Markets Daily
Fed Chair Powell signalled slower rate hikes to avoid overtightening, sparking a surge in US equities and slide in bond yields. AUD bounced to 0.6785. The data calendar is crowded again, including Australia Q3 capex and US November manufacturing ISM and October personal income and spending.
Yesterday
Australia’s monthly CPI Indicator lifted just 0.2% in October, softer than our expectation for a 0.6% rise, which saw the annual pace moderate from 7.3%yr to 6.9%yr. The reweighting of the CPI has shaved 0.1ppt off our December quarter forecast. Australia construction work advanced by 2.2% in Q3, meeting our expectations. This represents a rebound from the Q2 decline, a fall of -2.0% which was associated with inclement weather. Dwelling approvals posted a 6.0% decline in October, a touch weaker than Westpac’s -5.0% forecast but well below market expectations of a more mild 2.0% drop. Following on from September’s fall (revised down from -5.8% to -8.1%), it looks as though the downtrend in dwelling approvals is beginning to crystalise, responding to the numerous headwinds facing the sector and the broader economy. AUD/USD gyrated only slightly on the data, trading a muted 0.6670 to 0.6709 range over the day. Regional equities were mixed, the ASX 200 one of the better performers, +0.4%.
Currencies/Macro
The US dollar fell against all G10 currencies on the day, commodity FX outperforming. EUR/USD was volatile, trading 1.0291 to 1.0429, overall up about 0.7% at 1.0405. GBP/USD bounced off 1.1900, net up 1 cent on the day at 1.2055. USD/JPY dropped from 139.50 to 138.00 on the Powell headlines. AUD/USD jumped from 0.6705 to 0.6785 in the response to Powell, with a high of 0.6801, the first trade with a 0.68 handle since 13 September. NZD/USD rose 1 cent or 1.6% to 0.6305, printing highs since August. AUD/NZD ranged around 1.0775.
Fed Chair Powell, in a speech on the economy, said “the time for moderating the pace of rate increases may come as soon as the December meeting…Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.” Equities surged on confirmation of slower hikes ahead and Powell adding that the Fed does not want to overtighten or “crash the economy.”
Earlier, Fed governor Cook said the FOMC will keep hiking rates until "the job is done," but that given the lags in the policy response, smaller moves will be "prudent" as policy gets closer to that "uncertain destination."
US GDP in Q3, in a second estimate, rose to 2.9%y/y from 2.6%y/y (est. 2.8%). ADP employment in November rose 127k (est. 200k, prior 239k). JOLTS job openings in October fell to 10.334m (est. 10.250m, prior 10.687m). November Chicago PMI slumped to 37.2 (est. 47.0, prior 45.2), with notable falls in production and new orders. October Pending home sales fell 4.6%m/m (est. -5.3%m/m) and -36.7%y/y as the slowdown in housing continues.
The Fed’s Beige Book of regional economic conditions provided some evidence of economic stagnation, characterising growth as “flat or up slightly” from the October report. Only five of the twelve districts reported any growth. Interest rates and inflation were cited as headwinds, with uncertainty elevated and pessimism rising.
The key data release in Europe was Eurozone CPI for November, which reflected the turn seen in headline CPI in Germany and Spain yesterday. CPI fell 0.1%m/m and rose 10.0%y/y (est. +0.2%m/m and +10.4%y/y, prior 10.6%y/y). Core inflation however remained at 5.0%yr, matching forecasts.
Interest rates
US bond yields rose initially following the GDP data, but price action was reversed and yields ended lower following Fed Chair Powell’s comments, which signalled that a slowdown to 50bp hike is likely at the December meeting. 2yr government bond yields rose from 4.46% to 4.55% before retracing all gains and ended lower at 4.41%, 10yr government bond yields moved similarly and fell from 3.73% to 3.69% via 3.80%.
Australian bond yields broadly followed the trend in the US bond markets, yields were overall lower on the day. 3yr government bond yields (futures) fell from 3.19% to 3.13%, and 10yr government bond yields (futures) fell from 3.56% to 3.52% via 3.62%. Markets are pricing a 90% chance of a 25bp hike at the RBA meeting next week. The AU-US 10yr bond spread narrowed following AU outperformance, the spread currently at -14bps.
Credit spreads were fairly contained ahead of Powell’s speech, however CDX has reacted in line with broader risk markets post, rallying 4bp to 77.5 and back to its series lows as we write. We saw limited primary activity ahead of the Powell’s address. There were just the 2 issuers in the EUR market with the notable transaction being EDF’s corporate hybrid. The French utility was in the market with a EUR1bn PerpNC6yr that priced with a coupon of 7.5% (well inside IPT of 8.25%), and likely a sufficient deal to provide the call of the USD2.1bn Jan-23 call, noting the coupon on the new deal was broadly in line with the reset on the Jan-23 call instrument of 10yr swap+3.71% reset (current coupon 5.25%). This follows the previous night’s announcement by AroundTown that it would not call its NC6yr at the first opportunity in Jan-23 (more here) and, together with the Orsted transaction this week, suggests the hybrid market remains open for the right name or sector. In the US we saw 4 issuers price USD2.55bn including a USD1bn 2yr from BNS (T+90) and another FA back deal, this time through MassMututal (USD750M 5yr).
Commodities
Crude and energy markets jumped, helped by signs of incremental easing in China Covid policies, signs that the Fed will slow the pace of tightening this month, a huge fall in crude inventory and a slump in the US$. The January WTI contract is up $2.51 to $80.71 while the February Brent contract is up $2.76 to $87.01. The EIA reported a whopping 12.58mb, the biggest decline in inventory since June 2019, while exports rose 706kbpd to a fresh record and imports fell 1mbpd. With the focus on news in Guangzhou and Zhengzhou in China where Covid rules were relaxed to more targeted lockdowns, analysts are more excited we may have turned an important corner in terms of Asian crude demand, though the OPEC+ meeting and details of G7 price cap/ EU ban on Russian crude loom large these next few days.
And with signs that we are set for cooler weather across Europe, gas and coal markets pushed higher. The UK January NBP gas contract is up 22% to a 1 month high over the last week while the equivalent in Asia is up 14% over the last 5 days. Outflows from storage in Europe have started to pick up ahead of an arctic blast in the Nordics and Germany. The January Rotterdam thermal coal contract has also jumped 30% over the last week.
Metals reacted well to the risk on sentiment with copper last up 3% to $8,285 while aluminium is last up 4.7% to $2,491. Zinc is also up 3.4% to $3,034. Copper was up 11% in November, its best month since April 2021 with hopes of easing of Covid policies and further support for construction in China plus ongoing industrial unrest in Peru the key drivers. Confirming rumours earlier in November of an outage at the Goro mine in New Caledonia, the authorities imposed additional regulations that could limit production after a recent waste dam leak. The Goro nickel mine is one of the world’s largest nickel deposits. The WTO ruled that Indonesia’s nickel export ban violated WTO rules. The case was brought by the EU in 2021 and Indonesia has vowed to appeal.
Finally note that iron ore markets pushed comfortably above $100, helped by signs of easing of Covid lockdowns at a local level in China. The January SGX contract is up $1.55 from the same time yesterday at $101.00 while the 62% Mysteel index is up 30c at $101.35. Rio announced that it expects the costs of its share of the massive Simandou project in Guinea to be circa $4bn though it gave no indication of when it expects first iron ore and how much it will produce.
Day ahead
At 11:30am Syd we see Australia’s Q3 private new capital expenditure survey. We look for a rise in Q3 actual spending, supported by the up trend in equipment spending and a partial rebound in building and structures (Westpac f/c: 1.6%). For similar reasons, estimate 4 for 2022/23 capex plans should remain upbeat too, around $154bn.
Eurozone/UK: The European unemployment rate is expected to hold at historic lows in October, with slack set to emerge in 2023 (market f/c: 6.6%). The UK’s Nationwide house prices should continue to signal a deepening correction in November (market f/c: -0.4%). The final estimate to the November S&P Global manufacturing PMI is also due for both the Eurozone and the UK (market f/c: 47.3 and 46.2 respectively).
US: Personal income growth will remain under pressure from inflation in October, putting real personal spending capacity at risk of weakness (market f/c: 0.4% and 0.8% respectively). Meanwhile, close attention will be paid to the October PCE deflator given the importance of easing core price pressures for policy (market f/c: 0.4% headline; 0.3% core).
The ISM US manufacturing PMI is expected to dip into contractionary territory in November, which alongside the S&P Global manufacturing PMI will highlight the fragility of the sector (market f/c: 49.7 and 47.6 respectively). Softening demand will continue to weigh on construction spending in October (market f/c: -0.2%) and initials jobless claims should remain at relatively low levels (market f/c: 235k). The Fed’s Logan, Bowman and Barr are also due to speak at different events.
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