Markets Daily
US bond yields rose to new highs after strong US job openings data, while the S&P500 fell 1.4%. The USD continued to forge higher, apart from a plunge in USD/JPY.
Yesterday
The early impetus was to further USD gains, Cleveland Fed president Mester saying that another Fed hike may be needed. AUD/USD edged lower, from around 0.6365 to 0.6345 and in the wake of the RBA statement lurched down to around 0.6300. Regional equity sentiment was soft, Hong Kong down -2.7%, while the Nikkei fell -1.6% and the ASX was down -1.3%. Mainland China markets are closed for Golden week.
The RBA left rates unchanged at 4.1%, as widely expected. The statement was little changed, the Board retaining its tightening bias with the message that, “some further tightening may be required”. The Governor’s first statement made no substantive changes, beyond dropping the reference to the monthly CPI indicator showing further declines, adding fuel prices to the list of "concerns" and noting growth was a little stronger than expected in the first half. The RBA still expects growth to be below trend, with concerns about household consumption and China’s economic outlook remaining in place.
New housing finance approvals rose 2.2% in August, above consensus for a flat result. The mix showed gains led by owner occupier loans for existing dwellings, with other segments a touch softer. The picture continues to be one of a gradual up-trend coming from a weak starting point, with finance approvals still 27% below the peak at the start of 2022. Dwelling approvals posted a bigger than expected 7% rise in August, with both detached and units posting solid gains. The result comes off two months of sizeable declines led by units.
Currencies/Macro
The US dollar index is up 0.2% on the day, after a strong rebound in the always volatile US JOLTS survey of job openings, bolstering the case for the Fed to keep rates higher for longer. EUR fell from 1.0493 to 1.0448 – a nine-month low. USD/JPY initially rose from 149.65 to 150.16 – a fresh 11-month high – before abruptly plunging to 147.43 and inviting speculation of intervention (the MoF/BoJ did not comment).
With the USD firm on all fronts (ex-JPY) amid another high in US yields at 4.80%, AUD fell from 0.6350 to 0.6287 – an 11-month low. NZD fell from 0.5920 to 0.5888. AUD/NZD fell from 1.0700 to 1.0672 – a four-month low.
US JOLTS job openings in August were stronger than expected at 9610k (est. 8815k, prior revised from 8827k to 8920k).
FOMC member Mester said: “If the economy looks the way it did at the next meeting similar to the way it looked at our recent meeting, I would do the further rate increase”. Bostic said: “I am not in a hurry to raise, but I am not in a hurry to reduce either…I want us to hold. I think that’s the appropriate thing to do, for a long time.”
Interest rates
US 2yr treasury yields rose from 5.11% to 5.15%, while 10yr yields rose from 4.70% to 4.80% - highest since 2007. Markets currently price the Fed funds rate, 5.375% (mid), to be 9bp higher at the next meeting in November, with a 60% chance of a hike in December.
Australian 3yr government bond yields (futures) ranged between 4.09% and 4.15%, while the 10yr yield rose from 4.56% to 4.66%. Markets price the RBA cash rate, currently at 4.10%, to be 8bp higher in November. New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged after today’s meeting, with a 65% chance of a hike in November and a 100% chance by February 2024.
Credit was weaker with indices under pressure which saw Main 3.5bp wider (6.5bp in 2 sessions) to 86 and CDX also out 3.5bp (5bp in 2 sessions) to 78. US IG cash closed 2-4bp wider to break out of recent ranges and primary activity was limited as potential US issuers opted to stand down into the volatility. The sole issuer on the night was Emirates NDB Bank which priced a USD750M 5yr green deal at T+120.
Commodities
Crude markets recovered after extending the weekend’s losses earlier in the session despite US yields and the US$ rising further. The November WTI contract is last up 75c at $89.57, while the December Brent contract was last up 43c at $91.14. Russia was said to be considering lifting its diesel export ban for fuel producers, while leaving the ban in place for so called ‘grey-exporters’ or those companies that export but do not produce diesel. A decision could be taken as soon as this week with the Russian Deputy PM set to hold meetings today and Friday. OPEC+ JMMT will also meet today to assess supply and demand though no changes to production levels are expected. Meanwhile, US gasoline futures hit 10-week lows though Goldman warned the selloff is ‘excessive’ and that “gasoline is approaching both relative demand and cost support”, suggesting there is limited downside from here. Natural gas prices in Europe extended the recent selloff to multi year lows as unusually warm weather limited demand. The November TTF contract is down another 6%, to lows since early 2022.
Metals continued the selloff, with copper trading below $8,000 for the first time since late May. We are last at $8,008, down 0.6% while aluminium is down 1.3% to $2,292 and zinc down 3.3% at $2,515. The DRC and Zambia broke ground on an $850m road project to an East African port that will cut 150 miles from the existing journey. The new route will include a 345-meter bridge over the Luapula river and 184km of highway to a port at Dar es Salam in Tanzania, though the first metals are not expected to travel the route for 3 years. BHP also said it had begun mediated talks with union leaders at the world’s largest copper mine with mediation set to run to October 11. The Escondida mine continues operating normally. The discount for spot copper versus the 3m LME contract widened to -$77.5, a fresh low back to December 2000.
Iron ore markets dropped in thin holiday trade with concerns about the Chinese property sector weighing on prices. The November SGX contract is down $2 from the same time yesterday to $115.40. Despite Evergrande shares closing up 28% in HK, the Hang Seng properties and construction index fell to a fresh low back to November 2022. Rio and WCS signed a rail and port funding pact covering the first stages of the 600km rail and port facilities in Guinea. Construction is set to begin on the Simandou rail line next month.
Day ahead
NZ: The Reserve Bank of New Zealand is expected to keep the OCR steady at 5.50% and retain their tightening bias. Risks of persistent inflation remain following a resurgence in the housing market, strong inward migration, a stronger starting point for GDP and higher oil prices. (Westpac f/c: 5.50%, market f/c: 5.50%).
Eurozone: Retail sales for August will reflect a real income squeeze that is putting pressure on spending (market f/c: -0.5%mth). The producer price index is anticipated to fall further as base effects come into play (market f/c: -11.6%mth). The ECB’s President Lagarde will be speaking.
US: The ISM non-manufacturing PMI for September is likely to pullback from the August’s consumer-driven bounce (market f/c: 53.5pts). Factory orders are expected to be soft for August following a soft durable goods orders print (market f/c: 0.3%mth). September’s ADP employment report should reflect looser labour market conditions but often comes at odds with BLS data (market f/c: 150k). The FOMC’s Bowman and Goolsbee are speaking today.
Global: September S&P Service PMIs will show service sectors in the Eurozone, UK, US and Japan still expansionary, but with emerging headwinds.
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