Markets Daily
US bond yields rose, lending some support to the US dollar, AUD slipping to 0.6490. Equities were little changed after last week’s surge. Today’s calendar is dominated by the RBA policy decision. We will also see China October trade data and hear from some Fed officials.
Yesterday
After Friday’s steep US dollar decline on the soft payrolls report, Asia-Pacific markets lacked inspiration, G10 currencies not moving more than +/-0.2% over the day. AUD/USD consolidated its gains in a tight 0.6503-0.6520 range, a few pips short of fresh highs since mid-August. Regional equities were a sea of green, the ASX 200’s 0.3% gain a clear underperformance against the likes of Japan’s Topix +1.6%, the China CSI 300 +1.4%, let alone Korea’s Kospi which surged 5.7% after Korea’s government announced a ban on short-selling until end-June 2024.
Currencies/Macro
The US dollar was either higher or flat against G10 currencies on the day. EUR/USD was little changed net, at 1.0720. GBP/USD edged down -0.3% to 1.2345. USD/JPY followed Treasury yields higher, up 0.4% to 150.00. AUD/USD fell 25 pips or -0.4% to 0.6490. NZD/USD fell 35 pips or -0.6% (weakest in the G10) to 0.5965. This left AUD/NZD up about 20 pips at 1.0880, after an early low of 1.0857.
Eurozone November Sentix investor confidence rose to a still weak -18.5 (est. -22.4, prior -21.9), the expectations component rising to -10.0 (prior -16.8) and the current conditions component little changed at -26.8 (prior -27.0).
ECB member Holzmann said: “We should be very careful, that we should stand ready again to hike if needed, and certainly don’t declare victory too early on”.
Bank of England chief economist Pill spoke about the slowdown in inflation: “We are a little bit slower. We have gone a little bit higher, or in some cases quite a lot higher than the US, but I don’t think that those forces are very persistent. We’re going to see the UK get down to levels more comparable to what we’re seeing in the rest of the world.” On interest rates: “Rates will hopefully come off their current levels as long as we return inflation to target, but equally we shouldn’t anticipate they’ll go back to zero ... The situation that created rates at zero pre-Covid was an exceptional situation too, so they’re going to be somewhere in between.”
Interest rates
US 2yr treasury yields rose from 4.85% to 4.94%, while the 10yr yield rose from 4.57% to 4.65%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 4bp higher at the next meeting on 13 December, with a 20% chance of a hike by February.
Australian 3yr government bond yields (futures) rose from 4.28% to 4.31%, while the 10yr yield rose from 4.73% to 4.77%. Markets are pricing a 65% chance of a 25bp hike in the RBA cash rate to 4.35% today. New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged on 29 November, with only a 10% chance of a hike by February 2024.
Credit indices were softer after a strong recent run with primary activity dominating last night. Main was half a bp wider at 78 and CDX is out a bp to 71 as we write with IG cash also 1-2bp wider. Primary was the focus. Europe saw 11 issuers price EUR9.8bn across both fins and corps including Swedbank with a EUR1bn 5yr Sen Pref at MS+105, BNP priced a EUR1.5bn 9nc8yr SNP at MS+160 and JPM was also in the EUR space with a EUR2bn 8nc7yr at MS+130. In the US, 13 issuers priced USD26bn in a quick start to the ~USD40bn of supply expected this week.
Commodities
Crude markets saw choppy price action but held modest gains with the December WTI contract up 61c at $81.12 while the January Brent contract is up 85c at $85.47. Confirmation that both Saudi Arabia and Russia will hold production cuts through the end of the year supported prices, but the announcement that Saudi Arabia was slashing prices to Europe due to weakening demand capped gains. Prices for export to northwest Europe were cut by $2.30 a barrel while they were cut by $1.90 to the Mediterranean. The spread for the Arab Light blend to Asia was maintained at $4. Kpler reported that Iranian oil exports had slumped to a 7-month low on buyer caution, with the reason “likely linked with rising tensions in the middle east”. Iranian shipments have averaged 1.2mbpd so far this year but dropped to just under 1m in October. Bloomberg reported a record number of supertankers are steaming towards the US given records US crude production and close to record US crude exports. 48 vessels are bound for the US according to Bloomberg data.
In gas markets, European prices extended their slump as both German and European gas in storage approached 100% full levels. The December TTF contract has fallen 11% in the last week to a 1 month low.
Metals continued the move higher with aluminium leading, up 1.4% to $2,286 while copper rose 0.87% to $8,247. The focus in aluminium remains on production cuts in the Yunnan province in China. Reuters reported that “smelters in Yunnan are once again being asked to turn off production lines as hydro-rich Chinese province struggles to balance its power grid due to persistently low rainfall”. The cuts agreed amount to 1.15mt of annualised capacity. The piece noted that “several producers have swapped out old smelters using coal-fired power in other provinces for new “green” hydro-plants in Yunnan”. Smelter capacity in the province now amounts to “just over 6mt and until this week’s production [cuts] was running at around 5.7mt”. Chinese aluminium production year to date hit a fresh record high in September at 42.6mt, “refocusing minds on the government’s capacity cap of 45mt”.
Iron ore markets held onto 8-month highs with a plunge in Chinese steel mill stockpiles adding to the positive tone. The December SGX contract is up 80c from the same time yesterday at $123.55 while the 62% Mysteel index is up 50c at $127.10, a high back to the end of March. The slowdown in steel production has helped inventory levels fall, and CISA inventories for late October are now back to average levels for this time of year having been well above average for much of the summer.
Day ahead
The RBA policy decision is due at 2:30pm Syd. 29 of 32 forecasters in the Bloomberg survey (including Westpac) expect the RBA to raise the cash rate 25bp to 4.35%. Money markets price around a two-thirds chance of a hike this week. A hike would follow four consecutive ‘on–hold’ decisions, from July to October. On 24 October (the day before Q3 CPI), Michele Bullock stated in her first speech as Governor that the Board “will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation”. In our view, the Q3 CPI report highlighted that the pace of disinflation was not as fast as the RBA were hoping for, and the risk of a longer return to target – relative to the RBA’s current forecasts – is therefore material. The resilience of the household sector, alongside lingering capacity constraints amid strong population growth, supports the decision to raise rates as well. However, the Board will also recognise that the labour market has turned and the risk of a price–wage spiral is receding. In essence, November’s rate hike decision will be finely balanced.
Japan: September’s household spending data will reflect pressures on real income dissuading consumption (market f/c: 2.0%yr).
China: The trade surplus from October should showcase strength in demand from Asia offsetting developed world demand (market f/c: $82bn, exports -4%yr, imports -5%yr).
Eurozone: Producer prices are expected to continue their descent as last year’s energy inflation cycles out (market f/c: -12.5%yr).
US: The September trade deficit is anticipated to widen as exports demand falters across the developed world (market f/c: -$60bn). Consumer credit in September is expected to grow as excess saving dry up (market f/c: $9.0bn). Dallas Fed president Logan and Kansas City Fed president Schmid will be speaking.
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