Markets Daily
US bond yields rose despite a quiet economic calendar, supporting the US dollar and depressing equities. AUD slid to 0.6310, unwinding the CPI bounce. Today’s calendar features testimony by RBA Governor Bullock, the ECB policy decision and US Q3 GDP.
Yesterday
Australia’s Q3 CPI surprised to the upside rising 1.2%qtr compared to the market’s and Westpac’s expectation of 1.1%. We have seen a further moderation in the annual pace of inflation to 5.4%yr from 6.0%yr in Q2, 7.0%yr in Q1 and the recent peak of 7.8%yr in Q4 2022. The Trimmed Mean also surprised to the upside, rising 1.2%qtr, 5.2%yr. The market was expecting 1.0%qtr while Westpac’s forecast was 1.1%. The annual pace of core inflation continues to moderate from the recent peak of 6.8%yr in Q4 2022. The six-month annualised pace of this core measure of inflation is now 4.3%yr compared to 7.3%yr in Q4 2022 but only modestly down from the 4.5%yr pace in Q2. Rates markets pricing for the RBA to hike in November jumped from about 45% to 75% and the Aussie was strongest in the G10 on the day. AUD/USD jumped from 0.6360 to a high of 0.6400 but later faded to 0.6370. AUD/NZD jumped from below 1.0880 to a high of 1.0915 before easing a little. Regional equities were quite mixed, the ASX 200 one of the underperformers, closing fractionally lower.
Currencies/Macro
The US dollar rose against all G10 currencies on the day. EUR/USD fell 15 pips to 1.0570, the euro outperforming on crosses. GBP/USD fell 45 pips or -0.4% to 1.2110. USD/JPY kicked higher in late NY trade, reaching a high of 150.32, a high since the 21 October 2022 spike. AUD/USD reversed yesterday’s CPI-data led gains, falling from yesterday’s peak of 0.6400 to 0.6310, equal weakest in the G10 as risk aversion dominated. NZD/USD fell from yesterday’s peak of 0.5870 to 0.5805. AUD/NZD fell from yesterday’s peak of 1.0915 to 1.0875.
US new home sales were stronger than expected in September, rising 12.3% (est. +0.7%, prior -8.7% revised to -8.2%).
After 3 weeks of division, US House Republicans finally agreed on an apparent compromise candidate for Speaker, previously low profile Mike Johnson of Louisiana. His background suggests plenty of clashes with the White House ahead, but that a government shutdown on 17 November is unlikely, Johnson favouring another short-term funding bill.
The Bank of Canada kept its policy rate on hold at 5.0%, as was widely expected, and left the door open to further tightening. The statement cited a slowing of the economy in response to prior tightening, while moderation in inflation was seen as progressing slowly.
Interest rates
US 2yr treasury yields rose from 5.06% to 5.12%, while 10yr yields rose from 4.82% to 4.96%, steepening the curve by around 7bp on the day. A weak 5yr auction slightly extended the moves. 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 4.26% to 4.34%, while the 10yr yield rose from 4.74% to 4.85%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 18bp higher on 7 November, with a 100% chance of a hike by December. New Zealand rates markets price the OCR, currently at 5.50%, to be 1bp higher on 29 November, with a 25% chance of a hike by February 2024.
Credit reacted to the shift in sentiment with Main 2bp wider at 87.5 and CDX out 3bp to 80.5 (1bp better on the week), while US IG cash was more subdued. Primary activity remained relatively quiet with just the single IG issuers in both Europe and the US.
Commodities
Crude markets saw aggressive swings with EIA inventory data pushing prices lower then WSJ headlines suggesting Israel had agreed to delay an invasion to allow the US time to upgrade air defence systems in the Gulf and a Netanyahu speech which stated that the country is in battle for its existence pushed prices higher. The December WTI contract is last up $1.51 at 85.25 while the December Brent contract is up $1.91 at $89.98. Inventory data was generally bearish with crude inventory rising 1.37mb while gasoline rose 156kb though distillate fell 1.687mb and jet kerosene by 1.29mb. Crude production remained at record levels of 13.2mb and exports fell 9% to 4.8mbpd. Cushing inventory finally rose by the largest amount since June at circa 213kb from the lowest level since 2014. Implied gasoline demand edged higher on a four-week basis but remains more than 5% below the 5yr seasonal average. Bloomberg noted that WTI at Houston dropped to the lowest level for the year while WTI Midland recently traded at the weakest level since April, emphasising how the physical market has weakened as shipping rates have spiked. The Dec/ Jan WTI timespread fell to a fresh low back to late August. The NDRC released a plan to cap crude refining capacity in China to 1bntpy by 2025 and install carbon capture capacity. The phase-out of crude refiners with capacity below 2mt will be accelerated.
Metals reversed some of the China fiscal stimulus gains with copper down 0.8% to $7,984 though aluminium rose by 1% to $2,212 and zinc jumped 1.5% to $2,479. The blowout in costs at Teck’s QB2 flagship copper project in Chile added to the sense that the industry is struggling to expand supply and Southern Copper joined the likes of Teck and Anglo American in cutting guidance for this year and next. Codelco will report production Thursday and may update its annual guidance.
Iron ore markets marked time after the previous day’s China fiscal policy inspired gains with the November SGX contract unchanged from the same time yesterday at $116.90 while the 62% Mysteel index is up $1.15 at $1.15 at $119.75. CISA reported that steel mill stockpiles rose again mid-October even as production volumes were the lowest in 8 months. Swedish steel producer SSAB forecast that demand will remain weak for the rest of the year after a sharper than expected slowdown in Q3. US Steel is due to report later today.
Day ahead
From 9am Syd, RBA Governor Michele Bullock and Assistant Governor (Financial Markets) Christopher Kent appear before the Senate Economics Legislation Committee (Supplementary Budget Estimates), Canberra.
Australia Q3 import prices will likely come down for a third consecutive quarter as global prices ease (Westpac f/c: -0.5%qtr, market f/c: 0.1%qtr). Export prices are also expected to fall as commodity prices stabilise (Westpac f/c: -1.2%qtr, market f/c: -3.0%qtr).
The ECB is very much expected to hold its benchmark rates steady (4.0% deposit rate, 4.5% refinancing rate), given guidance at the previous meeting in September and following a constructive inflation print and tightening credit conditions. But the press conference from President Lagarde is always worth noting and could impact the euro.
US Q3 GDP is expected to show strength driven by strong household consumption (Westpac f/c: 4.0%yr annualised, market f/c: 4.5%yr).
Other US data will draw limited attention. Durable goods orders for September are likely to be subdued following easing demand (market f/c: 1.8%mth). The October Kansas City Fed index should reflect still-weak manufacturing conditions. Initial jobless claims are anticipated to remain low (market f/c: 207k). Wholesale inventories for September are expected to decline as the demand outlook remains uncertain and non-durable goods pose a key risk (market f/c: 0.1%mth). September’s pending home sales should reflect adjusting expectations among buyers (market f/c: -2.1%mth).
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