Markets Daily
Strong US spending and manufacturing data boosted bond yields but not the USD. The S&P500 finished flat.
Yesterday
The RBA Board again considered both the case for a rate increase and the case for leaving rates unchanged at its October meeting. But without much new information in the month, it concluded that there was no need to move. The minutes included a number of language changes from September, in Michele Bullock’s first meeting as Governor. Particularly noteworthy was the change to the last paragraph, adding the sentence, “The Board has a low tolerance for a slower return of inflation to target than currently expected.” This signals their willingness to act if the outlook changes. The wording change in the next sentence, “Whether or not a further increase in interest rates is required…” is also significant. It reads as a deliberate pointer to the Board’s assessment that it would only need to tighten further in the event of an upside surprise. AUD/USD rose 15 pips to 0.6360 on the headlines, later peaking at 0.6367 before steadying at 0.6355, a modest +0.2% net gain on the day. AUD/NZD was more impressive, +0.6% or 70 pips to 1.0770 on the combination of sub-consensus NZ Q3 CPI and the RBA minutes. Regional equity markets extended the overnight US rally, including the ASX 200 which closed up 0.4%.
Currencies/Macro
The US dollar index is up 0.1% on the day, boosted by the strong retail sales report and a jump in short term US yields, but constrained by steady global risk appetite conditions, an earlier stronger German ZEW survey and reports that the BoJ is considering raising their inflation projections for both fiscal years 2023 and 2024. EUR rose from 1.0533 to 1.0595. USD/JPY fluctuated between 149.37 and 149.80.
Outperformer AUD bounced off 0.6337 to 0.6380. NZD bounced off 0.5871 to 0.5909. AUD/NZD rose further from 1.0760 to 1.0800, due to the combination of hawkish RBA minutes and softer NZ CPI data yesterday.
US retail sales in September were stronger than expected, at +0.7%m/m (est. +0.3%m/m, prior revised to +0.8%m/m from +0.6%m/m). The core control group measure and ex-autos group both rose 0.6%m/m (both est. +0.1%m/m). Industrial production rose 0.3%m/m (est. flat, prior revised to flat from +0.4%m/m). The NAHB homebuilder confidence survey fell to 40 (est. 44, prior revised from 45 to 44), as high interest rates continued to erode the confidence of building companies, with buyers reported to be withdrawing from the market.
Canadian CPI in September rose only 3.8%y/y (est. unchanged at 4.0%y/y), with the core trim and core median measures also softer at 3.7%y/y and 3.8%y/y, respectively (est. 3.8%y/y and 4.0%y/y). The ex-food and energy measure fell to 3.2%y/y (prior 3.6%y/y).
The German ZEW investor sentiment survey rose to -1.1 (est. -9.0, prior -11.4). Eurozone expectations rose to +2.3 (prior -8.9), although current conditions were softer at -52.4 (prior -42.6).
Interest rates
US 2yr treasury yields rose from 5.10% to 5.22% - highest since 2006, while 10yr yields rose from 4.75% to 4.85% - highest since 2007. Markets price the Fed funds rate, currently 5.375% (mid), to be 4bp higher at the next meeting on 2 November, with a 65% chance of a hike in February.
Australian 3yr government bond yields (futures) rose from 4.10% to 4.18%, while the 10yr yield rose from 4.55% to 4.65%. Markets price the RBA cash rate, currently at 4.10%, to be 9bp higher on 7 November, with a 95% chance of a hike by March. New Zealand rates markets price the OCR, currently at 5.50%, to be 4bp higher on 29 November, with an 45% chance of a hike by April 2024.
Credit spreads have remained relatively contained against a volatile backdrop with Main half a bp tighter at 83.5 and CDX half a bp wider at 75.5 while cash spreads were little changed. Primary activity was also a little slower with Europe seeing 3 banks deals for a total of ~EUR2bn (including 2 covered) while the US saw just the 2 issuers. PNC was the standout with its post earnings USD3.5bn deal including USD1.25bn of 4nc3yr at T+160 and USD2.25bn 11nc10yr at T+203. The deal saw demand in excess of USD10bn and pricing with a NIC of ~7-10bp.
Commodities
Crude markets marked time ahead of Biden’s trip to Israel on Wednesday. The November WTI contract is up 60c at $87.25 while the December Brent contract is up 72c at $90.37. US Secretary of State Blinken confirmed that Biden will be “coming here at a critical moment for Israel, for the region and the world”. He will also meet the leaders of Jordan, Egypt, plus Mahmoud Abbas according to the NSC though AP reported that the Palestinian Authority President had cancelled his meeting after an explosion at a Gaza City hospital killed hundreds on Tuesday. The Central Bank of Russia noted an agreement from OPEC countries to discuss a possible increase at the beginning of 2024 “if the oil shortage on the world market widens”. However, Russian Deputy PM Novak said it was too early to talk about what decisions OPEC may take at its November meeting. Bloomberg reported that Russian crude shipments are creeping up again, with the 4-week average rising to about 3.36mbpd, the highest since July. And in natural gas markets, Chesapeake was reported as exploring buying Southwestern Energy which would make it the largest natural gas focussed exploration and production company in the US. Reuters reported the talks as “preliminary”. And Chevron was reported as having agreed on pay and working conditions deal with unions at its two LNG facilities in Australia. The Offshore Alliance said it would call off strikes planned for Thursday.
Metals marked time with Golman adding a downbeat summary of last week’s LME week noting that they “think the industrial metals markets in the near term are likely to remain vulnerable”. Copper was a modest 0.2% lower at $7,961 while aluminium was down 0.16% at $2,177. Rio noted that Escondida copper production rose 5% in the third quarter due to improved oxide leach performance. Glencore announced that it will shut its Mount Isa mine by 2025 and cut 1,000 jobs according to the AFR. Rusal was reported as considering idling some loss-making aluminium smelters due to low prices according to Interfax.
Finally note that iron ore markets continued probing higher on China fiscal policy optimism. The November SGX contract is up $1.80 from the same time yesterday at $118.25 while the 62% Mysteel index rose 15c to $120.60. BHP will report its quarterly production numbers today while China will also report Q3 GDP plus September industrial production including steel output. Using CISA data, we expect to see a roughly unchanged 86mt of steel produced in September though we would note that total steel production has come in circa 2mt lower than our estimate over the last 4 months suggesting we are seeing signs of smaller steel mills cutting back production due to low profitability/ weak margins.
Day ahead
Australia: The Westpac-MI Leading Index will provide a timely update on the economy’s current growth momentum. RBA Governor Bullock will give a ‘fireside chat’ at the AFSA Annual Summit Panel (9:30am AEDT). The RBA’s Smith (Head of International Department) is also due to speak.
China: Q3 GDP will likely reflect a slowing in momentum given the presence cyclical and structural headwinds (Westpac f/c: 4.4%yr). September’s partials on retail sales, industrial production and fixed asset investment may better capture some more promising developments near quarter-end (market f/c: 6.7%yr ytd, 3.9%yr ytd and 3.2%yr ytd respectively), but a clearer pick-up in momentum toward year-end is expected.
Eurozone/UK: The UK’s CPI deceleration will likely remain modest in September, albeit broadly in line with policymakers’ expectations (market f/c: 6.6%yr). The final estimate to September’s CPI is also due for the Eurozone (market f/c: 4.3%yr).
US: The uptrend in building permits is expected to have maintained its strength despite month-to-month volatility (market f/c: –5.9%), however the carry-over to housing starts is likely to remain limited at best (market f/c: 8.0%). The Federal Reserve’s Beige Book will provide an update on economic conditions across the regions. There will also be a raft of Fedspeak, including Waller, Williams, Bowman, Barkin and Harker.
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