Markets Daily
Bond yields and the US dollar fell after a mixed manufacturing survey and Fed chair Powell’s comments which were less hawkish than expected. AUD pushed up to 0.6670 while the euro underperformed on dovish ECB-speak. Today we see Australia Q3 company profits and inventories and October housing finance.
Friday
Trade was mostly wary ahead of the Powell appearance. The November China Caixin/S&P Global manufacturing PMI was well above expectations, 50.7 versus 49.5 in October. This produced a brief flicker of risk appetite, helping the Aussie reach its session high of 0.6630, but it later faded to 0.6605/10, flat on the day. Regional equities were mixed and the ASX 200 was indecisive, -0.2%.
Currencies/Macro
The US dollar was net unchanged versus the euro but otherwise soft against major currencies Friday. EUR/USD initially fell from 1.0910 to 1.0829, amid dovish ECB comments, but later returned to 1.0890. GBP/USD bounced from 1.2630 to 1.2710. USD/JPY was around 148.10 pre-manufacturing ISM, quickly dropping with Treasury yields to below 147.50, later extending to 146.85. AUD/USD was quiet ahead of the ISM at 0.6615, then began a rally that extended to 0.6676. NZD/USD rose from 0.6155 to 0.6210 – highest since early August. AUD/NZD rose 0.2% to 1.0755.
The November US ISM manufacturing survey remained in contractionary territory at 46.7 (est. 47.8, prior 46.7), with notably mixed components: prices paid up to 49.9 from 45.1, employment down to 45.8 from 46.8, new orders up to 48.3 from 45.5.
Fed chair Powell did push back on speculation on when it may start easing, but in a less forceful manner than was expected. While he reiterated that: “we are prepared to tighten policy further…if it becomes appropriate to do so”, he added that the current policy setting is “well into restrictive territory.”
Canadian employment in November rose 24.9k (est. +14k), but the unemployment rose to 5.8% (as expected, prior 5.7%), with participation unchanged at 65.6%. Wages growth remained firm at 5.0%y/y (est. 4.9%, prior 5.0%).
ECB member Villeroy commented that disinflation was developing faster than expected, that rate hikes were over (absent shocks), and that the ECB could look at rate cuts in 2024.
Interest rates
The US 2yr treasury yield fell from 4.69% pre-ISM to 4.54% (six month low), while the 10yr yield fell from 4.34% to 4.20% (three month low). Markets are pricing the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 14 December, with a 65% of a rate cut in March 2024.
Australian 3yr government bond yields (futures) fell from 4.09% to 3.97%, while the 10yr yield fell from 4.51% to 4.39%. Markets are pricing no change after tomorrow’s meeting, but a 35% chance of a hike 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, and an 80% chance of a rate cut by August 2024.
Credit markets reflected the sentiment with Main in 2bp to 66 and CDX a further bp tighter at 61.5 (both year to date tights) while US IG cash was little changed. Friday did not see any primary supply on either side of the pond, however November closed with US IG supply of ~USD100bn (USD98.6bn) which was around the average volume for the last 10 years, and while expectations for the week ahead remain solid (USD15-20bn), December will see a slowdown with ~USD30-35bn expected for the full month.
Commodities
Crude markets finished a volatile week with another sharp drop as the OPEC+ cuts announced Thursday failed to stem the tide of six consecutive weeks of losses, coming hot on the heels of Wednesday’s weekly inventory report which saw crude stocks rise for the sixth consecutive week to the highest since July even as US exports remained close to record levels. The January WTI contract fell 2.5% to $74.07 while the February Brent contract fell 2.45% to $78.88. The outcome of the OPEC+ meeting clearly left traders disappointed. While the cartel did announce cuts of 900kbpd, they were described as “additional voluntary cuts” which will extend “until the end of March 2024” when barrels will be “returned gradually subject to market conditions”. Bloomberg noted that 5,000 lots of a $40/$30 put spread was purchased on the June ICE WTI contract, suggesting traders were hedging further downside risks into next year. And over the weekend, Brazilian President Lula said that Brazil will never join OPEC+ as a full member, only as an observer. Meanwhile diesel prices hit lows back to mid-July with the January NY ULSD contract down 3.37%.
Metals ended the week with copper surging through its 200-day moving average, closing up 1.9% at $8,625, a 4-month closing high. The slump in the US$, dovish rates comments from Chair Powell, the closure of the Cobre Panama mine, the partial closure of the Panama Canal and risk on move in stocks added to the positive sentiment though other metals were more constrained with nickel up 1.5% to $16,890 and aluminium up just 0.3% to $2,200. Bloomberg noted a sharp rise in copper inventory draws from warehouses in New Orleans as the Panama Canal blockage forced US industrial users to ‘find alternatives’. And several major Chinese copper smelters were said to have agreed a 9% drop in processing fees, in line with an initial deal signed two weeks ago, with the shutdown of the Cobre Panama mine cited as a factor. First Quantum said it had started arbitration over the $10bn Panama mine.
Iron ore markets defied aggressive NDRC interventions, the onslaught of colder weather in China and weak property developer sales with prices holding above $130. The January SGX contract is last down 30c from the same time Friday morning at $131.35 while the 62% Mysteel index is up $1.70 at $133.35. China’s top 100 property developers saw a combined 30%yy drop in contract sales in November while the FT noted that Chinese borrowers are defaulting in record numbers with “a total of 8.54m people blacklisted by authorities after missing payments on everything from mortgages to business loans”. That’s up from 5.7m in early 2020.
Day ahead
At 11:30am Syd we see Q3 Australia data to help shape forecasts for GDP on Wednesday. Westpac estimates that company profits declined in Q3 amid falling commodity prices and a challenging domestic backdrop (Westpac f/c: –1.2%; market f/c: 1.2%). It is likely that inventories also fell in the quarter, but at a slower rate (Westpac f/c: –0.6%).
Australia housing finance approvals should post a larger increase in October (Westpac f/c: 3.2%; market f/c: 1.1%), as strength in construction loans sees owner-occupier loans outstrip that of investor loans (Westpac f/c: 3.3% and 3.0% respectively). November’s MI inflation gauge and ANZ job ads data will also provide a general update on risks.
Eurozone: An improvement in Sentix investor confidence is anticipated in December, in the context of lasting fragility (market f/c: –15.6; prior -18.6).
US: Factory orders in October are estimated to have fallen 3.0%. Durable goods orders are expected to be finalised for that month at -5.4%
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