FX

AUD – AUD looks to be tentatively basing just ahead of the 0.6685-0.6700 region, an area rich in support levels, but there's still some impactful risks to navigate, including US PPI, which contains a lot of PCE-relevant details and has much higher stakes after the less than ideal CPI, a fiscal policy briefing this weekend by China's Finance Ministry, not to mention Sept local employment and China's monthly batch of Sept. activity data+Q3 GDP next week. A less than benign US PPI, followed by an underwhelming China fiscal briefing would probably see AUD take out support levels and test support around 0.6625, alternatively a benign US PPI and reassuring China policymaker messaging matched with upsized fiscal plans could see AUD back above 0.6800. We have a slight lean towards the former less than ideal scenario for AUD - if the NDRC Monday briefing is any guide expectations are vulnerable to disappointment. Locally, RBA communications are subtly sounding less hawkish and strident too, ahead of what is a likely soft Q3 CPI 30 Oct, which can open the door to a further dialing down of their hawkish rhetoric at their 5 Nov meeting. All told not the most ideal backdrop for AUD/USD near term.- RF

USD – The persistent grind higher in US yields may be taking a pause after a solid but underlyingly benign CPI release and jobless claims numbers reflecting a bit more than just a bit of hurricane impacts. The devastation from hurricane Milton may not be as severe as feared but is still likely to weigh on sentiment and the swing in polls towards Trump should support USD if not bonds. The CPI release will be seen as assuring markets of the Fed’s progress on its dual mandate and the likelihood of Powell’s more cautious and gradual path. The potential return of US economic exceptionalism and US earnings period (financial firms on Friday) will also be key for sustaining USD’s rebounds while geopolitical tensions and the US election remain key issues. Current DXY squeeze could push into the 104’s. Should USD momentum falter, support at 101.80 will be key for sustaining the recent turnaround.

EUR – ECB officials continue to acknowledge that their October policy meeting is live, despite noting caution around the persistence of Services CPI and wages growth. Markets are pricing -24bps for next week’s ECB meeting in addition to an easing in December (cumulative -49bps of easing). Eurozone data may have been mixed but continue to suggest further regional economic weakness. Updated German Government forecasts highlighted the potential of contraction for 2024, adding to the rewinding of prior yield spread support for EUR along with the potential of US exceptionalism. The extent of pullbacks from EUR/USD’s failed attempts to breach 1.1200 suggest that the EUR is now more likely to establish a lower 1.08-1.11 range.

JPY - PM Ishiba has made it clear that he will support the nascent economic recovery into Japan’s 27th October elections and intentions for a further budget should he win. Although BoJ may be cautious over any near-term tightening, their recent communications have endorsed their projections of economic recovery with an increased focus on potential for wage growth into 2025 ahead of autumnal Rengo negotiations. Officials have stressed concerns over volatility in financial markets, overtly mentioning excessive JPY easing, which suggests that USD/JPY rebounds will find more pronounced messages of official “concern” above 150.00. The ensuring of growth potential into the elections also suggests the USD/JPY declines will be supported and so an effective 144-150 range may well develop.- TR

NZD - Near term risks to NZD/USD remain negative. It has retraced 62% of the Jul-Sep rally, and if 0.6060 support gives way, we’d be targeting 0.5980. Two major factors remain influential: the USD is strengthening as Fed easing expectations are pared and geopolitical risks rise, and NZ-US yield spreads are now negative (the 2yr OIS spread is at -22bp). On the latter, the RBNZ this week cut the OCR by 50bp and said nothing to dissuade markets from expecting another 50bp in November. NZ-AU yield spreads have also fallen significantly, but AUD/NZD has lagged the move. A catch-up would take the cross beyond 1.1150.-IS

Rates

US Rates – A stronger CPI data print out overnight and a spike in jobless claims print saw the UST curve twist steepen over the session, the UST 2 year falling to 3.99% and 10 year rising to 4.09%, a two month high. CPI printed slightly stronger to the upside (+0/2%m/m, 2.4%y/y vs. est. 0.1% m/m, 2.3%y/y) followed by a spike in initial jobless claims, although some of this may be attributed to the impacts of Hurricane Helene. FOMC member Bostic said he could see November being a pause, however, Goolsbee, Williams and Barkin agreed that inflation was overall headed in the right direction. Yields were also influenced by the move in higher oil prices and a firmer 30 year auction, weighing on the long end of the curve.

There is no longer a 50bp hike factored-in for any of the next 4 meetings, whereas before there was at least one, and the November meeting is now around 75% fully priced for a 25bp cut. Further out the curve, into 2025, a further full 25bp rate cut has been removed from the profile. That is a material shift and one that will set the tone for price action across the UST curve for weeks to come. The market looks towards the PPI print, which is expected to slip slighty in December.

Outright: We have been expecting a volatile, range-trade to proceed for some time. So the recent price action has not been surprising. Of course the more pressing question this week is whether the move above 4% is likely to be significant and sustainable? While some of the most recent price action is more likely to be position covering than anything else, we certainly expect an exploration of higher yields to be the near term market focus with 4.15% a realistic target near term. The more medium question is whether an overall “buy the dip” tactical approach is still prevalent. We think it will be, given then that the easing cycle has only just begun, but the new levels are yet to be established.

Curve: The US 2s10s curve has moved to almost +10bps after being almost flat post the payrolls data. The question is whether or not the broader curve steepening phases is over. We do not think so, but would expect the trend to be supported more by bearish impulses than bullish drivers for now. Even so, the pace of the steepening impulse has certainly slowed significantly.

10yr Spread to Bund: The UST underperformance has pushed the spread wider, to 181bp. That is the widest it has been since early August and we had flagged that the 185-190bp region is now the next target. We think that can be easily achieved in coming days. – DM & UC

AU Rates – The AU rates market opened the day slightly mixed following a slight upside surprise to US CPI, jobless claims and mixed Fedspeak. The yield curve slightly twist steepened in line with USTs. We expect this trend to continue given that the RBA is perceived to be more hawkish than other central banks and the data out of both China and the US certainly imply that they will remain patient observers for months to come. There is now very little factored-in to the forward profile for the RBA until the February meeting. That is largely in line with our own forecast. Indeed, that timeframe could be increasingly perceived as the earliest possible meeting, with all the risks pointing to an even later start. There was little news out from the RBA’s Sarah Hunter speech yesterday, and the market now looks to US PPI data for guidance and locally, employment figures out next week to drive price action.

Outright: Both bond futures contracts are now sitting just above technical support levels – 3yrs @ 96.20, 10yr @95.75. A breach of those levels opens the way for a further 15-20bp decent. The key market debate remains around just how much of a lag the RBA will have versus Fed policy combined with the global search for yield. The latter is likely to be dominant short term , and stretch valuations further. The latter will act more medium term, with a “buy the dip” mentality, both domestically and globally at this time of the cycle, serving to cap the extent of bearish corrections.

Curve: While there will still be incremental bull steepening impulses we think in an unchanged policy environment global yield-seeking behaviour will be a strong headwind limiting the size and pace of any steepening from current levels. We expect the 3s10s futures spread to settle around the 50bp in coming days.

Swap Spreads: We would be slightly paid EFPs but do not expect a material shift either way. Swap spreads remain near their narrowest levels and while there has been heavy payside flow as a result of the inversion in the 3m BBSW-3yr spread, it has been overwhelmed by receive-side flows across the curve. That talks to the macro environment we are in and there is little reason under that scenario to expect the narrow spread trend to reverse anytime soon.

Semi Spreads: NSWTC and SAFA have opened the October issuance season, however, we have seen a relatively quiet week of semi-issuance likely due to the shortened week. Whilst it is well known there are more semis to come this month, we expect the market to nonetheless make concessions for the new supply. That will see spread narrowing impulses hard to sustain, although given where we are in global yield cycles, any material corrections will continue to attract investor support. NSWTC announced that it had added the Sydney metro assets to its sustainable asset pool, potentially allowing them to bring a deal to the market. As we know, October is a busy month of issuance and a month for coupons. We have considered a deal in the Sep-35s which have only been tapped once this year post issuance. It is also a 4.75% coupon and thus raises more cash value than other bonds on the TCorp labelled curve.

10yr Spread to UST: Cross market spreads will relatively range-bound as the policy debate dominates. The benchmark AU-US 10yr bond spread will still likely widen on US rallies and narrow or be flat on selloffs, but remain under the recent wides of 25bps. We would rather enter narrowers at range highs and be square near the lows. – DM & UC

NZ Rates - The RBNZ started its easing cycle in August, and accelerated it with a 50bp cut in October. Markets have priced a 100% chance of another 50bp cut in November, with the whole easing cycle expected to be worth at least 250bp. While that suggests limited scope for further downside in swap rates, there is potential for the market to undershoot. 2yr swaps last week made a cycle low of 3.50%, and that level could be retested during the month ahead. NZ Q3 CPI data next week will be the main influence on the RBNZ’s stance, and in turn, market positioning. Our economists will finalise an estimate following today’s monthly price data.

The 2-10yr swap curve continues to steepen, at +38bp the highest since March 2022. Our NZ-AU 2-10yr steepener trade (entered in Feb at -90bp) is at -6bp, and while it is technically quite stretched (our take profit stop is at -20bp), we wouldn’t rule out further gains following the dovish RBNZ outcome. NZGB i-spreads have fallen slightly from record highs over the past week, the 10yr at +34bp, helped by rising outright yields. Near term performance will depend mainly on the direction of outright yields, with fresh fiscal news not until 7 November (government financial accounts) and then 17 December (HYEFU). Yesterday’s tender saw solid demand for the 2041 but subdued demand for the 2034.-IS

Funding, basis, and liability management

There has been a large narrative shift in the rates markets for liability managers over the last week. The US jobs print, last night’s CPI m/m number, and subsequent rhetoric from several Fed speakers suggests a far slower pace of delivery of rate cuts, and indeed the terminal rate has shifted higher. Unlike much of the last few years, the inflation risk has abated a long way, but that won’t deter some of the more rusted on afficionados of inflation risks.

But the ‘no landing’ narrative, which is the gentle deflation of exuberance, without the bubble looking for a pin to burst it, is gaining traction and this could mean a slower pace of cuts.

For context in Australia, readers will know the Australian economics team pushed out the first RBA rate cut into Feb 2025. Markets appear to even be pushing back on that at the moment, though it must be remembered there is a lot of data still to come. Dec OIS, which we have flagged as being too richly priced for rate cuts, has lifted from a cash rate forecast of 4.07% to 4.255%, taking out a very large chunk of risk of rate cuts this year.

Away from us, there is still one forecast for a cut, and a few rather curious hike proposals, including a curious 50bp hike from one strategist from the RBA in November. Rather than cast shade on these headline grabbing forecasts (specifically the latter), simply understanding where the RBA is at, will give a better clue. The labour market is still firm, but forward indicators are softening. Prices in some respects are still rising, but subsidies are helping, and inflation is falling, but perhaps not fast enough. Confidence has risen as the prospect of rate cuts has lifted (or hikes have abated). The consumer has not faced its own fiscal cliff on mortgages and activity numbers are neither disastrous nor strong.

All of this has meant that the rates curve, overstretched as we have described it, has pulled back from terminal rates that were lower than our forecasts. The biggest message we had been pushing, was that the inversion of the floating to fixed rate curves offered a very strong opportunity at levels not seen since the cutting cycle of the GFC, and they represented extreme cutting at a time when terminal rates were nowhere near as high and the outlook not as concerning. Using mid-rate levels a BBSW/3-year spread of -100bp has now pared back around 50% of the move.

It is far less compelling for hedgers to add here, but a structured trade of selling caps after the sell off is one way to look at the market. On the other side of the balance sheet, fixed income investors might be looking at the higher yield structure and edging their way back into the markets.

In FX/OIS basis, A$ 1-month tenor is still quite inverted, but the NZ$ 1-month, while still inverted has shifted less negative. This suggests some tightening in the NZ funding markets. In the forward implied yields, NZ tenors are at cycle lows, while Australian forward implied yields have followed the removal of rate cut pricing in OIS and are ticking higher. This is also illustrated in the rise of the 6-month BBSW rate.

In the Wrap yesterday we discussed the rise in yields as being an attractive level for depositors to consider term deposits, given the lack of substantial inversion past the 2-year mark, and that 1-2 years are close to 5%.

Xccy basis and FX/OIS are lower in the short end, and term basis has also started to drop. The front break is now at the lowest level since the start of the year, while term rates are 1.5bp from the highs. AU-US 5y5y has edged lower to 13.5bp and should start to trade lower from here in our view.

We expect that the Kangaroo issuance flow picks up as the month goes on, given the coupons being paid out and the HQLA/high grade issuers that are planning on coming to market. We have seen a few SSA/Kangaroo deals this week and banks issuing in the front end. There was a USD PP deal in the 15-20 year area. In NZ$, ASB issued EUR500m 5-year on Wednesday and NZD basis is still quite inverted. It may provide flow for a Kauri borrower to come to market but given that market has not seen a deal since the start of January, we would expect the flow to need to clear via banks not a deal. -MW

Commodities

Crude:

We remain a little surprised that crude has not been able to push above $80. The commentary coming out of IDF Gallant suggests that the upcoming Israeli retaliation for the Iranian missile strikes will be significant. Gallant warned that the strikes “will be deadly, precise and above all surprising” and that “they [Iran] will not understand what happened and how it happened”. Now there are a number of red lines here, and the extent to which the IDF is willing to approach, or even cross those red lines will be critical for markets. The first would be Iranian energy assets. As noted yesterday, Iran is currently producing circa 3.2mbpd and exporting 1.7/1.8mbpd. Were Isreal to target Iran’s energy facilities including the massive Kharg Island which has capacity to export as much as 7mbpd with up to 10 VLCC able to berth simultaneously, the impact on crude prices would be significant. Hence, we see heightened risks that prices could quickly vault above $80 and possibly $85 were that red line to be crossed. The other red line of course would be Iran’s nuclear infrastructure. Ahead of any such possible attack, Iranian Brigadier General Rasoul Sanaei-Rad warned that “some politicians have already raised the possibility of changes in [Iran’s] nuclear strategic policies” and that Isreal “striking nuclear sites could certainly have an impact on the calculations during and after the war”. Clearly, the Biden call with Israeli PM earlier in the week would have heaped pressure on Isreal not to cross either of those red lines. But Israel has clearly pushed much further and harder than expected into Lebanon, hence the very clear risk that we do see higher prices near term. However, we would still want to use a spike in prices as an opportunity to sell. The return of Libyan barrels is causing a glut at Mediterranean refiners with wires reporting that cargoes are being resold into Northern European ports. The doubling of Libyan production is also impacting volumes from Nigeria, where some supplies for loading this month are still hunting for buyers, according to wires. And Bloomberg also reported that Europe was set for the biggest diesel influx since the ban on Russian supply, with the surge in deliveries largely being driven by low demand for fuel in the US. None of this bodes well for crude prices in the medium term, and certainly argues for selling into European gasoil on strength.

Metals:

Copper should find something of a base in the $9,400/ $9,600 range as we await the slew of China data with September trade on Monday and Q3 GDP plus IP and retail sales for September on Friday. That should help us get a better understanding of how much impact the massive stimulus that has been announced to date is having on the Chinese economy, with all eyes on this weekend’s fiscal briefing. However, higher frequency data suggests that activity in China is only really stabilising at super weak levels rather than seeing the huge boost that markets are hoping for. Thus, we tend to see risks that copper is head back towards the $9,300/ $9,500 level. And given China continues producing record after record amounts of aluminium, $2,500 and below looks the obvious target for aluminium.

Iron ore:

We noted at length in Aug and Sep, the downside risks to rebar prices as Chinese authorities pushed ahead with new quality standards on September 25. Given the backdrop of property starts at the lows back to 2006, the collapse in rebar prices to 2017 lows should not really have been a surprise. Now, with the benefit of hindsight, the RRR and mortgage rate cuts announced the day before the new quality standards came into effect should also not really have been a surprise. And the subsequent waves of policy announcements have certainly had an impact on rebar prices given that inventory levels dropped to 2019 lows. The spot price of rebar has risen by circa 7% from the lows in September, hitting a high back to August. However, given that overall steel inventory remains well above average levels and other product such as HRC the same, we don’t think that prices will push much higher – unless of course more stimulus is announced this weekend. - RR

Gold:
An encouraging overnight rebound leaves an overarching supportive trend in place, and with the Mideast geopolitical picture still very combustible. keeping a structural safe haven bid intact, gold can see higher levels near term. We still see $2750/$2850 area on a 1-3mth horizon. Admittedly inflation-hedging demand is less likely to be a source of support as inflation stabilises nearer central bank targets, but global real interest rates are trending lower. In time we suspect the strong Sept US payrolls will prove to be an outlier to a softening trend and the Fed will remain on track to deliver 150bp in rate cuts by end-2025. Gold should find support not far from current levels, around the $2600/oz area.- RF

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