Markets Daily
Risk sentiment cooled after a strong few days, equities and bond yields mostly lower. AUD returned to 0.6555. The FOMC minutes had little impact. Today’s calendar highlight is a speech by RBA Governor Bullock. US weekly jobless claims are released early ahead of the Thanksgiving holiday.
Yesterday
The RBA November minutes contained little new information given recent publications and speeches. Inflation is not coming down as fast as the RBA would like. The upside surprise is attributed to domestic factors more so than the earlier global shocks. Domestic demand has been a bit more resilient than expected, outside the consumer sector, at least. The Board is becoming concerned that businesses are developing an inflationary mindset. There was some market attention on the observation that “the staff’s inflation forecasts would be for higher inflation if they had not been predicated on one or two rate rises.” Of course, one of these hikes has now been delivered. Earlier, RBA Governor Bullock appeared on a panel and noted concern over Australia’s poor productivity in recent years. AUD/USD was supported by ongoing USD weakness/Asian FX strength, extending its rally from 0.6555 early to a high of 0.6587, another high since 10 August. The ASX 200 closed up 0.3%, lagging the likes of Taiwan and Korea but in line with China.
Currencies/Macro
The US dollar was mixed against G10 FX on the day. EUR/USD fell from 1.0940 to 1.0910. GBP/USD rose 30 pips to 1.2535. USD/JPY ground down to a 147.15 low, then pushed back to 148.35, net flat. AUD/USD touched 0.6589 – a three-month high – then returned to 0.6555. NZD/USD steadied up 15 pips on the day, at 0.6050. AUD/NZD fell 25 pips to 1.0840. The GDT dairy auction resulted in an overall price change of zero, with whole milk powder up 1.9%.
The FOMC November minutes revealed little new information. Participants judged that it was "critical" to keep policy "sufficiently restrictive" and "all participants agreed" that they were in a position to proceed "carefully." Financial conditions had tightening "significantly" and were putting downward pressure on the economy and inflation. Risks to the outlook were becoming "more two-sided." However, many thought that while the economy had been resilient and the labour market remained strong, downside risks to the economy remained, including larger than expected effects of the prior rate hikes on household balance sheets and the commercial real estate sector.
Interest rates
US 2yr treasury yields fell from 4.91% to 4.88% via 4.86%, while the 10yr yield is net 2bp lower on the day at 4.40%. There was little reaction to the FOMC minutes. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be unchanged at the next two meetings, with easing expected from May 2024.
Australian 3yr government bond yields (futures) roundtripped from 4.10% to 4.06% and back, while the 10yr yield roundtripped from 4.46% to 4.42% and back. Markets are pricing no hike at the next meeting on 5 December, but a 50% chance of one by May 2024. New Zealand rates markets are pricing the OCR, currently at 5.50%, to be unchanged on 29 November and in February, with easing expected from May 2024.
Credit spreads were contained in line with broader markets with Main half a bp wider to 69 and CDX unchanged at 64 while US IG cash was flat to a bp better. Primary was mixed with the US seeing no IG supply last night while in Europe, 10 issuers priced EUR7.2bn, however reports are that mandates have slowed with limited supply scheduled for the remainder of the week in either market.
Commodities
Crude markets marked time as traders digested the FOMC minutes and watched developments in the Middle East. The January WTI contract is last unchanged at $77.84 while the January Brent contract is last up 16c at $82.48. President Biden’s announcement that a deal to free hostages was ‘very close’ did see prices dip, though the seizing of the Galaxy Leader vehicle carrier by Houthi rebels in Yemen maintained a bid under the market. Inventory data followed by the holiday ahead of the weekend OPEC meeting will leave traders nervous, potentially adding to volatility though Eurasia Group argued that the “weak fundamentals weighing on prices have not gone away”. Citi noted that “a deepening of cuts is not our base case” though an extension of Saudi’s 1mbpd and Russia’s 300kbpd should support Citi’s forecast of $80 for Brent over the next 3 months. Natural gas prices continued their slide with December TTF contract down 3.8% to 6-week lows. Goldman trimmed forecasts given the market is better supplied coming into winter, with storage rates across Europe standing at 99% on average.
Metals continued their push higher with copper up 0.5% at $8,470 and aluminium up 0.5% at $2,255. Both metals are testing their 200dma, pointing to the improved technical picture. And the China copper premium hit a 1yr high, pointing to rising demand from EV and solar production. That stands in contrast to the situation outside of China with the spot to 3-month LME spread remaining close to the lowest level seen back to 1994. Codelco announced the first mineral extraction from the Rajo Inca mine and also that it would invest $720m overhauling its oldest mines to bring late and over-budget projects on stream and arrest a slump in copper production. Emirate Global Aluminium confirmed it had begun construction of 170ktpy aluminium scrap recycling facility at Al Taweelah. Construction is due to be finished within 3yrs. Most aluminium scrap generated in UAE is exported. China Antaike argued that China should buy nickel, cobalt and lithium for its massive strategic commodity reserve, taking advantage of the “new window” offered by the markets being oversupplied. Press reported that the National Food and Strategic Reserve Administration had agreed to buy 3,000mt of cobalt following a meeting of 5 producers and traders with government officials last month. Global cobalt prices have more than halved since May.
Iron ore markets hit fresh 9-month highs on expectations that fiscal policy to boost urban village renovation and affordable housing programs will bring a surge in restocking post Lunar New Year. The December SGX contract is up another $1.60 from the same time yesterday to $133.95 while the 62% Mysteel index is up $2.20 to $134.95. The China Daily argued that China should make the best out of the 1tn yuan of bonds which will be sold to support disaster relief and construction by allocating in a timely and direct manner. Kallanish noted that construction steel demand is stabilising with sentiment improving. BHP train drivers are due to start limited industrial action Friday.
Day ahead
Australia’s official data calendar remains empty. At 10:30am Syd, the Westpac-MI Leading Index will reflect broader economic conditions in October.
From 7:35pm Syd, RBA Governor Bullock will speak on ‘A Monetary Policy Fit for the Future’ at the ABE Annual Dinner, Sydney. “The Governor will talk about the recent monetary policy decision and progress on the implementation of recommendations of the Review of the Bank.”
Eurozone consumer confidence for November is likely to remain pessimistic as rate hikes feed through.
The US data calendar is busy, with some releases pulled forward ahead of Thursday’s Thanksgiving Day holiday. Durable goods orders in October are likely to progress along their volatile path though excluding transport, orders have held up well (market f/c: -3.2%mth). Initial jobless claims should remain low for now (market f/c: 227k). The final estimate of November’s University of Michigan consumer sentiment will likely remain around where it was (market f/c: 60.5).
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