Markets Daily
US bond yields fell on a soft US manufacturing survey, extending after the Fed’s on-hold decision and press conference. Equities rallied and AUD outperformed, rising to 0.6395. Today’s calendar includes Australia September housing finance and trade balance and the Bank of England policy decision.
Yesterday
Australia dwelling approvals in September were weaker than expected, –4.6%mth, –20.6%yr. Private detached house approvals declined by –4.6% while private sector unit approvals fell -5.1%mth and are down heavily on a three-month rolling basis (–14.7%), as this segment continues to broadly track a weakening trend since May’s 60% spike began to unwind in June/July. Japanese equities extended their rally inspired by the cautious BoJ decision, the Topix up a further 2.5%. most regional bourses were higher, including the ASX 200 +0.8%. AUD/USD traded a very tight 0.6318-0.6345 range.
Currencies/Macro
The US dollar was mixed vs G10 currencies. EUR/USD dipped as low as 1.0517, only to return to 1.0570, net about flat on the day. GBP/USD was similar, slipping to 1.2096 then rebounding to 1.2150. USD/JPY chopped lower over the day as Japanese officials complained about the yen weakness, from 151.65 to 150.90. Outperformer AUD rose 60 pips or 0.9% to 0.6395. NZD/USD rose 0.4% to 0.5850, leaving AUD/NZD at 1.0930, printing highs since June.
The FOMC left the target range unchanged at 5.25% to 5.50%, as was universally expected, leaving the door open for further tightening if needed: "…in determining the extent of additional policy firming that may be appropriate…", while "the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments." The vote was a unanimous 12-0. In his press conference, Chair Powell said some progress on inflation is visible but it is too early to know for certain whether financial conditions are sufficiently restrictive.
US October manufacturing ISM disappointed at 46.7 (est. unchanged at 49.0), as production fell to 50.4 (prior 52.5), employment fell to 46.8 (51.2), and new orders fell to 45.5 (49.2). JOLTS jobs openings in September were stronger at 9.553m (est. 9.400mn. prior 9.497). ADP private sector employment growth in October disappointed at 113k (est. 150k, prior 89k).
Interest rates
US 2yr treasury yields fell from 5.08% to 4.95%, both the ISM data and FOMC contributing, while the 10yr yield fell from 4.93% to 4.74%, also helped by a benign bond issuance update. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 4bp higher at the next meeting on 13 December, with a 30% chance of a hike by February.
Australian 3yr government bond yields (futures) fell from 4.45% to 4.31%, while the 10yr yield rose from 4.98% to 4.84%. 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 unchanged on 29 November, with a 20% chance of a hike by February 2024.
iTraxx Europe tightened 2.4bps to 83.3bps, SES and Lanxess were the best performing contracts while SocGen and Bertelsmann dragged spreads wider. CDX IG tightened 3.5bps to 76.0bps, pulled tighter by DXC Technology and Lincoln National, while P&G and Conoco weighed on the index. Cash bonds tightened 0.6bps on the day to 161.3bps, the best performing sectors were technology and consumer staples, while the worst performing were from subordinated financials and the materials sector. The European session saw blank screens for the primary issuance market with a public holiday in many countries across the continent to mark All Souls Day and the impending FOMC decision. Unsurprisingly it was a similar story in the US.
Commodities
WTI tested 2-month lows as US stockpiles built and the Rafah border crossing opened for foreign citizen evacuations, though we end the choppy session largely unchanged. The December WTI contract is down 7c at $80.95 having traded as lows as $80.30 though the January Brent contract is up 3c at $85.05. The EIA reported a modest 775k increase in crude inventory and a 66kb increase in gasoline inventory. Stocks at Cushing also rose for the second week by 272k while crude production remained unchanged at a record 13.2mbpd. Demand for distillate dropped below the 5yr average though a cold snap forecast across the country may see consumption start to rise. OPEC+ production rose modestly to 28.08mbpd in October according to a Bloomberg survey, with much of the 50kbpd increase coming from Nigeria and other African nations. Wood Mackenzie noted that crude stockpiles in Europe have dropped to the lowest seasonal level in a decade and Bank of America raised 2024 diesel and gasoline crack forecasts due to “refinery hiccups and delays, resilient demand, low inventories, and persistent OPEC+ cuts”.
Metals were mixed with aluminium down another 0.6% at $2,238 and nickel down another 1% at $17,935 though zinc jumped 2.78% to $2,497. Nyrstar announced it was “temporarily pausing production” at two zinc mines in Tennessee due to “significantly weakened market conditions and inflationary impacts on input costs and operating margins”. The price of First Quantum Minerals stock has fallen by circa 50% this week after the Panama government said it planned a referendum to decide whether to extend or revoke First Quantum’s copper mining contract following weeks of civil unrest. The referendum is set for December 17, though the vote may require a law to be passed by congress first.
Iron ore markets were mixed, close to late March highs on potential supply disruptions. The December SGX contract is down 75c from the same time yesterday at $120.80 while the 62% Mysteel index rose $1.70 to $125.20. Citi revised up its short-term price forecast to $120 and sees “further upside potential” towards $130 depending on whether we see more policy stimulus from China and production risks due to potential strike action at BHP’s mines. The union is not set to officially notify BHP of strike action until November 3, meaning any supply disruptions could begin from November 10.
Day ahead
At 11:30am Syd, growth in Australia housing finance approvals is expected to rise in September (Westpac f/c: 4.0%); construction activity should see owner-occupier loans outstrip investor loans in the month (Westpac f/c: 4.2% and 3.5% respectively).
Australia’s goods trade surplus should hold firm in September, as both exports and imports continue to rise (Westpac f/c: $10.4bn vs $9.6bn in August). The ABS no longer estimates monthly services trade.
The Bank of England is widely expected to leave policy unchanged as inflation continues to decelerate gradually (Westpac and market f/c: 5.25%). The MPC voting split is likely to be 6-3, with the 3 dissenters preferring another hike.
US: Results from the national accounts suggest nonfarm productivity improved materially in Q3 (market f/c: 4.3%). Headline factory orders will likely benefit from the burst in aircraft orders over September, although an underlying uptrend is also adding support (market f/c: 2.3%). Meanwhile, initial jobless claims are expected to remain at relatively low levels, at least for now (market f/c: 210k).
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