Markets Daily
Bond yields fell after various second-tier US economic data skewed to the soft side. The US dollar and JPY outperformed in a mostly cool risk environment, AUD down to 0.6465. Oil slumped to lows since July. Today’s light calendar includes UK October retail sales and plenty more commentary from the Fed.
Yesterday
Australia October total employment jumped 55k after +8k in September, with full-time jobs +17k, part-time employment +38k. The unemployment rate ticked up to 3.7% from 3.6%. The participation rate rebounded to 67.0%, matching the post-WW2 record high. AUD flickered up about 10 pips to 0.6517 but within minutes was heading lower (session low 0.6461), amid poor regional equity sentiment. The ASX 200 closed -0.7%, China’s CSI 300 -1%. The Biden-Xi meeting at APEC in San Francisco was full of positive talk and praise, even after Biden responded in the affirmative to a reporter asking if he still thought Xi was a dictator.
Currencies/Macro
The US dollar was mixed vs G10, the Japanese yen outperforming. EUR/USD spiked briefly to 1.0896 (five month high) but then returned to be little changed at 1.0850. GBP/USD was also little changed net at 1.2410. USD/JPY followed US yields lower, falling from 151.35 to 150.29 then trimming losses to 150.75. AUD/USD was choppy, overall down 40 pips at 0.6454. NZD/USD slipped 55 pips or -0.9% to 0.5970. AUD/NZD rose 30 pips to 1.0835.
US industrial production in October fell -0.6% (est. -0.4%, prior +0.1% revised from +0.3%), the weakest result since December. Capacity utilisation fell to a low since October 2021. Weekly initial jobless claims rose to 231k (est. 220k, prior 218k), with continuing claims also rising, at 1865k (est. 1843k, prior 1833k). The November NAHB homebuilder confidence survey fell to 34 (est. 40, prior 40). High mortgage rates and affordability remain major headwinds for builders. The November Kansas Fed manufacturing survey rose to -2 (est. -9, prior -8), but components were weak.
Fed governor Lisa Cook said she is attuned to the risk of a sharp economic slump: “But I am also attuned to the risk of an unnecessarily sharp decline in economic activity and employment. As we try to identify the full, lagged effects of monetary policy tightening, I am considering whether small businesses, the housing sector, and low- and moderate-income households could be warning of broader stress ahead”.
Retiring Cleveland Fed president Loretta Mester said she hasn’t decided if another rate hike needed: “I haven’t assessed that yet. Where I think we are right now is we’re basically in a very good spot for policy. We’re at a more balanced place, but I don’t think we can say right now what necessarily the next policy meeting will be.”
Interest rates
US 2yr treasury yields fell from 4.90% to 4.85%, while the 10yr yield fell from 4.52% to 4.44%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 13 December, with only a 5% chance of a hike by February.
Australian 3yr government bond yields (futures) fell from 4.18% to 4.11%, while the 10yr yield fell from 4.57% to 4.48%. Markets are pricing only a 5% chance of a hike at the next meeting on 5 December, but a 40% 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 5% chance of a hike by February 2024.
Credit indices have settled around current levels (ie, ytd lows) with Main half a bp wider at 71.5 and CDX little changed at 65.5, with US IG cash also stable as primary market saw a big list of issuers in Europe (15 issuers priced ~EUR12.8bn). The US was a little more subdued, with 4 issuers coming to market to price USD8.2bn with Bayer the standout with its USD5.75bn, 5 tranche offering (3-30yr).
Commodities
Crude markets plunged by almost 6% at one point as key support gave way and traders liquidated positions. Concerns about rising stockpiles and waning Chinese demand appeared to be the key drivers, though algorithmic selling was arguably a factor too. The December WTI contract is down $3.79 (4.94%) at $72.87, having been down as much as 5.9% at one stage while the January Brent contract is down $3.73 at $77.45. The Dec Jan WTI spread is last at -20c, the lowest for the prompt spread back to late June while the second/ third WTI spread has also flipped into the deepest contango since March. Reuters reported that Chevron has begun supplying fuel to Venezuela, under Washington’s approval, as part of a crude swap agreement. The US Treasury’s Office for Foreign Assets Control extended a licence allowing some oil companies to conduct basic operations in Venezuela through to May 2024. In addition, Vitol was reported as having provisionally chartered a supertanker to load oil from Venezuela for China. The VLCC is scheduled to load between November 27 and December 2. JP Morgan however warned that OPEC+ may deepen supply cuts “given where the balances are”. “There’s a view that Saudi is tapped out – we don’t believe that”. OPEC+ will hold a Ministerial meeting on November 26.
Metals fell as well with copper down a modest 0.3% to $8,241 though aluminium fell 0.9% to $2,211, nickel fell 1.7% to a fresh 2 1/2yr low and zinc fell 3% to $2,574. The spread between spot and 3-month copper on the LME hit -$100, the widest seen on record back to 1994. Chinese refined copper production hit a fresh record high in October, up almost 24%yy and this has been a key theme from the Asia Copper Week in Shanghai where the focus has been on a growing surplus of refined metal given a wave of new smelters that have ramped up production this year in China. However, Trafigura warned the conference that “we are moving into a phase in the market where copper concentrate demand is set to accelerate and overtake the pace of growth in supply” and ‘inventories will fall to critical levels in coming years’. Mitsui warned that the global copper market will start seeing shortages from 2027. Norsk Hydro CEO does not expect aluminium demand to recover until the second half of 2024 “though it very much depends now how the interest rates will develop”. Bloomberg reported that the EU and US are looking to extend 2021 steel and aluminium ‘truce’ agreement until the end of 2025 to avoid the resumption of tariffs too allow more time for an agreement.
Iron ore markets held onto recent gains above $130 despite Beijing’s attempts to cool the rally, continued weakness in home sales and the plunge in crude steel production to the lowest rate for the year. The December SGX contract is up $2.70 from the same time yesterday to $130.80 while the 62% Mysteel index is up 35c to $132.50. The market focus clearly remains on reports of a potentially massive round of stimulus focused on low-cost financing for urban village renovation and affordable housing programs.
Day ahead
The Asia-Pacific calendar is quiet. Australia’s data calendar is now quiet for some days though we will see RBA November minutes on Tuesday.
The final estimate of Eurozone October CPI will provide full details around the deceleration in services inflation. The preliminary reading was 2.9%yr overall, 4.2%yr core inflation.
UK retail sales volumes are expected to post only a partial bounce-back in October (market f/c: 0.4%mth versus -0.9% in September).
US: Tightness in financial conditions are likely to continue to weigh on housing starts and building permits in October (market f/c: –0.6% and –1.4% respectively). The FOMC’s Collins, Barr, Daly and Goolsbee are also all due to speak.
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