Markets Daily
The US dollar and bond yields were mixed amid firm US PPI data and a flurry of Fed headlines. Oil prices retreated. AUD slipped to 0.6415. Today’s calendar features UK August CPI and the global highlight, US September CPI.
Yesterday
RBA’s Chris Kent spoke on monetary transmission channels. The speech had a slightly dovish tone. He said that “Our estimates suggest that the 4 percentage point increase in the cash rate target since May 2022 will have reduced overall household spending by around 0.4–0.8 per cent per year” and noted that there was more to come given lags. Kent added that rising home prices weren’t a major concern. AUD/USD traded a range of 0.6410 to 0.6445, little changed net. Regional equities were mostly positive, following the 3-day US rally, the ASX 200 closing up 0.7%.
Currencies/Macro
The US dollar was mixed against major currencies on the day. EUR/USD ranged between 1.0583 to 1.0635, ultimately +0.1% at 1.0620. GBP/USD steadied up 0.2% at 1.2314. USD/JPY rose from 148.70 to 149.20. AUD/USD fell to 0.6388 then edged back to 0.6415, net -20 pips on the day. NZD/USD fell 25 pips to 0.6020. AUD/NZD is a touch higher at 1.0655.
The US producer price index in September rose 0.5%m/m and 2.2%y/y (est. +0.3%m/m and +1.6%y/y, prior revised to +2.0%y/y from +1.6%y/y). Ex-food and energy rose 0.3%m/m and 2.7%y/y (est. +0.2%m/m and +2.3%y/y, prior revised to +2.5%y/y from +2.2%y/y).
The September FOMC minutes were broadly in line with expectations and the September meeting statement, showing "almost all participants" thought it appropriate to leave the funds rate unchanged. The restrictive stance would continue to support making progress on reducing inflation while giving policymakers time to assess additional data. In addition, "all" believed the FOMC was in a position to "proceed carefully," and "all" agreed policy should remain restrictive for some time. A "majority" of participants thought one more hike would likely be needed, and "most” participants saw upside risks to inflation.
Fed governor Bowman said: “inflation remains well above the FOMC’s 2% target. Domestic spending has continued at a strong pace, and the labour market remains tight. This suggests that the policy rate may need to rise further and stay restrictive for some time to return inflation to the FOMC’s goal.” Fed governor Waller said: “The real side of the economy seems to be doing well. The nominal side is going in the direction we want. So we’re in this position where we kind of watch and see what happens on rates. Financial markets are tightening up and they are going to do some of the work for us.” Atlanta Fed president Bostic said: “Today, I don’t think we need to do anything more in terms of interest rates.”
The ECB’s consumer expectations survey showed a rise in inflation expectations, the 1yr-ahead measure rising to 3.5%y/y from 3.4%y/y, the 3-yr expectations to 2.5%y/y from 2.4%y/y.
Interest rates
US 2yr treasury yields rose from 4.97% to 5.02% then back to 4.98%, while 10yr yields fell from 4.65% to 4.56%, flattening the curve by around 5bp. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 4bp higher at the next meeting on 2 November, with a 35% chance of a hike in December.
Australian 3yr government bond yields (futures) fell from 3.95% to 3.92% via 3.88%, while the 10yr yield fell from 4.45% to 4.35%. 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 February. 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 indices were weaker early with Main out half a bp to 83 (after yesterday’s outsized moved tighter) while CDX has firmed post the Fed minutes to now be half a bp tighter at 73.5. Cash is more subdued however primary activity returned with Europe seeing 6 issuers price ~EUR7.5bn while the US saw just the 2 issuers price USD4.75bn.
Commodities
Crude markets backfilled the gap left on Monday morning despite Israel agreeing to a national unity ‘war cabinet’ and mass mobilisation of reservists. The November WTI contract is down $1.97 to $84.00 while the December Brent contract is down $1.35 at $86.30. A New York Times story reported that US intelligence showed Iran was surprise by Hamas’s attack on Israel, adding to the pressure on prices. The EIA reported that US crude production surged to a record high in Q3 and is expected to climb further to 13.16mb in Q4, up from 12.94mb according to the Short-Term Energy Outlook. Exxon Mobil agreed to buy Pioneer Natural Resources for $59.5bn in an all-stock deal. If finalised, the deal will make Exxon the largest player in the Permian and bring daily crude production to 4.5mb.
Gas prices in Europe paused the sharp rally despite forecasts of a cold snap in northern Europe for early next week. After gaining circa 30% in the last 3 sessions, the November TTF contract was down close to 7%. NATO Secretary General Stoltenberg cautioned that if the attack on the Finland pipeline was deliberate, it “will be met by a united and determined response from NATO”.
Metals were lower again with nickel leading the move down another 1% on the day to $18,485 and copper back to $8,000, down 0.3%. The prospect of China fiscal stimulus was countered by a ‘higher for longer’ theme in the Fed minutes. Press reported that automaker Stellantis and Rio will increase investments in copper mines in Argentina.
Iron ore markets bounced as traders weighed up Country Garden news with hopes for fresh stimulus. The November SGX contract is up 60c from the same time yesterday at $112.10 while the 62% index is up $1.85 to $116.15. There is increasing focus on the October 20 bilateral EU US summit in Washington where the EU may announce new tariffs aimed at excess Chinese steel production. Failure to reach an accord by October 31 would mean that levies on $10bn of exports between the EU and US would automatically come back into force at the start of 2024.
Day ahead
Australia: The Melbourne Institute inflation expectations survey is expected to resume its downtrend that started in April.
Japan: Core machinery orders for August are anticipated to be weak as both domestic and foreign demand weakens, although car orders will be a bright spot (market f/c: 0.6%mth).
UK: August GDP is likely to rebound from July's steep decline, but weakness in services will limit output growth (market f/c: 0.2%mth). The trade deficit will reflect weaker consumer demand as well as a slump in demand from Europe (market f/c: -GBP3.7bn).
US September CPI is the key global data release this week. Consensus is 0.3%mth, 3.6%yr versus 3.7%yr in August, with CPI ex-food and energy seen up 0.3%mth, 4.1%yr, easing from 4.3%yr in August.
US initial weekly jobless claims should remain around their recent lows. Boston Fed president Collins are speaking.
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