Markets Daily
Bond yields were volatile and the USD fell amid improved risk sentiment, BoJ speculation, and an update on US borrowing. AUD rose to 0.6375. Equities snapped their losing streak. Today’s busy calendar includes the BoJ decision, China October PMIs, Eurozone Q3 GDP and October CPI and US Q3 employment costs.
Yesterday
Australia retail sales jumped in September, lifting 0.9% to be slightly higher than Westpac’s forecast for a 0.7% gain but well above the consensus forecast for a 0.3% increase. This follows gains of 0.3% and 0.6% in August and July respectively, leaving nominal sales up 0.8% on a three-month basis. Annual growth in nominal sales growth lifted slightly, from 1.8%yr to 2.0%yr in September, however, this still represents a sizeable decline once the impact of inflation and population growth are accounted for. The ABS noted support from unseasonably warm weather and the new iPhone. AUD/USD traded a narrow range, overall up 20 pips at 0.6355. Regional equities were quite mixed, Japan’s Topix +1.0% but China’s CSI 300 +0.6%. The ASX 200 closed -0.8%, slightly off its early steep fall.
Currencies/Macro
The US dollar fell against all G10 currencies on the day. EUR/USD rose 50 pips to 1.0615. GBP/USD rose 45 pips to 1.2170. USD/JPY fell from 149.80 to a low of 148.81 after the Nikkei story, steadying just above 149.00. AUD/USD rose 0.6% to 0.6370. NZD/USD rose 0.6% to 0.5845. AUD/NZD rose to 1.0930 – a three-month high – then returned to 1.0905.
The usually well-informed Nikkei News service reported that the Bank of Japan, at its policy meeting which ends today, will discuss a further tweaking of yield curve control and is likely to allow further flexibility in yield movements, allowing 10-year Japanese government bond yields to temporarily rise above 1% by modifying its fixed-rate buying operations.
The US Treasury reduced its estimate for federal borrowing for Q4 2023, to $776bn from July’s estimate of $852bn, after upgrading its revenue projection.
The Dallas Fed manufacturing activity survey fell to -19.2 in October (est. -16.0, prior -18.1), the 6-month outlook was less weak at -6.8 (prior -16.5).
German CPI in October was flat m/m and 3.8%y/y (est. +0.2%m/m and 4.0%y/y, prior 4.5%y/y), with the EU harmonised measure at -0.2%m/m and 3.0%y/y (est. +0.1%m/m and 3.3%y/y, prior 4.3%y/y). GDP in Q3 contracted -0.1%q/q (est. -0.2%q/q), with Q2 revised to +0.1%q/q from flat, taking the annual rate to -0.3%y/y (est. -0.7%y/y).
Eurozone economic confidence at 93.3 in October was slightly better than the 93.0 expected (prior revised to 93.4 from 93.3), but still soft.
Interest rates
US 2yr treasury yields initially rose from 5.02% to 5.07%, helped by risk sentiment and the BoJ story, but later fell to 5.03% after US Treasury borrowings were less than expected. The 10yr yield rose a net 5bp to 4.89%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 1bp higher after this week’s meeting, with a 40% chance of a hike by February.
Australian 3yr government bond yields (futures) rose from 4.38% to 4.45%, while the 10yr yield rose from 4.86% to 4.99%, currently 4.85%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 17bp 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 tightened 1.4bps to 87.9bps, Unibail-Rodamco-Westfield and Airbus had the best-performing contracts, while Bayer and Enel dragged spreads wider. The Crossover Index tightened 7.4bps to 462.4. CDX IG tightened 0.7bps to 81bps, pulled tighter by Freeport and AIG, while Paramount Global and Honeywell weighed on the index. Cash bonds widened 0.8bps on the day to 163.1bps, the best performing sectors were subordinated financials & utilities, while the worst performing were from the technology sector and industrials.
Commodities
Crude markets slumped to pre-Israel/ Hamas war levels even as US NSA Jake Sullivan warned of an “elevated risk” of a regional spillover. The December WTI contract is down $3.05 (3.57%) to $82.49 while the December Brent contract is down $2.66 (2.94%) to $87.82. Traders noted the huge rise in Brent call buying on Friday as a factor behind the slide in prices on Monday, with over 100k of options contracts bought making October 27th, 20th and 13th the three busiest trading days for call options since Russia invaded Ukraine in 2022. Adding to the weakness, Saudi Arabia is expected to keep prices unchanged for Asian customers according to a Bloomberg survey, having boosted prices every month since June and Citi noted that Chinese imports are expected to “stay more moderate” as high prices curb demand. Bloomberg noted that Russia’s diesel export cargoes are “set to surge after the lifting of the export ban” with loadings from the Black and Baltic Seas 56% above the October levels. Russia imposed a temporary ban on diesel exports late September. In gas markets, Chevron stated that a majority of employees at the Gorgon and Wheatstone LNG export facilities voted to back an enterprise agreement.
Metals markets continued the weekly gain helped by optimism on China and a sharp drop in copper inventory. Copper is up 0.5% at $8,138 while aluminium rose 2% to $2,263. Copper in Shanghai exchange inventories dropped to a one-year low, pointing to ongoing solid Chinese demand. LME aluminium inventory also dropped to the lowest since Feb of this year.
Iron ore markets continued their sharp bounce following last week’s rare mid-year budget announcement from China with the November SGX contract up another $2.15 versus the same time yesterday at $121.15 while the 62% Mysteel index is up $2.55 at $124.35. There was little fresh news though Evergrande again struggled to avoid an asset liquidation order at a hearing at Hong Kong’s High Court. The judge adjourned proceedings to December 4, the latest in a series of delays that began last year.
Day ahead
Australia: Growth in private sector credit should continue tracking a modest pace in September (Westpac f/c: 0.3%). The RBA’s Jones (Assistant Governor Financial Markets) will also speak at the AFIA Conference at 10:50am Syd.
NZ: The October ANZ business confidence survey will provide some insight into the reaction from businesses around the general election results.
Most economists expect the Bank of Japan to leave policy settings unchanged today, but a number see potential for a tweak, with markets to be on edge given the Nikkei story claiming a change will be discussed. There seems little risk of a change in the -0.1% rate on excess bank balances held at the BoJ, which has been in place since 2016. But the BoJ is attentive to the distortions caused by the 0% 10-year bond yield target in a global environment of elevated long-term yields, most obviously the 10-year Treasury around 5%. The current guidance is that yields are targeted to range from -0.5% to +0.5% but with an effective yield cap at 1.0%. The 10-year has been allowed to rise to 0.89% in recent days. Some analysts see the yield cap being raised to 1.5%, without expecting that to trade any time soon, as the BoJ maintains its willingness to buy JGBs “without setting an upper limit.” Inflation readings have tended to the upside so there should be upward revisions to quarterly forecasts. There is no set time for the announcement, but the usual window opens from 11:30am local time i.e. 1:30pm Syd. Governor Ueda’s press conference begins at 5:30pm Syd.
At 12:30pm Syd, the China October official PMIs should reflect some stability in activity as policy stimulus begins to filter its way through the economy (market f/c: 50.2 manufacturing; 52.0 non-manufacturing).
Eurozone: Growth in GDP will likely fall flat in Q3 as the impact of rapid interest rate tightening materialises (market f/c: 0.0%qtr; 0.2%yr). Elevated prices remain a drag for now, but the decelerating pace of consumer inflation should provide support in time (market f/c: 3.1%yr).
US: The Q3 Employment Cost Index should post a gain similar in size to that of last quarter, broadly tracking a moderating trend over the past year (market f/c: 1.0%). Meanwhile, the Chicago PMI is expected to improve notably in October (market f/c: 45.0), just as consumer confidence is anticipated to continue easing (market f/c: 100).
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