Markets Daily
Amid dovish Fed commentary, US bond yields fell to multi-month lows. The US dollar fell further, helping AUD rally to 0.6650, printing highs since 1 August. Today’s calendar features Australia October CPI indicator and Q3 construction work, the RBNZ policy statement and the Fed Beige Book.
Yesterday
RBA Governor Bullock spoke on a HKMA-BIS panel in Hong Kong. She discussed the need to keep inflation expectations anchored and noted that both demand and inflation had been stronger than expected. But she also argued that now was the time to be “a bit careful” so that policy doesn’t push up unemployment unnecessarily. Australia retail sales came in softer than expected in October, recording a -0.2% decline vs Westpac and market expectations of a 0.2% gain. This follows gains of 0.9%, 0.2% and 0.6% in Sep, Aug and Jul respectively. Annual sales growth slowed to just 1.2%yr. With population growth running at around 2.4%yr and retail price inflation running at 3.6%yr in the Sep quarter, the result implies a large real, per capita decline in the 4.5-5% range. AUD/USD flickered up to a high of 0.6632 soon after the data, but presumably not in response to the data, instead watching the gyrations in the Chinese yuan. Regional equity sentiment was mostly positive, the ASX 200 joining in with a 0.4% rise.
Currencies/Macro
The US dollar fell against all G10 currencies on the day. EUR/USD rose from 1.0935 to 1.1009. USD/JPY fell from 148.83 to 147.33. AUD rose from 0.6597 to 0.6666 – highest since 1 August – before partly retracing. NZD rose from 0.6080 to 0.6147 – highest since 2 August - before partly retracing. AUD/NZD fluctuated between 1.0826 and 1.0862.
Fed governors Waller and Bowman have both been firmly on the hawkish side of the FOMC spectrum and their views carry extra weight for markets since governors (unlike regional Fed presidents) always vote at FOMC meetings. Waller said: “I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%. I am encouraged by what we have learned in the past few weeks — something appears to be giving, and it’s the pace of the economy”. He added that if inflation kept falling then there could be room to cut the funds rate in a few months, which he suggested could be 3 to 5 months.
Bowman was still somewhat hawkish, although her support for higher rates was more conditional than it had been in previous remarks: “I remain willing to support raising the federal funds rate at a future meeting should the incoming data indicate that progress on inflation has stalled or is insufficient to bring inflation down to 2% in a timely way. We should keep in mind the historical lessons and risks associated with prematurely declaring victory in the fight against inflation, including the risk that inflation may settle at a level above our 2% target without further policy tightening”.
Chicago Fed president Goolsbee said: “Overall, we have made progress on inflation outside of the food sector. It’s been coming down. It’s not yet down to target. But 2023, we’re on a path to set the highest drop in the inflation rate in 71 years.”
US house price data from FHFA and CoreLogic for September was close to expectations. The FHFA index rose 0.5%m/m (est. +0.5%m/m, prior revised to +0.7%m/m from +0.6%m/m), while the CoreLogic data slightly undershot consensus with a rise of 0.7%m/m (est. +0.8%m/m, prior revised to +0.8% from +1.0%m/m). US consumer confidence (Conference Board) rose to 102.0 in November (est. 101.0, prior revised from 102.6 to 99.1). The Richmond Fed manufacturing survey fell to -5 in November (est. +1, prior +3).
ECB member Nagel reiterated his stance on inflation remaining too high and that it is premature to consider any lowering of rates.
BoE Deputy Governor Ramsden underscored the MPC’s concerns over continued inflation risks, and that they too were keen to push back against any premature pricing of rate cuts.
Interest rates
The US 2yr treasury yield tumbled from 4.89% to 4.74%usgg1, while the 10yr yield fell from 4.39% to 4.33%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 14 December, with a 70% of a rate cut by May 2024.
Australian 3yr government bond yields (futures) fell from 4.18% to 4.10%, while the 10yr yield fell from 4.52% to 4.45%. Markets are pricing no hike at next week’s meeting, but a 50% chance of a hike by February 2024. New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged on 29 November, and in February, with a 40% chance of a rate cut in May 2024.
Itraxx Europe tightened 0.3bps to 69.3bps with BBVA and Zurich the best performing contracts and Unibail-Rodamco-Westfield again weighing on the index. CDX IG tightened 0.7bps to 63.bps; Lincoln National and Ovintiv had the best performing contracts while Paramount Global and DXC Technology were a drag on the index. Cash bonds widened 0.8bps to 143.0, the best performing sectors were consumer staples and subordinated financials, while utilities and materials were again the worst performing.
Commodities
Crude markets bounced with interest rate markets moving sharply lower and the US$ under pressure. That’s despite suggestions that the deadlock within OPEC has hit “stalemate” and may not be resolved before the scheduled online meeting on Thursday, possibly requiring further delay. The January WTI contract is up $1.52 at $76.38 while the January Brent contract is up $1.58 at $81.56. US authorities warned of a spate of attacks on merchant shipping near Yemen and Somalia after Houthi rebels seized the Galaxy Leader car carrier last week and a Liberian-flagged chemical tanker was targeted over the weekend. The UK navy also confirmed at least 4 other suspicious approaches to ships in the Indian Ocean. The US Department of Transportation Maritime Administration recommended that ships “exercise caution” and remaining “cognizant of evolving threats in the region”. And Bloomberg noted a “growing group of tankers that are sailing thousands of extra miles to take the long way around South America to avoid the drought-stricken, congested Panama Canal”. Vessels without reservations are facing ‘indefinite delays’ in the canal.
US natural gas futures settled at two-month lows with the December Henry Hub contract down 6% over the last week. However, a loaded LNG vessel stuck at the APLNG plant on Curtis Island in Australia due to power failure was a focus for the market, possibly causing disruptions.
Metals jumped with the lower US$ helping sentiment. Copper jumped 1% to $8,451 though nickel surged 4% to $16,730. The sharp bounce in nickel appeared to be driven by a report published by SMM noting that “Indonesia must establish specific nickel prices to reflect the market” and that a new pricing mechanism was discussed at an SMM conference in Bali on Tuesday. SMM and the Indonesian Nickel Miners Association signed an agreement to create an Indonesian nickel price index earlier in the year. A judge in Panama ruled against a law approving a contract with First Quantum, throwing into doubt the massive Cobre Panama mine which accounts for about 1.5% of global copper production. It’s not clear whether First Quantum will have to immediately suspend operations or appeal the ruling. Gold also jumped sharply, up 1.3% to $2,040 and up 2% so far this week.
Iron ore showed clearer signs of the aggressive intervention by China’s NDRC. Over the last week or so, the NDRC has confirmed that it has sent personnel to the Dalian Exchange in a move to “jointly study and strengthen the supervision of iron ore market”, conducted research on steel, iron ore and other commodity indices, and is “studying and strengthening the supervision of iron ore at port”. The December SGX contract is down $3.40 from the same time yesterday at $128.00 while the 62% Mysteel index is down $4.05 at $129.70.
Day ahead
At 11:30am Syd, the Australia October Monthly CPI Indicator is expected to be a softer print given the larger proportion of goods items being measured in the month (Westpac f/c: 5.3%yr; market f/c: 5.2%yr). Construction work should experience further gains from public works and business construction in Q3 (Westpac f/c: 1.3%; market f/c: 0.3%).
At 12pm Syd, we expect the RBNZ will leave the OCR unchanged at 5.50%. The RBNZ’s forward profile for the OCR is likely to be little changed and suggest no change in the OCR in 2024. On balance, recent data will have left the RBNZ more comfortable with an ‘on hold’ stance. Notably, price data indicates that imported inflation is easing faster than previously anticipated. In addition, we have continued to see weakness in cyclical demand indicators, such as retail spending, the PMIs, credit growth and imports. Short term inflation forecasts will be reduced, but the longer-term profile will likely be little changed. The RBNZ will be keen to ensure as much of the recent increase in mortgage rates remains in place for a while.
Eurozone: A slight improvement in economic confidence is expected in November (market f/c: 93.6pts).
US: Growth in wholesale inventories will likely remain low in October as uncertainty around the demand outlook lingers (market f/c: 0.2%mth). A small upward revision is expected in the second estimate to Q3 GDP (market f/c: 5.0% annualised vs preliminary 4.9%).
The Federal Reserve’s Beige Book will provide an update on economic conditions across the regions. Retiring Cleveland Fed president Loretta Mester is also due to speak.
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