Markets Daily
A fairly modest downside surprise on US CPI sparked a plunge in bond yields and the USD, while equities surged. AUD jumped 2% to above 0.6500. Today’s crowded data calendar includes Australia wages, Japan GDP, China retail sales and industrial production, UK CPI and US retail sales.
Yesterday
The Westpac-Melbourne Institute Index of Australia consumer sentiment declined -2.6% to 79.9 in November, down from 82 in October. Responses over the survey week show sentiment was heading for a slight gain prior to the RBA move, responses amongst those surveyed before the decision consistent with an index read of just over 83. That compares with sharply weaker responses after the move consistent with an index read of 78.2, a -6% fall over the course of the survey week. The NAB business conditions index consolidated in October, rising 1pt to +13, down from the 2022 highs but still comfortably above long-term averages. Business confidence remains soft and fragile, slipping 2pts to –2 and has averaged –0.3 since last October, well below the long-run average, at +5. AUD/USD edged down from 0.6380 to 0.6365. Regional equities were mostly upbeat, the ASX 200 joining in with a 0.8% gain.
Currencies/Macro
The US dollar fell heavily against all G10 currencies on the day. EUR/USD rose from 1.0725 pre-CPI to 1.0880, including highs since 31 August. GBP/USD jumped from 1.2295 to trade above 1.2500 for the first time since 14 September. USD/JPY fell from 151.70 to 150.35. AUD/USD surged from 0.6375 pre-data to 0.6505/10, still a little short of the early November highs. NZD/USD rose from 0.5870 to 0.6010, a slight outperformance that left AUD/NZD down 20 pips on the day at 1.0825.
US CPI in October was softer than expected at 0.0%m/m and 3.2%y/y (est. 0.1% and 3.3%, prior 0.4% and 3.7%), with ex-food and energy at 0.2%m/m and 4.0%y/y (est. 0.3% and 4.1%, prior 0.3% and 4.1%). The outturn reflected a large -2.5% energy price fall, including a -5.0% gasoline price fall, a -0.8% fall in used cars prices, and a -0.9% fall in airfares. Owners' equivalent rent posted a restrained 0.4% rise (0.6% in September).
Richmond Fed president Barkin remained cautious on the decline in inflation: “I’m just not convinced that inflation is on some smooth glide path down to 2%. The inflation numbers have come down, but much of the drop has been partial reversal of Covid-era price spikes, which were driven by elevated demand and supply shortages. Shelter and shelter inflation remain higher than historic levels, so does services inflation.”
Chicago Fed president Goolsbee said: “Progress continues, though we still have a way to go. With goods inflation already coming down and non-housing services inflation typically slow to adjust, the key to further progress over the next few quarters will be what happens to housing inflation. More generally, there are always some bumps in the road as inflation comes down.”
Interest rates
US 2yr treasury yields fell from 5.02% pre-CPI to 4.83%, while the 10yr yield fell from 4.61% to 4.45%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 13 December, with only 5% chance of a hike by February.
Australian 3yr government bond yields (futures) fell from 4.31% to 4.19%, while the 10yr yield fell from 4.69% to 4.56%. Markets currently price only a 10% chance of a hike at the next meeting on 5 December, but a 75% chance of one by June 2024. 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 also saw a strong session with Main 4bp tighter with the majority of that move seen late in the session, while CDX is ~3bp tighter at 64.5 and both indices are at their roll adjusted tights for the year. US IG cash is also 2-4bp better but remains some way off the post SVB tights seen in late July. Primary activity was muted in the US as expected into a key data event. Europe was dominated by the EU’s EUR8bn offering with a further EUR2.5bn priced across 5 bank/corp issuers, while the US saw just 3 issuers.
Commodities
Crude markets are ending a choppy session largely unchanged despite a huge fall in US yields and the US$. Indeed, as we write, the December WTI contract has turned negative on the day, down 9c at $78.17 while the January Brent contract is down 13c at $82.39. WTI did manage to all but touch $80 on the weaker than expected CPI print but gave back all the gains after the IEA noted that “global oil demand is expected to decelerate sharply” in 2024 after being supported by “a narrow set of non-OECD countries, led by China”. Further, the agency warned that “sustained macroeconomic headwinds will become increasingly apparent with demand growth slipping to 930kbpd in 2024”. And Iraq has managed to bolster its output to 4.33mbpd, 110kbpd above its production quota, by diverting crude that would have been piped via the Ceyhan pipeline to local refineries. Platts notes that it has Iraqi output at a nine-month high of 4.4mb. And with the Iraqi oil minister Hayyan Abdul Ghani conducting “final” talks, an additional 450kbpd pumped into the Mediterranean via the pipeline could add to the pressure on the market. Despite recommending ‘going long commodities’ Goldman cut its 2024 Brent forecast on higher supply from Brazil, Venezuela and Nigeria plus lower than expected heating demand in Q4. It now has Brent averaging $92 in 2024 from $98. Nigerian output hit a 21m high in October at 1.35mbpd. And JP Morgan noted that the return of El Nino means temperatures in China are expected to be 1 to 2C warmer than the average this winter, depressing fuel demand.
CNPC said it has stored 17.1bcm of gas in 13 underground storage sites, up 10%yy and it is building another 8 sites after Beijing called for more storage to avoid gas crunches. And CNOOC confirmed it had started output at the country’s biggest offshore gas field on Tuesday.
Metals jumped on the US CPI outcome though gave back some of the gains into the afternoon. Copper is last up 0.6% at $8,212 after trading to a 1 ½ month high at $8,275 though aluminium is unchanged at $2,224. The discount for spot to 3-month copper hit a fresh record low back to 1994 at -$91. Bloomberg reported that a trucking strike in the DRC that had blocked copper and cobalt exports via Zambia had been resolved. The Asia Copper Week conference kicked off on Tuesday with Goldman noting that apparent Chinese demand has increased by about 10% so far this year. However, Codelco Chairman noted that it is shipping less copper to China as domestic output grows at double-digit rates. China’s imports of refined copper from Chile are on track to be the lowest this year since 2008.
Iron ore hit $130 helped by news that China plans to provide ‘at least 1 trillion yuan of low-cost financing to the nation’s urban village renovation and affordable housing programs’ in its latest effort to shore up the struggling property market according to Bloomberg. The December SGX contract is last at $130.30, up $2.90 from the same time yesterday while the 62% Mysteel index is up 10c at $130.05. Low steel inventory at mills and iron ore at ports is adding to the bid tone in the market though traders will be wary about comments from the regulators after the CMRG warned that prices had reached “unreasonable levels” last week. China will report October FAI and IP today including steel production. Using a simple model from CISA production data, we would expect to see somewhere in the region of 82 to 84mt of steel produced in October.
Day ahead
At 11:30am Syd we see Australia’s Q3 wage price index. Wage inflation has been quite disappointing given how tight the labour market is and the outsized increase in the minimum wage this year. It is true that the increase in the minimum wage is not applied till July 1st, so its main impact will appear in Q3, but we had thought it should have some signalling impact on near–term wage bargaining. Our forecast is for a minimum wage increase boosted rise of 1.3% (in seasonally adjusted terms) which would be 1.7% in original terms. Consensus is also 1.3%qtr, 3.9%yr, versus 3.6% in Q2.
The RBNZ’s Q4 household expectations survey will provide an important update on inflation expectations.
Japan: Growth in GDP is set to decline in Q3, driven by a decline in net exports and only a partial recovery consumer spending from earlier weakness (market f/c: –0.1%).
At 1pm Syd, China’s October activity data is expected to highlight an ongoing gradual recovery in retail sales (market f/c: 7.0%yr vs 5.5%yr in September). Industrial production is seen maintaining a 4.5%yr pace, while fixed asset investment will likely hold steady as weakness in property persists (market f/c: 3.1%yr ytd, property investment -9.1%ytd).
UK CPI should benefit from a sharp fall in household energy bills over October as other underlying pressures continue to abate gradually. Consensus is 4.7%yr versus 6.7%yr in September, with core CPI seen easing to 5.8%yr from 6.1%yr in September.
US: A pull-back in headline retail sales is anticipated in October given the steep 0.7% jump in September and the fall in gasoline prices. Total sales are seen -0.3%mth but +0.2% on sales ex-autos and gasoline and +0.2% on the core control group measure (after 0.6% in September).
Lower energy prices should meanwhile see the US PPI ease further in October (market f/c: 0.1%), although the New York Fed Empire State index continues to highlight fragility within the manufacturing sector (market f/c: –3 in November).
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