Markets Daily
Bond yields and the US dollar fell further in the wake of Fed Chair Powell’s speech and as the US manufacturing ISM survey softened. AUD underperformed most of the G10 but edged above 0.6800. Today’s calendar includes Australia October housing finance, comments from RBA Governor Lowe and US November employment.
Yesterday
Australian private capex edged lower in Q3, -0.6%, to be 1.8%yr. The outcome represented a downside surprise, Westpac f/c +1.6% and market median +1.5%. Equipment spending slipped by 1.6%qtr. We had anticipated a rise of 1.2%. Mining was the main source of weakness, down by 4.9%, non-mining was 0.9% lower in the quarter. Capex plans for 2022/23 continue to point to double digit growth, in part to meet higher costs. AUD/USD extended the rally sparked by Fed Chair Powell’s speech, from 0.6785 to 0.6820/25, printing fresh highs since September. Also helping were reports that China was loosening Covid rules further, notably on quarantine. Regional equities were mostly quite upbeat, including the ASX 200 +1.0%.
Currencies/Macro
The US dollar posted notable declines against all G10 currencies except CAD. EUR/USD rose from 1.0405 to 1.0525, posting highs since June. GBP/USD surged 1.85 cents or 1.5% to 1.2245, also seeing highs since June. As 10-year Treasury yields fell to lows since September, USD/JPY fell steadily through the day, from 138.00 to 135.30. The Aussie underperformed most of the G10, consolidating up a modest 25 pips at AUD/USD 0.6810, though it is around highs since September. NZD/USD rose 75 pips or 1.2% to 0.6375, with a high of 0.6400 – highest since August. AUD/NZD fell 90 pips to 1.0690, recording lows since March.
US ISM manufacturing fell to 49.0 in November (est. 49.7, prior 50.2), with new orders falling to 47.2 (from 49.2), employment 48.4 (50.0), and prices paid 43.0 (46.6) - the lowest since May 2020. Personal spending in October rose 0.8%m/m as expected, while income rose 0.7%m/m (est. +0.4%m/m). The PCE deflator rose 0.3%m/m (est. +0.4%m/m) and 6.0%y/y (est. 6.0%y/y, prior revised to 6.3%y/y from 6.2%y/y), with core rising 0.2%m/m (est. +0.3%m/m) and 5.0%y/y (es expected, prior revised to 5.2%y/y from 5.1%y/y).
Fed Governor Bowman said, “As we approach a sufficiently restrictive level of the federal funds rate, it will become appropriate for us to slow the pace of rate increases as we determine how high we need to raise the target range”, while also indicating a higher peak rate than previously.
New York Fed President Williams said: “I still think we have a ways to go in terms of where the fed funds target is and where we need to get it to next year in order to get to a sufficiently restrictive stance…My view is we need to get the federal funds rate above the inflation rate, and sufficiently above the inflation rate to basically bring downward pressure on inflation…We’re seeing some forward-looking indicators that inflation is turning. We’re moving now, and into next year, with a lower inflationary trend.”
The Chicago Fed announced that Austan Goolsbee, a professor at the University of Chicago and former economic adviser to President Obama, would replace the retiring Charles Evans.
Eurozone unemployment in October fell to 6.5% (est. 6.6%, prior 6.6%). German retail sales in October fell 2.8%m/m (est. -0.6%m/m).
Interest rates
US bond yields fell, following key data outcomes which showed the sign of a slowdown in the US economy. Fed’s Bowman also echoed Chair Powell’s message around the slowing of hikes as well as the “higher for longer” rhetoric. 2yr government bond yields fell 4.36% to 4.26%, and 10yr government bond yields fell from 3.64% to 3.54%.
Australian bond yields followed the price action in US bond markets. 3yr government bond yields (futures) fell from 3.16% to 3.08%, while 10yr bond yields fell from 3.51% to 3.44%. Markets are pricing a 75% chance of a 25bp hike at the RBA meeting next week. The AU-US 10yr bond spread widened overnight, the spread currently at -7bps.
Credit spreads were mixed with cash playing catch up to yesterday’s post Powell rally to be 2-4bp tighter across the various sectors, Main also responded, closing in almost 5bp at 87 while CDX had put in the big steps yesterday and was little changed at 76.5. Primary activity was limited with no activity in the US as we enter what is expect to be a quiet December period for supply, while Europe saw 6 issuers price EUR4.1bn including CS with a EUR750M 3yr covered deal that priced at MS+73 (IPT +75, BBSW+126) and SocGen had the largest deal of the day with its EUR1.5bn 8nc7yr SNP at MS+180.
Commodities
Crude markets had another solid session with further signs of easing of Covid restrictions in China and moves by the US Office of Petroleum Reserves to end mandatory oil sales in FY 2024 to 2027 adding to the move. The January WTI contract is up 82c at $81.37 while the February Brent contract is up 3c at $87.00. A Bloomberg survey had OPEC production falling by 1mbpd in November, with Saudi Arabia cutting production by 470kbpd. EU diplomats also appear to be closing in on a $60 Russian price cap though Poland was still said to be holding out. Diplomats have agreed to start talks on a ninth package of sanctions and, assuming agreement can be reached on the cap, will meet every two months to assess the cap level with the IEA helping to assess the appropriate discount for Russian blends.
Meanwhile in gas markets, a group of 7 EU members including Italy, Belgium and Greece were said to be pushing for a more dynamic gas price cap set at a lower €160 with 25% of the cap referenced to US, Asian and Mediterranean prices. The January TTF contract was up 11% in early trade but closed down 5% on the news.
Metals continued their move higher on further signs of easing of China Covid restrictions. Copper is last up 1.5% at $8,360 while nickel is up 1.2% at $27,310. Aluminium traded above $2,560 for the first time since mid-June while gold hit a 4-month high. The plunge in the US $ DXY index through 105 added to the momentum in gold. Copper had its best month since April 2021 in November.
Finally note that iron ore markets surged through $100 with the January SGX contract up $1.20 to $102.20 while the 62% Mysteel index rose $1.60 to $102.95. The China steel PMI measure of output rose slightly to 39.3 in November, up from 38.8 though new orders slumped to 34.4 from 43.4.
Day ahead
At 11:30am Syd, the recent stabilisation in turnover is expected to see a slower pace of decline in Australia housing finance approvals in October (Westpac f/c: -3.5%), though the sharp drop in construction-related loans should see a larger fall in owner-occupier loans relative to investor loans (Westpac f/c: -4.5% and -2.0% respectively).
RBA Governor Lowe will participate in a panel at a Bank of Thailand conference (1pm Syd). There should be no market-sensitive comment given the pre-meeting media blackout is in effect.
US: A slower pace of growth in non-farm payrolls is widely anticipated in November, ultimately aligning more clearly with trends in other indicators (Westpac f/c: 180k; market f/c: 200k). The unemployment rate should round slightly upwards though it will remain little-changed for now (Westpac f/c: 3.8%, market 3.7%), supporting robust growth in average hourly wages (Westpac and market f/c: 0.3%).
The FOMC’s Barr, Barkin and Evans are also due to speak at different events.
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