Markets Daily
US equity markets rallied for a third straight day as US yields consolidated lower. AUD rose slightly to 0.6430. Today’s calendar features a speech by the RBA’s Kent and the September FOMC meeting minutes.
Yesterday
The October Westpac consumer sentiment index rose 2.9%mth to 82.0, the firmest reading since April but still very much on the gloomy side of historical averages. The NAB survey showed that Australian business conditions moderated in September (+11 vs +14 in August) and business confidence remains soft and fragile (unchanged at +1). These messages from the latest business survey come as no surprise. The new information was a material easing of cost and price pressures, from input prices to final product prices and wages growth. If sustained, that would point to a further deceleration of inflation. AUD/USD initially pushed up from 0.6415 to 0.6433, then faded to 0.6405 in late trade. Regional equities were mostly higher, partly due to catchup from holidays, China underperforming. The ASX 200 closed up 1.0%.
Currencies/Macro
The US dollar softened against most majors on the day. EUR/USD rose from 1.0565 to 1.0605, GBP/USD from 1.2240 to 1.2285. USD/JPY is little changed net at 148.65, with a range of 148.17 to 149.10. AUD/USD was choppy in London trade, then rose to 0.6430 in NY, net +0.3%. NZD/USD rose 25 pips or 0.4% to 0.6045, leaving AUD/NZD a touch lower at 1.0635, printing fresh lows since May.
Bloomberg sources claimed that China’s government is considering fiscal stimulus focused on infrastructure to help meet the 2023 official growth target of ‘around’ 5%.
US NFIB small business confidence survey remained weak in September at to 90.8 (est. 91.0, prior 91.3), citing continued pessimism, concerns over credit tightening, and a declining business outlook over the coming six months. The NY Fed consumer expectations survey’s 1-year ahead inflation expectations component rose slightly to 3.67% (prior 3.63%), while the 3-year ahead rose to 3.0% (prior 2.8%).
The IMF released updates to its economic outlooks, with minor upgrades for 2024 inflation and downgrades for growth, reflecting weaker EU and Chinese activity and a resilient US.
Interest rates
US 2yr treasury yields ranged between 4.94% and 5.02%, while 10yr yields ranged between 4.62% to 4.71%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 5bp higher at the next meeting on 2 November, with a 35% chance of a hike in December.
Australian 3yr government bond yields (futures) ranged between 3.89% and 3.97%, while the 10yr yield ranged between 4.43% and 4.51%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 4bp higher on 7 November, with a 45% chance of a hike by May. New Zealand rates markets price the OCR, currently at 5.50%, to be 8bp higher on 29 November, with a 70% chance of a hike by April 2024.
Credit spreads were positive with Main following the strong equity lead in Europe to be 4.5bp tighter at 82.5 with cash spreads also a touch firmer, while in the US, CDX has rolled out of a Monday holiday to be a bp tighter at 74.5, with IG cash also 1-2bp better. Primary activity emerged in the US with both Energy Transfer and BPCE completing USD4bn multi-tranche offerings.
Commodities
Crude markets stabilised after the last week’s extreme volatility despite the fact that the conflict in the Middle East rages on. The November crude contract is down 58c at $85.80 while the December Brent contract is down 61c at $87.54. Traders will be watching a number of factors in the days and week ahead including any signs of sanctions being tightened on Iran given the recent relaxation has allowed exports to rise from circa 1.9mbpd in 2020 to the recent peak above 3mbpd. In addition, any signs of disturbance in the Straits of Hormuz (which sees about 17mb of crude pass through it each day) would add to the level of market concern. Comments from OPEC+ will also be closely watched given that Bloomberg noted spare capacity is sitting at ‘more than 4mb’ according to US EIA data. Finally, EIA inventory data will be closely watched given last week’s data revealed a slump in demand for gasoline in the US.
Gas prices kept rising with the Tamar field in Israel remaining closed plus the Finland gas pipe leak probe proceeding “on the premise of sabotage”. The Finnish government said on Tuesday that it had also detected a fault in a communication cable with Estonia and had consulted with NATO on the issue. The November TTF contract jumped another 13% and is up by 34% over the last week. Reuters reported that Chevron and unions were set to meet Wednesday for talks to try to reach an agreement ahead of a threatened restart of strikes on October 19th.
Metals gave back much of the previous day’s gains with the focus on rising surplus and developments in Chinese real estate markets. Copper is down 0.9% at $8,029 while aluminium fell 1.27% to $2,481, and nickel fell 1.68% to $18,728. Antaike noted at LME Week that the Chinese refined copper market will see a large 340kt surplus this year as a result of record production and low overseas demand. The discount for spot copper versus the 3m LME contract dropped to the lowest level seen since December 2000. Bloomberg reported that Citi has been ‘buying large volumes of physical aluminium and zinc on the LME in a bold metal-financing trade’. In the last few months, Citi requested delivery of about 100kt of aluminium and 40kt of zinc.
Iron ore markets were mixed following the post Golden Week holiday slump despite signals from Country Garden that it was set to default on offshore bonds plus weak holiday property sales data. The November SGX contract is up $1.50 versus the same time yesterday at $111.50 while the 62% index fell $1.45 to $114.30. Country Garden said in a filing Tuesday that it “expects it will not be able to meet all of its offshore payment obligations when due or within the relevant grace periods”. It also reported September sales down 81% from a year earlier. CISA reported that steel inventory at major steel mills dipped slightly at the end of September though they remained circa 16% above the average levels seen in September over the previous 4 years. Steel production at the end of September dropped to the lowest level seen since late February suggesting that mills were idling capacity ahead of the Golden Week holiday as a result of weak margins and limited demand. The FT reported that the EU was planning an anti-subsidy probe into Chinese in return for avoiding the reimposition of US tariffs on EU steel.
Day ahead
At 12pm Syd there will be considerable interest in the speech by RBA Assistant Governor Chris Kent titled ‘Channels of Transmission’ in case he discusses how the RBA might reduce its holding of bonds bought under the pandemic policy of quantitative easing.
The FOMC will release minutes to their September meeting, shedding light on the balance of risks for the next rate hike. The producer price index for September is expected to post a small gain following a surge in oil prices (market f/c: 0.3%mth). FOMC’s Daly, Bowman and Collins will speak.
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