Markets Daily
US bond yields fell in response to softer core prices in the US GDP report, despite stronger activity. AUD recovered from a 2023 low of 0.6270 to 0.6320 even as US equities remained heavy on earnings disappointments. As expected, the ECB held rates steady. Today’s calendar includes Australia Q3 PPI, October Tokyo CPI and US September personal income and spending.
Yesterday
The main local event was RBA Governor Bullock’s testimony before the Senate Economics Committee. A lot of the November rate hike pricing was unwound and AUD dropped from 0.6310 to 0.6285. The market assessed her comments as more dovish. When asked specifically on the CPI outcome she noted that while the CPI was higher than their forecast in the August SoMP, it was "in line" with the data seen since, such as monthly CPI. So the market read that as downplaying the "surprise" element in the data, which implied a higher hurdle to delivering a hike in November. Also, when asked about her "low tolerance" wording from recent communications, she said she "hasn’t said anything new there" and that the phrase was trying to express the concern "which we've had all along" that the longer inflation stays high, the more inflation expectations could become unanchored. However, Westpac believes that answering questions from politicians is not the venue for guidance on a looming rates decision. Given the CPI surprise, Westpac Chief Economist Luci Ellis now looks for the RBA to hike in November, a call that also had impact on rates markets. But FX markets on the day were dominated by US dollar strength with risk aversion elevated. Regional equity markets were sharply lower outside a late rally in Shanghai. The ASX 200’s -0.6% close was better than most.
Currencies/Macro
G10 currencies were mixed. EUR/USD ranged between 1.0524 and 1.0574, the ECB outcome as expected, only causing small gyrations on the headlines. GBP/USD recovered from a low of 1.2070 (low since 4 October) to 1.2130. USD/JPY reached a high of 150.78 in the London morning – the highest since October 2022 – then tumbled to 149.96, presumably on intervention jitters, later steadying up just 0.1% on the day at 150.40. AUD/USD reached a low of 0.6270 in Sydney trade – lowest since October 2022 – then ground up to 0.6320 in New York, net +0.2% on the day. NZD/USD bounced off 0.5774 – lowest since November 2022 – to 0.5820. AUD/NZD is 15 pips lower over the day at 1.0855.
US Q3 GDP was stronger than expected, rising 4.9%q/q annualised (est. 4.5%, prior 2.1%), but much attention was placed on the fall in core PCE to 2.4% (est. 2.5%, prior 3.7%) - the lowest rate since Q4 2020.
US durable goods orders in September rose 4.7%m/m (est. 1.8%m/m, prior revised to -0.1%m/m from +0.1%m/m). Ex-transport rose +0.5%m/m (est. +0.2%m/m). Weekly initial jobless claims rose 210k (est. 207k, prior 200k), with continuing claims at 1.790m (est. 1.740m, prior 1.727m).
The ECB left policy rates unchanged, the deposit rate remaining at 4.0%. There were no changes signalled regarding bond holdings. The ECB referenced lower growth and inflation indications, while reiterating data dependency. President Lagarde said that holding steady did not preclude further hikes and that it was “totally, totally premature” to discuss lowering rates.
Bank of Canada Governor Macklem said that they may not need to raise rates further if inflation slows as expected.
Interest rates
US 2yr treasury yields fell sharply from 5.14% to 5.04%, while 10yr yields fell from 4.95% to 4.85%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 2bp higher at the next meeting on 1 November, with a 35% chance of a hike in February.
Australian 3yr government bond yields (futures) fell from 4.39% to 4.30%, while the 10yr yield fell from 4.92% to 4.81%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 15bp higher on 7 November, with a 100% chance of a hike by February. New Zealand rates markets are pricing the OCR, currently at 5.50%, to be 1bp higher on 29 November, with a 25% chance of a hike by February 2024.
Credit matched the weaker session for equity with Main another 2bp wider to 89.5 (closing in on series wides) while CDX was more contained to be just half a bp wider at 81, while US IG cash was more subdued across corporate, but financials were 2-3 wider. Funds flow data (Lipper) pointed to another week of outflows (USD2.7bn) which was weighted to IG funds in the last week (USD1.8bn v USD2.3bn in the previous week).
Commodities
Crude markets dropped in line with the wider risk off move as the US$ rose further and yields remained high. Signs of weakness in the physical market added to the pressure and the December WTI contract is down $1.83 at $83.56 while the December Brent contract is down $1.83 at $88.30. Tanker rates to Europe hit $100,000 per day, the highest since December and more than twice the year-to-date average and Bloomberg noted that prices of WTI delivered into Europe have fallen by almost $2 per barrel in a little more than a week, hitting lows back to the end of last year. The spread between the prompt and next WTI contract fell to a fresh 5 week low of 66c, down from a peak of $2.38 just a month ago. Citi noted that the US has overtaken Russia as the world’s largest gross exporter of middle distillates and that domestic product demand is “surprisingly weak amid signs of economic strength”. Bloomberg noted that global oil stockpiles hit multiyear lows according to Kpler data, with volumes the lowest since at least 2017. This data chimed with recent IEA commentary noting that crude inventories are set to drain sharply this quarter, with stocks having drawn by a “massive’ 102mb in August to the lowest since 2017.
Metals markets were also hit in line with the wider risk off move with copper down another 0.6% at $7,988, aluminium down 1% at $2,196 and nickel making fresh 2yr lows down 1.7% at $18,005. Citi noted that the 2yr lows in nickel could prompt “some form of supply reaction from Indonesia” and the risk of “an aggressive short covering rally on any bullish catalyst”. Despite a $4bn blowout on the QB2 expansion project in Chile, Teck said it was “very focused on developing new copper mines throughout the Americas”.
Iron ore markets softened slightly as traders awaited fresh details on the Chinese fiscal policy developments earlier in the week. The November SGX contract is down just 25c from the same time yesterday at $116.65 while the 62% Mysteel index is down 40c at $119.35. CISA noted at a conference in Shanghai that Chinese stainless-steel makers have started cutting output due to losses. The International Nickel Study Group noted at the same conference that the global nickel market would remain in surplus in both 2023 and 2024 by more than 200kt.
Day ahead
Australia: Q3 producer prices should show moderation in upstream price pressures, from 3.9%yr in Q2. The 2022-23 National Accounts will also be released.
Japan: The October Tokyo CPI should reflect a pick-up in momentum in food inflation offset partially by a decline in energy prices from government subsidies (market f/c: 2.8%yr).
China: Industrial profits for September are expected to continue to decline as costs continue to soar.
US: September’s personal income data should show less robust income gains (market f/c: 0.4%mth). However, personal spending is expected to remain elevated as consumers draw down on savings (market f/c: 0.5%mth). The September PCE deflator should broadly reflect CPI outcomes and the cycling out of goods inflation (market f/c: 0.3%mth). The final October estimate of the University of Michigan’s sentiment index is expected to remain broadly unchanged from the pessimistic first estimate (market f/c: 63.0).
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