Markets Daily
The US dollar and bond yields fell sharply following softer US non-farm payrolls data. AUD/USD jumped to 2-month highs above 0.6500. Equities rose for a fifth straight session. Today’s calendar includes the Albanese-Xi meeting in Beijing and only second-tier data.
Friday
Australia real retail sales rose 0.2% in Q3, ending a run of declines over the previous three quarters. The result was well above the consensus forecast of a –0.3% fall but in line with Westpac’s forecast which had been revised up from flat to +0.2% following the preliminary release. Broadly speaking, the picture from both retail sales and other indicators, including the Westpac Card Tracker, is of a stabilisation after a substantial fall. Real retail sales are still down -1.7%yr, a particularly large -4% decline in per capita terms. AUD/USD traded a tight 0.6420 to 0.6439 range, its session low corresponding with softness in the Chinese yuan. Asia-Pacific equities rallied for a third straight day, the ASX 200 fairly typical with a 1.1%.
Currencies/Macro
The US dollar fell against all G10 currencies on Friday. EUR/USD rose from 1.0620 to 1.0747 – a two-month high. GBP/USD rose 1.65c or 1.4% to 1.2370. USD/JPY fell from 150.20 pre-NFP to 149.35. AUD/USD rose from 0.6450 pre-NFP to 0.6518 – a high since 1 September. NZD/USD rose from 0.5900 to 0.6001 – a one-month high. AUD/NZD fell -0.4% over the day to 1.0860.
US non-farm payrolls in October was weaker than expected, rising 150k (est. 180k), with net revisions of -101k to the two prior months. Unemployment rose to 3.9%, despite a pullback in the participation rate to 62.7% from 62.8%, and the underemployment rate rose to 7.2% from 7.0%. Average hourly earnings rose 0.2%m/m and 4.1%y/y (prior 4.3%y/y).
The ISM US services survey was mostly weaker in October, the headline index falling to 51.8 (est. 53.0, prior 53.6), although the prices paid component remained firm at 58.6 (prior 58.9), and new orders rose to 55.5 (prior 51.8).
Minneapolis Fed president Kashkari commented on the payrolls data, saying: “This suggests that the labour market is slowing, which we’re looking for, that’s helpful. It gives us more comfort that the economy is moving back into balance, but I don’t want to overreact to one job report”. Richmond Fed president Barkin said: “What we saw today was data that showed a gradual lessening of the job market. I think that’s what those who would like to not see another rate hike would want to see. We’ll see what inflation comes in.”
Canadian employment in October rose 17.6k (est. 25k), with unemployment rising to 5.7% (est. unch. at 5.6%).
Eurozone unemployment in September rose to 6.5% (est. unch. at 6.4%).
BoE Chief Economist Pill and MPC hawk Haskel delivered hawkish comments, on the need to sustain restrictive policy against still persistent inflation. Haskel emphasised the factors underpinning wage pressures.
Interest rates
US 2yr treasury yields fell from 5.00% to 4.80%, closing at 4.84%, while the 10yr yield fell from 4.67% to 4.48%, closing at 4.57%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 3bp higher at the next meeting on 13 December, with a 20% chance of a hike in February.
Australian 3yr government bond yields (futures) fell from 4.33% to 4.21%, while the 10yr yield fell from 4.77% to 4.63%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 16bp higher after tomorrow’s meeting, 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 only a 15% chance of a hike by February 2024.
Credit indices rallied in line with the broader market which saw Main and CDX each 2bp better on the day to 77 and 70 respectively which now sees CDX 10bp better on the week, while cash spreads were little changed on Friday and ~3-4bp better on the week. Primary activity was light with Jyske Bank the sole EUR deal on Friday and Paccar the only US issuer, completing an upsized USD400M 3yr deal at T+60 (BBSW+80).
Commodities
Crude markets closed on their lows for the second week in a row as traders priced out any risk associated with a widening of the Israel-Hamas war. The December WTI contract closed down $1.95 at $80.51 while the January Brent contract lost $1.96 to $84.89. Weak China activity data during the week plus the rise in US crude stockpiles added to the pressure on prices with WTI making fresh lows back to late August. Over the weekend both Saudi and Russia announced they will stick to current oil production cuts, “with the aim of supporting the stability and balance of the oil market”. A Saudi official emphasised that a comprehensive review of the cut’s efficacy will take place next month. The focus on weak diesel and naphtha demand in Europe added to the pressure on prices. French diesel sales fell by 13.4%yy in September and the IEA noted that Europe’s diesel fuel demand in 2023 is set to be down by about 380kbpd versus the 2019 pre-pandemic levels. The numbers on naphtha are even more stark with consumption set to fall more than a quarter this year versus 2021 to the lowest it’s been in 48 years according to the IEA. Bloomberg reported that Russia’s oil and gas revenue soared in October to the highest since April 2022. The price of the Urals blend exceeded the G7 price cap for the fourth consecutive month according to the Finance Ministry.
Metals saw modest gains last week with the weak US$ and slump in US yields helping copper finish the week close to a 1 month high at $8,168, up 0.3% on the day. Aluminium rose 1.3% Friday to $2,256 while zinc rose 1.5% to $2,515. First Quantum stated it expects to continue operating its giant Cobre Panama copper mine despite efforts to repeal its contract there. Panama’s Congress passed a revised mining bill late Thursday which eliminated an article that would have voided First Quantum’s new 20yr contract. And BNEF forecast that China is on track to produce a record amount of aluminium this year despite a drought in the main manufacturing hub of Yunnan. China produces 58% of the world’s aluminium.
Iron ore markets closed the week on fresh 8-month highs as optimism about demand and restocking added to the positive sentiment. The December SGX contract closed up 20c from the same time Friday at $122.75 while the 62% Mysteel index closed up 10c at 126.60. That’s a high back to the end of March. Futures have jumped circa 10% since Beijing announced fresh stimulus measures. China will announce a raft of data this week including iron ore imports on Tuesday.
Day ahead
Australian Prime Minister Albanese is due to meet with China President Xi in Beijing, the first such meeting since 2016. Trade Minister Farrell expressed optimism that China’s restrictions on beef and lobsters would be removed before Christmas.
The Melbourne Institute Australia inflation gauge for October is due; September’s reading was 5.7%yr. Meanwhile, ANZ job ads have been broadly stable over the last three months.
NZ: October’s ANZ commodity prices index should reflect the jump in dairy prices over the month.
Eurozone: As the cumulative impact of interest rate tightening crystalises, Sentix investor confidence will likely remain in a fragile state (market f/c: –22.4).
The final estimate to the October S&P Global services PMI is due for Japan and the Eurozone.
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