Markets Daily
The USD and bond yields jumped in response to firm US employment cost data. AUD trimmed losses to 0.6335 while the yen extended its BoJ-driven losses. The FOMC decision dominates the calendar but data releases include Australia dwelling approvals and in the US, manufacturing ISM, job openings and ADP private payrolls.
Yesterday
Australia credit to the private sector grew by 4.9% over the year to September, slowing from 5.2% in August and from a high of 8.9% last September and October. That has annual credit growth at a fresh two year low - the slowest pace since August 2021, when the Covid delta outbreak was impacting NSW and Victoria. The Bank of Japan tweaked its policy settings only slightly, matching the Nikkei story on Monday. The 10-year JGB target is still 0% and the “upper bound” still 1.0% but rather than the previous hard cap on yields, the BoJ will now use 1.0% “as a reference.” USD/JPY bounced from 149.35 to 150.20 on this cautious approach. The 10-year JGB yield had jumped from 0.89% to 0.96% at the open, dipped about 3bp to 0.91% on the initial headlines, then resumed its upswing to 0.95%. Japanese equities rallied in relief, +1.0%, but otherwise regional equities were mostly negative. The ASX 200 outperformed, +0.1%. The jittery mood comported with AUD/USD price action, slipping from 0.6375 to 0.6345.
Currencies/Macro
The US dollar rose against all G10 currencies on the day, the yen weakest. EUR/USD fell from 1.0660 pre-wages data to 1.0575. GBP/USD steadied down 25 pips on the day at 1.2145. USD/JPY extended its post-BoJ response to 151.71 – highest since October (which was the highest since 1990). Over the day, the yen slumped -1.7% or 2.6 yen. AUD/USD fell from 0.6365 pre-ECI to 0.6315, then trimmed losses to 0.6335. NZD/USD fell a net 20 pips to 0.5825. AUD/NZD slipped 25 pips to 1.0885.
The October CoreLogic Australia home price index rose 0.9%mth, with Sydney up 0.8%, Perth 1.6% and Brisbane 1.4%.
The US Employment Cost Indicator (ECI) in Q3 rose 1.1%q/q and 4.3%y/y (est. +1.0%q/q, prior 4.5%y/y). The wages and salaries component rose 1.2%q/q and 4.6%y/y, with notable gains of 1.8%q/q and 4.8%y/y in government wages and salaries.
US house prices in August were firmer than expected, with the FHFA index up 0.6%m/m (est. 0.5%m/m) and CoreLogic up 1.0% (est. 0.8%). US Conference Board Consumer Confidence for October pulled back to 102.6 (est. 100.5) from a revised 104.3 (from 103.0). However, this was still a decent pullback into the low zone of the past two years after rebounding in mid-year.
Canadian GDP in Q3 was weaker than expected at -0.1%q/q (est. flat), recording a technical recession given Q2’s contraction of -0.3%q/q.
Eurozone CPI in October rose only 0.1%m/m and 2.9%y/y (est. +0.3%m/m and 3.1%y/y, prior 4.3%y/y), although core was in line with expectations at 4.2%y/y (prior 4.5%y/y). GDP in Q3 contracted -0.1%q/q (est. +0.0%q/q, with the prior reading revised up to +0.2%q/q from +0.1%q/q), for a +0.1% annual pace.
Interest rates
US 2yr treasury yields jumped from 5.01% to 5.08% following the US ECI data, while the 10yr yield tracked down to 4.80%, only to rebound to 4.93%. Markets are pricing no change in the Fed funds rate at today’s meeting, with a 45% chance of a hike by February.
Australian 3yr government bond yields (futures) rose from 4.40% to 4.47%, while the 10yr yield rose from 4.90% to 4.98%. 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 30% chance of a hike by February 2024.
iTraxx Europe tightened 2.6bps to 85.9bps, Unibail-Rodamco-Westfield was again amongst the best performing names along with BASF while Standard Chartered and Veolia dragged spreads wider. CDX IG tightened 1.6bps to 79.6bps, pulled tighter by Ally Financial and Lincoln National, while Southwest and Whirlpool weighed on the index. Cash bonds tightened 0.4bps on the day to 162.3bps, the best performing sectors were communications and energy, while the worst performing were from the financial sector.
Commodities
Crude markets slid again towards the pre-Israel/ Hamas war October lows as traders focused on higher global rates and limited signs that the conflict will spread. The December WTI contract is down $1.09 (1.32%) while the January Brent contract is down $1.05 (1.22%) to $85.30. The slide in the China PMI did not help price action and BP noted that fuel retail margins are “challenging” in diesel and gasoline given that markets are currently oversupplied. BP noted that refining margin were down in Q3 and will be lower still in Q4. In a sign of weakening in the structure of the market, the WTI Dec/Jan time spread dropped 21c to 63c, the weakest since September 20 and the front month time spreads for diesel in Asia have dropped to the smallest backwardation since July. The IEA forecast that Germany’s overall oil usage will drop by about 90kbpd this year, driven by a sharp contraction in demand for diesel and naphtha. Russian fuel shipments fell to a 17-month low in October after a temporary ban on September 21 and refinery maintenance though the government lifted the temporary ban on October 6.
Metals gave back much of the China stimulus gains, hit by the China PMI, with copper down 0.3% to $8,119 though aluminium fell 0.9% to $2,247, zinc fell 2% to $2,417 and tin fell by a hefty 3.8% to $24,079. Chile reported a third monthly increase in copper production, with September seeing output up 4.1%yy at 457kt. Rusal said it was moving its trading headquarters from Zug, Switzerland to Dubai. Bloomberg reported that Beijing was discussing imposing curbs on copper smelting. China’s base metals industry has said that it aims to hit peak emission before 2025. China has annual copper smelting capacity at about 8.8mt with a near-30% expansion of 2.4mt set for completion by 2026 according to Antaike. One scenario under discussion is for smelters to complete existing projects in the pipeline before restrictions are imposed in the middle of the decade. Aluminium smelters in China’s Yunnan province plan to reduce output again this winter as hydropower supply wanes. The production cuts across 4 smelters will range from 9% to 40% according to SMM and will result in overall production reduction of around 1.15mt of annualised output.
Iron ore markets were mixed given the weaker China PMI with the November SGX contract up 40c from the same time yesterday at $121.55 though the 62% Mysteel index fell 85c to $123.50. FMG was upbeat on Chinese demand at the Imarc conference in Sydney noting that “we’ve seen demand from China over the last 10, 20 years be particularly robust for our product” and they are “confident that the demand will continue to be there”. FMG CEO Dino Otranto said that its first energy projects that will cut all emissions from its own operations by 2040 will be presented to the board “imminently”.
Day ahead
Australia: Westpac anticipates a solid gain in dwelling approvals in September, likely a result of temporary factors associated with regulatory changes in NSW (Westpac f/c: 5.0%, median 2.5%, due 11:30am Syd).
At 12:45pm Syd, there is a risk that October’s Caixin/S&P Global manufacturing PMI may print below consensus following the downside surprise in the official PMIs. The median forecast is 50.8 versus 50.6 in September.
The Federal Reserve’s FOMC is fully expected to leave the Fed funds rate unchanged at 5.25-5.50%, hence the focus will be on any tweaks to the statement and on Chair Powell’s comments on the near- and medium-term paths for policy (5am Thu Syd).
The ISM manufacturing PMI is expected to remain in contractionary territory in October (market f/c: steady at 49.0). JOLTS job openings will likely continue to track a gradual downtrend in September (market f/c: 9400k), though this series has surprised in recent months and impacted on markets. The October ADP private payrolls survey is expected to have risen 150k after September’s modest 89k rise which was a lousy guide to the 263k surge in official private payrolls.
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