Markets Daily
Bond yields jumped on hawkish headlines from Fed chair Powell. Equities tumbled and AUD slid to 0.6370. Today’s calendar includes the RBA Statement on Monetary Policy, UK Q3 GDP and US November consumer sentiment.
Yesterday
Australia’s data calendar remained quiet. China October CPI was a touch softer than expected, -0.2%yr, CPI ex-food and energy +0.6%yr. Producer price deflation continued, -2.6%yr. AUD/USD traded a very narrow 0.6401-0.6417 range. Regional equities were mixed again, the ASX 200 somewhere in the middle with a 0.3% gain.
Currencies/Macro
The US dollar rose against all G10 currencies on the day. EUR/USD fell from1.0710 to 1.0670 while GBP/USD fell from 1.2290 to 1.2225. USD/JPY rose from 150.95 to 151.35. AUD/USD was around 0.6415 pre-Powell remarks, slipping to 0.6370. NZD/USD outperformed, steadying down just -0.2% at 0.5905. AUD/NZD fell from 1.0830 to 1.0795.
US weekly jobless claims were little changed at 217k (est. 218k, prior 220k), with continuing claims at 1834k (est. 1820k, prior 1812k).
Fed chair Powell said he isn’t confident the Fed has tightened enough to return inflation to 2%: “If it becomes appropriate to tighten policy further, we will not hesitate to do so. We will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data, and the risk of overtightening.”
Richmond Fed president Barkin said: “In aggregate, we are still not seeing the full effects of policy…I believe there’s a slowdown coming, I believe we’re going to need that slowdown, because I think that’s what it’s going to take to convince price-setters the days of pricing power are over.” Bostic said: “I think our policy is restrictive, and likely sufficiently restrictive, but I think we’re going to still have bumps along the way…Inflation is going to get to 2%...We will keep restrictive policy until that happens, or until we are sure that is going to happen.”
Interest rates
US 2yr treasury yields rose from 4.92% to 5.03%, while the 10yr yield rose from 4.49% to 4.63%, mostly due to anticipation of and reaction to Powell’s comments, with a poor 30yr auction contributing. 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 4.18% to 4.27%, while the 10yr yield rose from 4.55% to 4.65%. 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.
Late session equity weakness has extended to credit indices with Main another half a bp tighter (75.5) in line with equity gains in Europe, however CDX is now a bp wider (70.5) with losses all coming post the 30yr auction results which also contributed to bond and equity downside. Primary activity was also more mixed as Europe saw another 7 issuers price EUR4.5bn while in the US, Polaris priced a USD500M long 5yr to be the sole issuer on the day, taking weekly supply close to ~USD47bn.
Commodities
Crude markets ended a volatile session with only modest gains after comments from Powell erased an attempted rally in the NY afternoon. The December WTI contract is up just 23c at $75.56 while the January Brent contract is up 32c at $79.86. Prices did see a decent jump earlier in the session on comments from Saudi Energy Minister Prince Abdulaziz bin Salman who noted that oil demand is not weak; “people are pretending it’s weak. It’s all a ploy”. However, the front month WTI spread flipped into a contango of -4c for the first time since July. And oil trader/ guru Pierre Andurand cited higher US and Iranian production as the catalyst for the recent price slump. In fuel markets, Reuters reported that Russia will lift the remaining restrictions on gasoline and diesel exports next week. Diesel is Russia’s largest oil product export, almost three quarters of which is transported by pipeline. The December NY ULSD contract has lost almost 9% in the last 3 sessions.
In gas markets, an EU parliamentary resolution called for moves to “strengthen coordination on the enforcement of existing sanctions on Russian oil exports” and to “impose a full ban on Russian LNG and LPG imports as well as on the imports of fuel from non-EU countries if those products were produced using Russian oil”. The December TTF contract jumped 5% from a one-month low.
Metals were lower across the board with copper down a modest 0.3% to $8,117 though aluminium was down by a larger 1.1% at $2,238 and nickel dropped by 1.68% to $17,790, a fresh low back to June 2021. Rusal announced that it had increased the share of recycled content in foundry alloys for the automotive industry to 30%. Bloomberg noted that 5 of 6 LME metals are trading in contango, with the copper contango at the biggest since the 1990s earlier in the week. Next week sees Goldman Sachs host its Global Metals and Mining Conference 2023 in NY and China will release October retail sales, FAI, property investment and IP for October including steel and aluminium production.
Iron ore appeared immune from the lurch lower in commodity prices with the December SGX contract up 5c from the same time yesterday to $125.20 while the 62% Mysteel index was unchanged at $127.75. ArcelorMittal confirmed that a commercial ship hit by a Russian missile had been due to haul a cargo of its iron ore, though the vessel was struck before ore was loaded. ArcelorMittal reported a 28% decline in Q3 earnings from the previous quarter.
Day ahead
At 11:30am, the RBA will release its Statement of Monetary Policy. There will be particular interest in the commentary around their lower unemployment forecast which was revealed in Tuesday’s statement.
UK Q3 GDP is expected to decline as rate hikes weigh in on domestic demand (market f/c: -0.1%qtr, +0.5%yr).
The University of Michigan’s preliminary November reading on US consumer sentiment is expected to be weak (market f/c: steady at 63.8, versus 100 pre-pandemic, 50 in June 2022). Atlanta Fed president Bostic and Dallas Fed president Logan will speak.
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