Markets Daily
Risk sentiment improved, European and US equities closing higher. The US dollar slipped, AUD up to 0.6340. Today’s calendar includes RBA October minutes, UK August average earnings and US September retail sales.
Yesterday
AUD/USD traded tight ranges again, grinding up about 20 pips to 0.6320 over the day. This was despite a sea of red in regional equity markets, many falling further than the -0.5% for the S&P 500 on Friday. Japan’s Nikkei 225 for instance closed -2.1%. The ASX 200 limited its decline to -0.4%. The local data calendar was quiet.
Currencies/Macro
The US dollar was about flat versus the yen but down against all other G10 currencies on the day. EUR/USD rose from 1.0510 to 1.0560. GBP/USD rose from 1.2135 to 1.2215, close to Friday’s intraday highs. USD/JPY ranged between 149.32 and 149.76. AUD/USD followed the equity rally to 0.6340, net +0.7% or 45 pips on the day. NZD/USD slightly extended its early Monday bounce (perhaps on election clarity), to 0.5925, reversing Friday’s decline. AUD/NZD recovered from 1.0650 early Monday to 1.0700.
The New York Fed’s Empire State manufacturing survey fell to -4.6 in October (est. -6.0, prior +1.9). but remained near the upper end of its recent range. Price pressures appeared to be waning, while employment rose, and new orders and 6-momth business conditions fell.
Philadelphia Fed president Harker repeated last week’s assertion that the Fed can remain on hold its benchmark rate steady as long as there is not a sharp turn in the economic data.
Bank of England chief economist Pill said that there was no room to be complacent with inflation remaining too high and that they need a “persistent response” to persistent pressures. However, he added that the BoE has done a lot already, and that as headline inflation falls, the cycle of wages chasing prices will end.
Interest rates
US 2yr treasury yields rose from 5.06% to 5.10%, while 10yr yields rose from 4.61% to 4.71%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 3bp higher at the next meeting on 1 November, with a 40% chance of a hike in December.
Australian 3yr government bond yields (futures) rose from 3.96% to 4.01%, while the 10yr yield rose from 4.47% to 4.53%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 6bp higher on 7 November, with a 55% chance of a hike by March. New Zealand rates markets price the OCR, currently at 5.50%, to be 8bp higher on 29 November, with an 80% chance of a hike by April 2024.
Credit spreads reflected the shift in risk sentiment with Main 1.5bp tighter at 84 and CDX in 2bp to 75 to open the week and US IG cash was 1-2bp better as post-earnings supply opened up. On the primary front, Europe saw 5 issuers price ~EUR2.6bn, while the US was dominated by post-earnings supply from the banks with JPM and WFC pricing USD7.25bn and USD6.0bn respectively.
Commodities
Crude markets softened as frantic diplomacy efforts appeared to be having an impact on the Israeli-Hamas conflict and Venezuela was set to sign an agreement that would lead to an easing of US sanctions. The November WTI contract is down 74c at $86.95 while the December Brent contract is down 87c at $90.02. However, Israel’s defence minister told the US to brace for a “long war” and Hezbollah confirmed it attacked 5 Israeli sites. Norway announced that a deal between Venezuela and banned opposition candidates allowing them to run in the 2024 presidential election will be signed on Tuesday. If the deal is signed, the US is prepared to announce the lifting of certain oil sanctions according to officials. China was reported by Bloomberg as “snapping up benchmark North Sea Forties crude” with as many as 4mb of the key grade bought for export in October, the most in 4 months. And the WSJ reported that natural gas is more vulnerable than oil given the closure of the Tamar gas field and the suspected sabotage at the Balticconnector pipeline.
Metals were mixed with copper up 0.5% at $7,984 though aluminium dropped 0.8% to a fresh 1 month low at $2,181. Citi emphasised that the risks for copper are “heavily skewed to the downside” after attending LME Week in London last week. Citi said they are more confident in their $7,500 forecast after the conference. Bloomberg noted that China is importing unusually large amounts of aluminium, partly to feed a demand surge from green technologies which is one of the few bright spots for the metals market this year. China’s production of EVs has risen 30% in the first 8 months of the year and the nation has added more solar panels in 2023 than the US has ever built according to BNEF.
Iron ore markets pushed towards $120 despite continued gloom in the construction industry and rising steel and steel product stockpiles in China. The November SGX contract is up $1.70 from the same time yesterday at $116.45 while the 62% Mysteel index rose $2.20 to $120.45. Rio and Vale will report quarterly production today while BHP will report on Wednesday.
Day ahead
At 11:30am Syd, the minutes from the RBA Board’s October policy meeting will provide more colour around the Board’s views, in what was Michele Bullock’s first meeting as Governor.
NZ: Q3 CPI will be released. Sharp increases in fuel prices will only be offset partially by lower food prices over the quarter, which is likely to leave both headline and core inflation at elevated levels (Westpac and median f/c: 1.9%qtr/5.8%yr).
The Germany ZEW survey of investor/analyst expectations has been broadly tracking sideways over the last few months, signalling a lack of momentum. In October, the expectations index is seen improving slightly to -9, but the current situation index is expected to remain very gloomy at -81.
In the UK, growth in average weekly earnings is expected to ease only modestly in August (market f/c: 8.3%yr, 7.8%yr ex-bonuses). The September payrolls number is seen little changed.
US: Gains in gasoline and auto sales should buoy headline retail sales in September, despite soft underlying momentum (market f/c: +0.3% overall, +0.1% on the core ‘control group’). Growth in industrial production is set to slow in September following two solid months of gains (market f/c: 0.0%). The housing sector remains under pressure though, with the NAHB housing index expected to hold at weak levels (market f/c: 44). The FOMC’s Williams, Bowman, Barkin and Kashkari are also all due to speak.
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