Markets Daily
US equities rallied sharply Friday, brushing off the risk aversion of Asia and Europe. US bond yields and the US dollar though were little changed, AUD holding at 0.6360. The RBA’s Kohler speaks but there are no major data releases and it is a Singapore holiday.
Friday
The RBA Statement on Monetary Policy elaborated on Tuesday’s rate rise and clarified some key forecasts. Headline inflation is forecast to rise 3.9%yr by Q2 2024 (previously seen at 3.5%), while GDP is expected to grow 1.8% over the same period (was 1.25%). International students and tourists are seen aiding spending. AUD/USD traded a very tight 20 pip range. Regional equities took their cue from the Wall Street decline, almost all indexes in the red, especially Hong Kong. The ASX 200 closed -0.6%.
Currencies/Macro
The US dollar was little changed against most major currencies on Friday. EUR/USD rose 15 pips to 1.0685. GBP/USD returned to 1.2215. USD/JPY is a touch higher at 151.40. AUD/USD remained around 0.6360. NZD/USD hovered around 0.5890, leaving AUD/NZD at 1.0790.
US consumer sentiment (University of Michigan) fell to 60.4 in the preliminary November reading (est. 63.7, prior 63.8), with both current conditions and expectations components falling. Inflation expectations 1 year ahead rose to 4.4% (est. 4.0%, prior 4.2%), 5-10 years ahead rose to 3.2% (est. 3.0%, prior 3.0%).
San Francisco Fed president Mary Daly said it may need to hike again if progress on inflation stalls: “If inflation continues to move sideways, and the labour market and GDP growth remain solid or strong? Well, then we probably have to raise again”. If those things don’t happen, they come down and inflation comes and continues to come down to 2%, well, then that’s a different decision. Optionality has to be the metric of the day”. Atlanta Fed president Bostic said they can return US inflation to target without needing to raise interest rates further: “This is … going to take some time. I think we will get to our 2% target without us having to do anything more.”
ECB President Lagarde said that keeping the deposit rate at 4% should be enough to tame inflation, but officials will consider raising borrowing costs again if they need to: “The level where we are at the moment, if we sustain it for long enough… will make a significant contribution to bringing inflation back to our 2% target. If major shocks come up, depending on the nature of the shocks, we’ll have to revisit that.”
Interest rates
Moody’s lowered the outlook on its Aaa US credit rating from stable to negative. US 2yr treasury yields rose from 5.02% to 5.06%, while the 10yr yield returned 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 35% chance of a hike by February.
Australian 3yr government bond yields (futures) ranged between 4.23% and 4.29%, while the 10yr yield ranged between 4.62% and 4.68%. Markets are pricing only a 10% chance of a hike at the next meeting on 5 December, with a 60% chance of one by May. New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged on 29 November, with a 10% chance of a hike by February 2024.
Credit indices mirrored the broader transition in sentiment with Main unchanged at 75.5 (series tights), however CDX was in 2.5bp to 68 and US IG cash was also 1-2bp better as US equity recorded a strong session and primary activity in credit faded. Friday saw just the sole IG deal in Europe with Proximus pricing a EUR750M 10yr at MS+100.
Commodities
Crude markets bounced from arguably oversold levels on Friday with the December WTI contract up $1.43 to $77.17 while the January Brent contract rose $1.42 to $81.43. Despite the Friday bounce, Brent closed down just over 4% on the week as flows from the Middle East remained unaffected by the Israel/ Hamas war and liquids demand remained weak. The December ARA gasoil contract fell 10.7% last week after French diesel sales fell 13.4%yy in September and Europe’s diesel demand is forecast to be down by about 380kbpd this year versus 2019 pre-pandemic levels by the IEA. The IEA and OPEC will issue their latest monthly oil market reports this week, which will be closely watched for supply and demand forecasts.
In gas markets, the FT reported that the US was directly targeting Russia’s ability to export LNG for the first time in a move that could “cause disruptions in global energy markets” after announcing sanctions on the Arctic LNG 2 project last week. The move will in effect block European and Asian buyers. TotalEnergies has a 21.5% total interest via its holding on Novatek and Japan Arctic LNG has a 10% stake in the project. The State Department said, “our allies and partners share a strong interest in degrading Russia’s status as a leading energy supplier over time”.
Metals slumped into the end of the week with copper down 1.38% to a low for the month at $8,034 while nickel plunged by a hefty 3.5% to a fresh two and a half year low. Codelco’s new CEO Ruben Alvarado announced that copper output will increase to 1.34mmt in 2024, up from near 1.31mmt this year. The WSJ noted that a prolonged slump in copper prices was threatening the shift to wind power and electric cars, as the temporary surplus discourages investment necessary to meet “the world’s expanding population of wind farms, solar arrays and electric vehicles”. McKinsey forecasts a copper shortfall of 6.5mmt in 2031 though in the near term, the ICSG forecasts a 467kt surplus next year. Reuters reported that Indonesian President Joko Widodo and US President Biden would meet at the White House Monday to discuss how to advance a minerals partnership aimed at stimulating nickel trade.
Iron ore bucked the trend in other metals last week, rising for a third week to fresh seven month plus highs after 16 major cities removed maximum land price limits on auctions according to the China Securities Journal. The December SGX contract is up 40c from the same time Friday to $128.15 while the 62% Mysteel index is up $1.60 to $129.35. Iron ore demand is expected to improve given weak inventory at mills. Last week China reported iron ore imports rose 4.6%yy to 99.38mt, though that was down from the circa 7%yy rate we were looking at mid-year. China will report October industrial production on Wednesday including steel production. Cesco’s Asia Copper Week in Shanghai commences Tuesday as does the FT Commodities Asia Summit in Singapore. Goldman Sach’s Global Metals and Mining conference commences in New York on Wednesday.
Day ahead
The RBA’s Marion Kohler (Acting Assistant Governor Economics) is due to speak at the UBS Australasia Conference, 10:30am Syd.
Markets are closed in Singapore for Deepavali.
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