac f/c: 1.1%qtr, 3.2%yr, median forecast 0.9%qtr).
Also in Australia, the Westpac-MI Leading Index is set to include some weaker component updates in October, pointing to a material loss of momentum heading into 2023.
Japan: Recent weakness in machinery orders is pointing to downside risk in capex spending (market f/c: 0.7%).
UK: An outsized gain in the CPI is widely expected in October, driven by a lift in utility prices upon the government’s increase in the energy price cap (market f/c: 1.8%mth, 10.7%yr, core rate 6.4%yr).
US: Headline retail sales should post a solid bounce in October, though underlying sales are expected continue softening (market f/c: 1.0%). The outlook for industrial production is becoming increasingly bleak as weakening domestic/global demand and excessive business inventory accrual weighs on businesses’ capacity to expand (market f/c: 0.1% and 0.5% respectively). Meanwhile, import prices are expected to continue declining in October (market f/c: -0.4%) and the NAHB housing market index should remain in historically weak territory (market f/c: 36). The Fed’s Williams, Barr and Waller are also due to speak at different events.
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