Markets Daily
In choppy trade Friday following mixed US data, bond yields fell slightly while the US dollar was mixed, AUD steadying at 0.6340. Equities remained under pressure. Today’s light calendar includes Australia September retail sales.
Friday
Australia Q3 producer prices rose 3.8%yr versus 3.9%yr in Q2 while the final 2022/23 national accounts showed GDP grew 3.0%yr. October Tokyo CPI surprised on the high side, overall 3.3%yr versus 2.8%yr in September and core inflation 2.7%yr, up from 2.5%yr prior. Equity sentiment improved from early trade, US futures higher. This encouraged regional stocks to rally sharply in most cases (1% plus), the ASX 200 underperforming with a modest 0.2% rise.
Currencies/Macro
The US dollar closed mixed against major currencies Friday. EUR/USD fluctuated between 1.0535 and 1.0597 for little net change at 1.0570. GBP/USD is net flat at 1.2130. USD/JPY fell steadily over the day to 149.60 (-0.6%), the yen strongest in the G10 on the day. AUD/USD touched a high of 0.6368 then steadied at 0.6340, net +0.3%. NZD/USD is net -0.1% at 0.5815. AUD/NZD 45 pips to 1.0905.
US personal income in September rose 0.3%m/m (est. +0.4%m/m), while spending rose 0.7%m/m (est. +0.5%m/m). The core PCE deflator was in line with expectations at +0.3%m/m and +3.7%y/y (prior revised to 3.8%y/y from 3.9%y/y).
US October consumer sentiment (University of Michigan) was revised from 63.0 to 63.8. Inflation expectations for 1yr ahead rose to 4.2% from 3.8%, while the 5-10yr ahead measure remained at 3.0%.
Interest rates
US 2yr treasury yields fell from 5.05% to 5.00%, while 10yr yields were little changed at 4.83%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 1bp higher at this week’s meeting, with a 35% chance of a hike in February.
Australian 3yr government bond yields (futures) fell from 4.37% to 4.33%, while the 10yr yield fell from 4.87% to 4.82%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 16bp higher on 7 November, with a 100% chance of a hike by February. 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.
iTraxx Europe was mostly unchanged finishing the week at 90.0bps, with crossover 1pbs tighter at 472.0. CDX widened 1.0bps to 81.9bps, McDonalds and Eastman Chemical were the best performing names while Whirpool and Avnet saw the most widening. Cash Bonds widened 2.5bps to 162.6bps pushed wider by utilities and industrials overtaking the gains from the financial sector.
Commodities
Crude markets jumped Friday as the Israeli defence force stepped up its ground war operations in Gaza, though prices fell on the week. The December WTI contract closed up $2.33 (2.88%) at $85.44 and the December Brent contract closed up $2.55 (2.9%) at $90.48 Friday though WTI closed down 3.6% on the week as traders speculated that the conflict would not spread further in the region. Price action was choppy on the day though as two Iran-linked facilities in Syria were hit by precision US “self-defence strikes”. Over the weekend, the US’s Dwight Eisenhower passed through the Strait of Gibraltar on its journey to the eastern Mediterranean to join the USS Gerald Ford. In a sign of weakness in the physical market, Western Canada Select hit the softest since late August with the focus on sharply rising costs of tankers due to the war. Chevron said it will boost Venezuelan oil production to about 150kbpd by the end of the year, up circa 15% from current levels.
Metals closed the week on highs as China stimulus lifted sentiment. Bloomberg reported that a handful of western banks were increasingly willing to enter new deals for Russian metals, “seizing opportunity for profit while competitors hold back”. Trafigura has struck a term deal to “buy over 100kt of copper from Norilsk” and has been “buying significant quantities of nickel from the Russian company” plus is “bidding to win a long-term contract to buy zinc ore that will be produced by the vast Ozernoye mine in Siberia, which is due to start production in the next few months”. Codelco reported a Q3 2.1% lift at copper mines, producing 333kt in the July to September period. The FT reported Norsk Hydro warning that a flood of imported EVs from China could have a big impact on regional demand. The average EV produced in Europe contained 283kg of aluminium compared with 196kg in an ICE engine according to a study commissioned by European Aluminium trade body. BNEF warned that the US and EU failing to reach an agreement on a proposal to bar emissions-intensive imports of steel and aluminium meant there seemed “little chance of the sides striking a deal by a new-year deadline” noting the initial deadline for an agreement by October 31 “is now out of reach”. Failure to reach an agreement on the so-called Global Arrangement on Sustainable Steel and Aluminium (GSA) by next January could risk the return of tariffs on EU steel and aluminium.
Iron ore markets closed on a high Friday, the fifth week of gains, helped by Beijing’s rare mid-year budget. Prices were helped by a further drop in iron ore port stockpiles for the seventh straight week though the Country Garden default added to jitters. The November SGX contract closed up $2.35 versus the same time Friday at $119.00 while the 62% Mysteel index closed up $2.45 at $121.80, a 4-week high for the 62% index. Regulators in China appeared to show their concern over rising prices with the Dalian exchange capping speculative positions for the January and May contracts. China will report PMIs Tuesday and Wednesday and China’s top leaders are set to gather in Beijing Monday and Tuesday for a closed door financial work conference this week with resolving debt risk high on the agenda.
Day ahead
Card data suggests Australia retail sales posted a decent rise in September. Westpac forecasts a 0.7%mth gain, above the market consensus of 0.3% (11:30am Syd).
NZ: Tax data suggests growth in filled jobs is slowing, the September monthly employment indicator expected to rise just 0.1%.
US: The Dallas Fed manufacturing survey index is expected to remain in contractionary territory in October, manufacturing conditions fickle and susceptible to shock. Treasury will announce updated borrowing estimates for Q4 and Q1 2024, the former at $852bn at the July update, with weakness in receipts and increased spending since then.
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