Markets Daily
The USD rebounded against the euro, helped by slightly better US (and disappointing Eurozone) PMI data. Bond yields were mixed, while the S&P500 snapped a 5-day losing streak. AUD outperformed, up to 0.6355. Today’s calendar highlights are Australia Q3 CPI, Germany October IFO business sentiment and the Bank of Canada meeting.
Yesterday
The US dollar was on the back foot in Asia, in the wake of the pullback in US Treasury yields and as equities started to recover after heavy losses in recent days. The Aussie led G10 FX, up from 0.6335 to 0.6375, printing 6-day highs. A late session rally in Shanghai stocks may have helped the Aussie, closing +0.8% after opening lower. The ASX 200 rose 0.2%, snapping a 3-day losing streak.
Currencies/Macro
The US dollar rebounded against European majors and CAD but was otherwise mixed, the Aussie outperforming. EUR/USD fell from 1.0685 pre-PMIs to 1.0590, wiping out Monday’s gains. GBP/USD dropped -0.7% to 1.2160. USD/JPY was volatile at times but overall up 0.1% at 149.85. AUD/USD rose 0.3% over the day to 0.6355, with an intraday high of 0.6379. NZD/USD was net unchanged at 0.5845, leaving AUD/NZD up 30 pips at 1.0870.
RBA Governor Bullock said: “Our focus remains on bringing inflation back to target within a reasonable timeframe, while keeping employment growing…The board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation”, adding they are mindful that demand growth and the rate of inflation have been moderating, and there are long lags in policy transmission.
China announced an extra CNY 1 trillion bond issuance to support the economy, which Bloomberg Economics estimates could add 0.5ppt to GDP growth in 2024.
The flash October Eurozone manufacturing PMI from S&P Global disappointed at 43.0 (est. 43.7, prior 43.4), with services falling to 47.8 (est. 48.6, prior 48.7) and the composite falling to 46.5 (est. 47.4, prior 47.2). The report warned of recession, led by Germany, with pricing seen as cooling across the region (apart from Germany).
The ECB’s bank lending survey reported further tightening of credit conditions for both firms and households, it also continued to report extremely low credit demand from both firms and consumers.
The flash October S&P Global US manufacturing PMI rose to 50.0 (est. 49.5, prior 49.8), with services at 50.9 (est. 49.9, prior 50.1) and the composite at 51.0 (est. 50.0, prior 50.2). The report also noted an easing in pricing pressures.
The flash October S&P Global UK manufacturing PMI rose to 45.2 (est. 44.7, prior 44.3), with services at 49.2 (est. 49.3, prior 49.3) and the composite at 48.6 (est. 48.5, prior 48.5).
Interest rates
US 2yr treasury yields rose from 5.05% to 5.11% via 5.13%, while 10yr yields fluctuated between 4.80% and 4.88%, flattening the curve by around 5bp. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 2bp higher at the next meeting on 1 November, with a 45% chance of a hike in February.
Australian 3yr government bond yields (futures) rose from 4.16% to 4.23%, while the 10yr yield rose from 4.67% to 4.74%. 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 1bp higher on 29 November, with a 30% chance of a hike by February 2024.
Credit saw a better session across cash and synthetic with Main 1.5bp better at 85.5, CDX in 2bp to 77 (and now well off its 81.5 close on Friday) and US IG cash was also 2-3bp better. Primary activity remains subdued with Europe seeing 4 issuers price 3.1bn, which included 3 financial issuers.
Commodities
Crude markets closed at their lowest level in a week as concerns eased about the Israeli-Hamas conflict spreading more broadly. The December WTI contract is down $1.73 at $83.76 while the December Brent contract is also down $1.73 at $88.10. Bloomberg noted signs that the physical market has weakened too with WTI Midland dropping to the weakest since April and surging tanker rates as a result of the Israel-Hamas war denting the economics of moving crude from the US Gulf Coast to Europe and Asia. The WTI prompt to second month time spread has also slumped from a late September high of $2.38 to a 1-month low of 72c. Saudi Energy Minister Prince Abdulaziz bin Salman noted the kingdom’s strategy for managing the oil market is working given that “we have a less volatile oil market that will help the global economy to grow and prosper” and that the recent mega-deals in the US energy sector were a sign that “hydrocarbons are here to stay”. The IEA disagreed though calling peak oil demand this decade in the newly released World Energy Outlook. Oil guru Pierre Andurand said that “the market will have to beg for more supply at some point” during a Q&A at Saudi Arabia’s Future Investment Initiative conference and that current Saudi supply curbs could remain in place until “around $110 a barrel”.
Metals joined in the positive risk sentiment move with copper up 1.3% at $8,077 and aluminium up 1.4% at $2,206. Zinc jumped 1.6% to $2,458. The jump in US PMIs helped sentiment as did news that China will raise its fiscal deficit ratio to 4.88t yuan from 3.88t yuan in 2023. Economists suggested that this would raise growth in 2024 by circa 0.5%. China announced refined copper production in September at 1.136mt, a fresh record high and up 20%yy. BHP Chief Economist Huw McKay noted that current copper surpluses aren’t big enough to provide a sufficient buffer for later this decade when green-energy demand will put a squeeze on markets. Teck Resources announced another cost overrun on its Quebrada Blanca 2 project in Chile. The project is now estimated to cost between C$8.6 to 8.8bn compared with an earlier estimate of 8 to 8.2bn. At full production it will double Teck’s copper output.
Iron ore markets jumped on the China fiscal news and risk on sentiment. The November SGX contract is up a hefty $4.90 from the same time yesterday at $116.90 while the 62% Mysteel index is up $2.90 at $118.60. China’s Central Huijin Investment also announced that it bought an undisclosed amount of ETFs on Monday and will ‘keep increasing holdings’.
Day ahead
At 11:30am Syd, Australia’s Q3 CPI will be susceptible to upside risk given the pick-up in momentum in the monthly indicator. Adding to the uncertainty will be the impact of government rebates on childcare costs. Westpac forecasts a 1.1%qtr, 5.3%yr rise in headline inflation (down from 6.0% in Q2), with the core ‘trimmed mean’ inflation measure up 1.1%qtr, 5.0%yr (down from 5.9%). Petrol prices and utilities are expected to be the largest contributors to inflation in the quarter, neither of which are typically very relevant for monetary policy.
The release of the Q3 CPI overshadows the September monthly CPI indicator. It will reflect the impact of rebates for electricity and childcare (Westpac f/c: 5.2%yr, market f/c: 5.3%yr).
Germany: October’s IFO business climate survey is expected to consolidate around YTD lows, consensus 86.0 versus 85.7 in September.
US: New homes sales for September are likely to remain under pressure as supply-constraints remains (market f/c: 0.7%mth).
The Bank of Canada is expected to remain on hold following a constructive inflation update (market f/c: 5.0%).
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