Markets Daily
Bond yields rebounded and the US dollar rose, despite inflation declining as expected. Month-end adjustments may have played a role. AUD was somewhat resilient at 0.6605. The calendar focus is comments from Fed chair Powell, while data includes China Caixin manufacturing PMI and the US manufacturing ISM.
Yesterday
Australia private capex spending in Q3 rose a subdued 0.6%qtr, a little weaker than the market expected (median forecast of +1.0%, range of -1.5% to +2.7%) but above Westpac’s forecast of -0.6%. Capex plans for 2023/24 were upgraded modestly from 3 months earlier. Our interpretation is that on current plans, the value and volume of capex spending in 2023/24 will be higher than in 2022/23. However, current plans imply a modest decline in real capex spending over the next 3 quarters - off an elevated starting point. Australia dwelling approvals posted a stronger than expected 7.5% rise in October but the detail is more subdued. As is often the case with approvals, big swings in ‘units’ can drive significant monthly volatility. This was the case in October, with private unit approvals up 19.5% in the month – a gain that is almost certainly ‘noise’ rather than the beginning of a sustained up-trend. Private credit rose 0.3%mth, 4.8%yr, the slowest pace since August 2021. The Aussie wobbled briefly on sub-consensus China PMIs (manufacturing 49.4, services 50.2) but then rallied to 0.6650, up 35 pips. A rebound in regional equities seemed to help, morning losses turning into gains, including the ASX 200 +0.7%.
Currencies/Macro
The US dollar was about flat versus CAD and NZD but otherwise firmer against G10 FX on the day. EUR/USD fell from 1.0970 to 1.0885. GBP/USD slipped -0.5% to 1.2625. USD/JPY rose from 147.00 to 148.20 as Treasury yields rose. AUD/USD dipped to 0.6571 at one point but later steadied at 0.6605, barely lower on the day. NZD/USD was also choppy but ultimately flat at 0.6160. AUD/NZD was 15 pips lower at 1.0730.
The US core PCE deflator in October rose 0.2%m/m and 3.5%y/y (as expected, prior 3.7%y/y). Weekly initial jobless claims were as expected at 218k, but continuing claims rose to 1.927m (est. 1.865m). The MNI Chicago PMI jumped to 55.9 in November (est. 46.0, prior 44.0), new orders, employment and inventories higher while prices paid fell slightly. Pending home sales in October made another record low with a fall of -1.5%m/m (est. -2.0%m/m).
Eurozone CPI in November fell -0.5%m/m for 2.4%y/y (est. -0.2%m/m and 2.7%y/y, prior 2.9%y/y), with core 3.6%y/y (est. of 3.9%y/y, prior 4.2%y/y).
Interest rates
The US 2yr treasury yield bounced off 4.61% (five month low) to 4.68%, while the 10yr yield bounced off 4.25% (lowest since mid-September) to 4.32%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 14 December, with a 40% chance of a rate cut in March 2024.
Australian 3yr government bond yields (futures) rose from 3.98% to 4.11%, while the 10yr yield rose from 4.35% to 4.51%. Markets are pricing no change at Tuesday’s meeting, but a 35% chance of one in February 2024. New Zealand rates markets are pricing the OCR, currently at 5.50%, to be unchanged on 28 February, with no further rate hikes in this cycle (despite the RBNZ’s November MPS indication), and a 50% chance of a rate cut in July 2024.
European primary markets saw the number of offering slow on Thursday with two from the corporate sector and the same number from financials. The US market also experienced a quiet session with only one high grade issue coming from business development company Golub Capital. Itraxx Europe widened 0.9bps to 67.6bps with BNP Paribas and Barclays the best performing contracts and Alstom and Telia a drag on the index. CDX IG widened 0.4bps to 63.4bps; Cox Communications and Radian had the best performing contracts while Hess and Occidental underperformed. Cash bonds tightened 2.2bps to 139.2, the best performing sectors were communications and subordinated financials, while industrials and consumer staples were the worst performing.
Commodities
Crude markets saw an outside range day with optimism that OPEC+ had agreed to make additional cuts and Russia and Saudi Arabia extending cuts into Q1 2024, giving way to pessimism with Angola rejecting its cap, saying it would produce 80kbpd above its cap from January. The January WTI contract is last down $1.77 at $76.09 while the January Brent contract is down $1.96. The roughly 900kbpd of additional cuts was clearly not seen as enough by the market given that the US reported a record high of 13.24mbpd the day before – more than any country in history - and the IEA forecast that the market will flip into surplus as a result of non-OPEC flows earlier in the month. The OPEC+ statement also noted that the cuts will extend “until the end of March 2024” when barrels will be “returned gradually subject to market conditions”. In other big news, Brazil said it will join the cartel next year in January, which was met by a round of applause from the online meeting. Saudi Aramco will announce official selling prices next week and a Bloomberg survey suggests a cut of $1.05 on Arab Light into Asia for January deliveries.
Metals were mixed with copper reacting to risk on moves in other asset markets, up 0.6% to $8,469 but aluminium slumping 0.9% to $2,194, zinc down 1.1% to $2,472 and nickel down 2.8% to $16,635. Chile reported October copper production was down 4.4%yy at 464,311t and traders remained focused on the Panama Cobre shutdown. Bloomberg reported that the EU may be leaning towards conceding some key issues on the so-called Global Agreement on Sustainable Steel and Aluminium (GSA) due to concern about “the prospect of another Trump term”. EU trade chief Dombrovskis said that “to avoid an unnecessary escalation, we have agreed that the US should improve the administration of the tariff-rate quotas for EU exports of steel and aluminium” and that tariff-rate quotas “were highly likely to be rolled over”.
Iron ore saw a modest bounce with the January SGX contract up $1.65 from the same time yesterday to $129.15 while the 62% Mysteel index rose 70c to $131.65. The weaker than expected China manufacturing PMI had little impact on the market, nor did the sharp slide in the Hang Seng property and construction index which has fallen by circa 5.5% so far this week as optimism about fiscal policy developments has waned.
Day ahead
Japan: Additional potential for wage growth should be encouraged by tight labour market conditions, as evinced by a likely little-changed jobless rate for October (market f/c: 2.6%).
China: Recent stimulus should aid the Caixin/S&P Global manufacturing PMI in time, but for November, conditions will likely remain modestly soft (market f/c: 49.6, due 12:45pm Syd).
Federal Reserve Chair Powell is due to speak at two separate events, those being a fireside chat and a roundtable discussion. The ISM manufacturing PMI is likely to improve but remain in fragile territory in November, a theme that has persisted over most of this year amidst tight financial conditions (market f/c: 47.8). For a similar reason, October’s construction spending data will likely also remain subdued (market f/c: 0.3%mth).
Global: The final estimate to November’s S&P Global manufacturing PMI is due for Japan, Eurozone, UK and US. COP28 has its first full day of meetings and presentations in Dubai where the hope is that climate change conference will deliver a “truly ambitious outcome”.
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