Markets Daily
A risk averse mood prevailed, Middle East concerns ongoing, pushing defensive currencies higher and equities lower. AUD slipped to 0.6335. Bond yields were volatile, net higher. Today’s calendar highlights are Australia September employment and a keynote speech by Fed Chair Powell.
Yesterday
RBA Governor Bullock said that monetary policy was “starting to bite” on consumption, which was in turn cooling inflation. But she noted various factors that were keeping inflation above target. Pricing for another RBA hike continued to rise, but perhaps more due to the jump in US yields. As China President Xi welcomed international leaders to the Belt and Road Forum, China’s data beat expectations. Q3 GDP rose 4.9%yr, while September industrial production grew 4.5%yr and retail sales 5.5%yr. AUD/USD ticked down to 0.6351 in a poor risk environment but later rallied as high as 0.6393, some of the bounce coming after the China data. The ASX 200’s 0.3% gain was one of the best performances in the region.
Currencies/Macro
Haven currencies Swiss franc, Japanese yen and US dollar were strongest on the day, while Scandis and the dollar bloc underperformed. EUR/USD fell from 1.0580 to 1.0535. Sterling was choppy through the UK data release but ultimately 45 pips lower at 1.2140. USD/JPY rallied in late NY trade as Treasury yields rose, overall up 10 pips at 149.90, the 150 level obviously inducing some caution over intervention. AUD/USD fell in New York trade as the risk mood soured, overall down 30 pips on the day at 0.6335. NZD/USD fell 40 pips to 0.5855, including lows since November 2022. AUD/NZD rose further from 1.0795 to 1.0820.
US housing starts in September rose 7.0% (est. 7.8%), while building permits fell -4.4% (est. -5.7%).
The Fed’s Beige Book of regional economic conditions indicated the outlook for the US economy is stable or may show softer expansion: “The near-term outlook for the economy was generally described as stable or having slightly weaker growth…Labor-market tightness continued to ease across the nation…Consumer spending was mixed, especially among general retailers and auto dealers, due to differences in prices and product offerings”.
New York Fed president Williams said interest rates will need to stay at restrictive levels for some time: “We’re going to stick at it to make sure that we really achieve that goal of 2% on a sustained basis. We need to keep this restrictive stance of policy in place for some time”, while noting the Fed’s dot plots point to easing next year, and that the policy rate “will continue to come down over the next couple of years, but that’s going to depend on the data, depend on what we’re seeing.”
Fed governor Waller said: “I believe we can wait, watch and see how the economy evolves before making definitive moves on the path of the policy rate…I will be looking carefully at the data to see whether the real side of the economy begins to cool off or whether prices, the nominal side of the economy, heat up…As of today, it is too soon to tell.” Fed governor Bowman said “Inflation has come down, but we know that it is still too high”.
UK CPI rose +0.5%m/m and +6.7%y/y (est. +0.5%m/m and +6.6%y/y), with core CPI at +6.1%y/y (est. +6.0%y/y).
Interest rates
US 2yr treasury yields rose 2bp to 5.22% (via 5.17% and 5.24% - highest since 2006), while 10yr yields rose from 4.84% to 4.91% - highest since 2007. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 3bp higher at the next meeting on 1 November, with a 60% chance of a hike in February.
Australian 3yr government bond yields (futures) rose from 4.20% to 4.23%, via 4.16% while the 10yr yield rose from 4.67% to 4.74% (highest since 2011). Markets are pricing the RBA cash rate, currently at 4.10%, to be 9bp higher on 7 November, with a 100% chance of a hike by March. New Zealand rates markets price the OCR, currently at 5.50%, to be 3bp higher on 29 November, with a 50% chance of a hike by April 2024.
Credit spreads were wider with Main out 2bp to 85.5 and CDX almost 3bp wider at 78 as US IG cash also reacted to the ongoing volatility to close 2-3bp. Against this backdrop, EUR primary activity remained relatively light with 5 issuers pricing ~EUR1.5bn including some smaller deals, while the US has seen bank supply continue from both large cap and regional players.
Commodities
Crude markets hit two-week highs after Iran called for an embargo against Israel and Cushing inventories dropped to 2014 lows. The November WTI contract is up $1.59 (1.8%) at $88.25 while the December Brent contract is up $1.49 (1.66%) at $91.39. Iran’s foreign minister called for a “full and immediate boycott” of Israel by Muslim countries and the expulsion of Israeli ambassadors following the horrific and deadly explosion at a Gaza hospital. EIA data showed an aggressive draw across refined products with gasoline down 2.37mb and distillate down 3.18mb. Coming on top of a 4.49mb draw on crude stocks, total crude plus liquids fell by almost 12mb, the biggest 1 week draw since late 2021. Crude exports jumped to 5.3mb, the highest since June as refineries remained in ‘turnaround’ mode (switching to winter fuels) and the steep backwardation disincentivized barrels from going into storage though demand across refined products jumped by the most since June 2022 even if current levels remain well below seasonal average levels. The US gave Exxon permission to unload crude from a tanker that was sanctioned by the US Treasury Department for previously breaching a cap on Russian oil prices given the violation occurred months ago and didn’t involve Exxon. Reuters reported that the US administration plans to provide some broad easing of energy-related sanctions for Venezuela’s oil and gas sector almost immediately in response to a deal on guarantees for the 2024 presidential election. Such a move should help to divert barrels back to the US from the current main destination which is China according to analysts. Bloomberg noted that traders were “puzzled” by Unipec’s unusual buying of US oil, snapping up 3.5mb of WTI Midland for delivery to Europe despite Unipec not having any refining capacity in the region. Unipec’s purchases in October hit the highest since 2014.
Metals rose on the stronger Chinese data though much of the gains were given back through the session as US yields and a stronger US$ weighed on sentiment. Copper did trade above $8,060, though is last up just 0.3% at $7,992 while aluminium is up 0.6% at $2,189. China reported record daily aluminium production at 119ktpd in September after smelters brought back idled capacity. The previous record was 116ktpd in August. China reported a surge in hydroelectric power in September, up 39%yy, allowing smelters in the Yunnan region to restore operations. Copper inventories at LME warehouses hit the highest since October 2021. Gold continued its surge higher and is now up circa 5% from pre-Israel/ Gaza conflict levels.
Iron ore markets gave back some of the recent gains as Chinese steel production data for September showed a sharp drop, coming in at just 82.11mt, -5.6%yy and the lowest on a seasonally adjusted basis in 9 months as smaller mills showed signs of going into maintenance. The November SGX contract is down $1.60 to $115.65 while the 62% Mysteel index is down $1.40 to $119.20. However, Vale reported lower Q3 iron ore output at 86.2mt, in line with expectations and versus 89.7mt in the same quarter last year. BHP also reported iron ore output 4%yy lower at 69.4mt in the September quarter.
Day ahead
At 11:30am Syd we see Australia’s September labour force survey. Growth in employment has slowed gradually over this year and it is expected to continue tracking a modestly below-trend pace in September (Westpac and market f/c: +20k after the 65k rebound in August). With participation anticipated to pare back slightly, the unemployment rate should hold steady (Westpac and market f/c: 3.7%).
Federal Reserve Chair Powell is due to speak at the Economic Club of New York (3am Thu Syd). This will be the market focus though there is another raft of commentary by other Fed speakers, including Cook, Jefferson, Goolsbee, Barr, Bostic and Harker. The FOMC’s pre-meeting media blackout period begins on Saturday.
The US leading index will likely continue pointing to a gradual slowdown in activity (market f/c: –0.4% in September), something that has been more apparent in regional manufacturing surveys, particularly the Philly Fed index (market f/c: –6.9 in October). Meanwhile, supply constraints will continue to weigh on existing home sales in September (market f/c: –3.7%).
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