Markets Daily
The US dollar rose in Europe then trimmed gains in New York as risk aversion eased a little, leaving AUD at 0.6435, still down half a cent despite the RBA hike. Bond yields fell. Oil prices slumped to lows since July. Today’s global data calendar is low key though we will hear from Fed Chair Powell.
Yesterday
The Aussie approached the RBA decision around 0.6485. The initial pop to 0.6501 was consistent with a knee-jerk response to a cash rate hike not fully priced in (80%). But it was very fleeting, the A$ quickly sliding as low as 0.6455 before trying to stabilise around 0.6460/65 after 15 minutes. The A$ selling was presumably prompted by the change in guidance in the key final paragraph, from “Some further tightening of monetary policy may be required” (used for the past 6 meetings) to “Whether further tightening of monetary policy is required.” The rest of the lengthy statement was mixed as expected. By the Sydney close, the Aussie had extended its decline to 0.6440, its cause not helped by a sea of red in regional equity markets. The ASX 200 closed -0.3%, a more muted decline than e.g. in Japan, Hong Kong and Korea.
Currencies/Macro
The US dollar rose against all G10 FX on the day, though it was near flat against fellow haven Swiss franc as risk aversion prevailed particularly in Asia and Europe. EUR/USD fell from 1.0720 to 1.0664 before recovering slightly to 1.0695. GBP/USD fell about -0.4% to 1.2300. USD/JPY rose as high as 150.69 before trimming its gain to 0.2%, at 150.40. AUD/USD extended the negative reaction to yesterday’s RBA rate hike to 0.6404, before recovering to 0.6435 as US equities ticked higher. NZD/USD fell a net 30 pips or -0.5% to 0.5935. AUD/NZD extended the post-RBA decline to 1.0821 then edged back to 1.0840, net -40 pips.
There was a flurry of Fed commentary as the usual post-meeting public appearances ramped up. Fed governor Waller said the US labour market has been cooling this year, and there was a better balance between the supply and demand for workers. Chicago Fed president Goolsbee said the top priority is returning inflation to its target: “We’ve got to get inflation down — that’s the No. 1 thing. I’m absolutely hammering that’s what we should be watching”. Fed governor Bowman said: “I continue to expect that we will need to increase the federal funds rate further to bring inflation down to our 2% target in a timely way”. Minneapolis Fed president Kashkari said the Fed’s inflation fight isn’t over yet: “Ultimately, the economy will tell us how much is needed to get there. And I just don’t know…I’m not seeing a lot of evidence that the economy is weakening”. Dallas Fed president Logan expected tight financial conditions to persist, and thought inflation appeared to be trending towards 3% rather than 2%.
Eurozone PPI in October was close to expectations, rising 0.5%m/m (est. +0.5%m/m) for an annual decline of -12.4%y/y (est. -12.5%y/y, prior -11.5%y/y). The US September trade deficit widened to -USD61.5bn (est. -USD59.8bn, prior -USD58.7bn), driven by a lift in US goods imports.
The latest GDT dairy auction fell -0.7%. After a series of sound gains, markets were geared for a pullback. Whole milk powder fell -2.7% (butter fell -1.6%) but other products posted sound gains (skim milk +2.3%, cheddar +4.5%).
Interest rates
US 2yr treasury yields were choppy, overall -3bp at 4.91%, while the 10yr yield fell from 4.64% to 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 by February.
Australian 3yr government bond yields (futures) fell 9bp in response to the RBA decision, and another 10bp to 4.17% overnight, while the 10yr yield fell overnight from 4.72% to 4.59%. Markets are pricing only a 10% chance of a hike at the next meeting on 5 December, with a 60% chance of one by March. 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 held firm with Main half a bp tighter at 77.5 and CDX is now 1.5bp tighter at 70, around its series tights. IG cash has also been resilient in the face of solid supply with both Euro and USD markets active again last night. In Europe, 8 IG issuers (ex-SSA) priced EUR5.4bn with the 5 fins deals including 4 covered bonds. In the US, another 10 issuers priced a total of USD8.4bn, taking supply over the first 2 days of the week above USD34bn.
Commodities
Crude fell to three plus month lows as weak trade data from China, the push back from Fed speakers and concern about weak European demand all took their toll. The December WTI contract is down a hefty $3.53 at $77.29 while the January Brent contract is down $3.60 at $81.58. And indicating a lack of near-term demand, the Dec/ Jan WTI spread fell to just 12c, the lowest level for a prompt spread since July. Bloomberg shipping data showed that Russian crude exports were running at the highest rate in more than four months though data from TankerTrackers pointed to Iranian oil exports dropping for a second month in October after hitting a peak in August. Chinese crude imports were up 13.5%yy in October and 13.4%ytd versus the average of the last 5yrs though exports of gasoline, diesel and other fuels fell to the lowest in 4 months as refineries came close to exhausting export licences. Warm weather across the US and Europe plus weaker Chinese imports hit gas prices with the December Henry Hub contract down 2.8% and 11% over the last week. Chinese gas imports dropped sharply to close to lows for year though they were still +15%yy and +15%ytd versus average of the last 5yrs. Coal prices continued their slump with Newcastle coal dropping to fresh lows back to March of last year. Chinese coal imports fell to their lowest level since February suggesting recent stories that China is struggling to digest “a growing glut of coal” have some merit.
Metals lurched lower after recent gains with the Fed pushback on lower rates hitting sentiment. Copper is down 0.5% at $8,195 and aluminium fell 0.46% to $2,277. Nickel slumped by a larger 2.7% to $17,955, a fresh 2+ year low. The spread between the spot and three-month LME copper contract hit a discount of $85.5, the lowest on record going back to 1994. Codelco has cut its China copper premium by 36% for next year reflecting weak demand, with the charge set at $89 per ton, down from $140 this year. Chinese copper and copper ore imports were up 23.5%yy and 22.5%ytd versus average of last 5yrs. Bloomberg noted that a trucker strike in the DRC is blocking copper and cobalt exports from the mining hub of Kolwezi.
Iron ore markets reacted to warnings from the China Mineral Resources Group that high iron ore prices are hurting Chinese steel mills and are “not reasonable”. The CMRG head Guo Bin urged joint efforts to “improve” current pricing. The December SGX contract is down $1.85 from the same time yesterday at $121.70 while the 62% Mysteel index is down $1.15 to $125.95. China imported 99.39mt of iron ore in October, down from 101.18mt in September but up 4.6%yy and +6.2%ytd versus the average of the last 5yrs.
Day ahead
RBNZ inflation expectations for Q4 are expected to remain above target but also show signs of easing back (1pm Syd). The Q3 reading was 2.83%.
Eurozone: September’s retail sales will likely reflect weakness in consumption as rate hikes factor in (market f/c: 0.1%mth).
US: The final estimate for wholesale inventories for September is likely to be unchanged (market f/c: 0% mth). Fed Chair Powell delivers opening remarks at the central bank's Division of Research and Statistics Centennial Conference. Fellow Fed officials Williams and Barr are also due to speak.
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