Markets Daily
Bond yields continued to fall amid resurfacing concern about recession. The US dollar was mixed amid hawkish commentary from ECB officials. AUD underperformed, down to 0.6405. Today’s calendar includes China October CPI and PPI and plenty more from the Fed.
Yesterday
Australia’s data calendar was empty, with the main topic of conversation the Optus phone outage affecting millions of customers for most of the trading day. AUD/USD traded a tight 0.6423 to 0.6449 range. Regional equities were mostly weaker, the ASX 200 outperforming with a 0.3% gain.
Currencies/Macro
The US dollar was little changed versus most G10 FX on the day but firmer against the dollar bloc and the yen. EUR/USD bounced off 1.0660 to 1.0710, helped by the ECB-speak. GBP/USD trimmed its losses to -0.1%. USD/JPY rose from 150.40 to 151.00, ignoring the fall in the 10yr Treasury yield. The Aussie underperformed for no obvious reason, AUD/USD -0.5% at 0.6405. NZD/USD slipped -0.4% to 0.5910, leaving AUD/NZD down 15 pips at 1.0830.
Fed Chair Powell spoke to a Fed conference about forecasting, with no comments on the monetary policy outlook. Fed governor Cook said that Russia’s war in Ukraine and the Middle East conflict could generate further risks to markets.
US wholesale trade sales in September rose 2.2%, well above expectations (est. 0.9%, prior 2.0%), with inventories up 0.2% (est. 0.0%). This is the largest rise in sales since January 2022, with a 9.2% jump in petroleum making a notable contribution. The inventory-sales ratio fell from 1.36 from 1.33 – a low since September 2022.
ECB member Nagel (Germany) reiterated the “high for longer” message, saying: "given the visible economic slowdown, the 'last mile' before we reach our inflation target may well be the hardest". ECB chief economist Lane was also cautious on inflation, emphasising that while inflation has started to fall it remains high and will only return to target in 2025. He indicated that the focus now will be services inflation and local costs, especially wages.
BoE Governor Bailey said it’s too early for rate cut talk, saying that while inflation will fall sharply in coming months, largely thanks to base effects from energy prices, monetary policy needs to remain restrictive for an extended period of time: "our forecast suggests inflation will be back at target in around a two-year horizon" but it has "got to continue to do the work to make it happen".
Interest rates
US 2yr treasury yields closed up about 2bp at 4.94%, while the 10yr yield fell from 4.57% to 4.50%, a closing low since 22 September. 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) fell from 4.20% to 4.13%, while the 10yr yield fell from 4.62% to 4.51%. Markets are pricing only a 10% chance of a hike at the next meeting on 5 December, with a 50% chance of one by May. 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 extended recent gains with Main another 1.5bp tighter at 76 and CDX in half a bp to push below 70 (69.5) with US IG cash also flat to a bp tighter as primary remains in focus. Europe saw 12 issuers price EUR7.3bn as corporate supply increased led by Novartis spin-off, Sandoz, which priced the largest deal on the day with its EUR2bn 3 tranche offering (3-10yr). In the US, another 10 issuers priced a total of USD12.4bn taking supply for the week above USD46bn.
Commodities
Brent slumped below $80, hitting lows back to July as economic concerns and deterioration in the physical market slammed sentiment. The December WTI contract was down $1.78 at $75.59 at 7am Sydney time, bringing losses over the last week to 6% while the January Brent contract was down $1.83 at $79.78. Warning signs about waning demand have been flashing across the market with the Dec/ Jan WTI spread collapsing to just 4c. API data showed a 1.1mb increase in Cushing inventory while national stocks increased by 11.9mb. Note the EIA will not publish official data this week due to a system overhaul, instead releasing two weeks of data next week. However, the EIA forecast that American gasoline demand will fall to a 20yr low on a per capita basis next year while US crude production will rise to a new record of 13.15mb versus 13.12mb in October. And high prices and weakening demand for diesel and gasoline have hit margins at China’s independent refiners or “teapots”. Indeed, according to local industry consultant JLC, margins in Shandong turned negative late October for the first time since early January and run rates dropped to around 57% of capacity, the lowest since May 2022 according to OilChem data. Meanwhile Russian oil product exports are picking up after the diesel restrictions and seasonal maintenance ended. Oil product exports from Russia in the week ended Nov 4 totalled 2.5mb, the biggest weekly amount since September.
Price action in metals was very mixed with copper falling 1% to $8,106 while zinc jumped 1.5% to $2,607. The jump in zinc was linked to a surge in cancelled warrants at the LME up by almost 80%. This follows Nyrstar’s announcement that it would halt output at two US mines due to the slump in prices and a fire at an eastern Siberian zinc mine on Wednesday. The discount for spot versus 3-month copper at the LME remained at a record of $85.5, the lowest back to 1994. Novelis CEO was optimistic about aluminium demand heading into 2024 now that the UAW strike has ended. Novelis is the largest maker of flat rolled aluminium products used in everything from cars to soda cans.
Iron ore markets hit fresh 7-month highs on Reuters headlines suggested that Ping An was set to take a controlling stake in Country Garden, under instructions from the State Council. While Ping An said it had no plans or discussions with Country Garden, the December SGX contract hit a fresh high back to mid-March, up $3.45 from the same time yesterday to $125.15 while the 62% Mysteel index rose another $1.80 to $127.75, a high back to late March.
Day ahead
Japan: The current account surplus for September should show a weak yen supporting primary income (market f/c: JPY2977.8bn).
At 12:30pm Syd we will see China October CPI and PPI. Excess capacity and easing commodity prices should keep producer prices weak (market f/c: -2.7%yr). This should feed through to consumer prices, deflation risks brought on by weak demand and fixed prices (market f/c: -0.1%yr).
Due any day until 15 November, China October new loans data could reflect a turn in sentiment brought on by government support, though further support to the property sector is needed for a marked turn (market f/c: CNY655bn). M2 money supply will likely also reflect this (market f/c: 10.3%yr).
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