Markets Daily
Bond yields fell after the ECB accompanied its 75bp rate hike with less hawkish guidance. That, and some solid US GDP data, lifted the US dollar, AUD/USD down to 0.6450. US earnings continue to weigh on equity sentiment. Today’s calendar includes the Bank of Japan meeting and US Q3 employment cost index.
Yesterday
After tremendous gains in recent years, Australia’s terms of trade weakened in Q3, export prices -3.6% and import prices +3.0%. Iron ore and coal led the export price decline while prices of imported electrical machinery and appliances rose 5.1%. FX markets were mixed, Chinese yuan weakness resuming and most G10 currencies slipping versus USD but JPY gaining. AUD/USD was quiet for several hours, then rallied 40 pips to 0.6520, only to slide back to 0.6485. Regional equities mostly outperformed the negative lead from Wall Street, including the ASX 200, +0.5%.
Currencies/Macro
The US dollar rose against most G10 currencies on the day. EUR/USD fell from 1.0080 to 0.9965 (1.0040 pre-ECB). GBP/USD was a little more resilient, -0.5% to 1.1565. USD/JPY ranged between 145.11 and 146.93, overall net unchanged around 146.25. AUD/USD reversed from 0.6520 late Sydney to 0.6426, eventually down about 45 pips at 0.6450. NZD/USD largely held its ground around 0.5830. AUD/NZD thus fell 65 pips to 1.1070.
The ECB raised its policy rates by 75bp, as was widely expected, taking its deposit rate to 1.5% and its refinancing rate to 2.0%. The statement indicated further tightening ahead, but dropped the phrase "next several meetings", which was interpreted by markets as a potential slowdown in tightening pace. It said, ”With this third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation”, compared to the previous meeting’s “Based on its current assessment, over the next several meetings the Governing Council expects to raise interest rates further”. In the press conference, President Lagarde said that “we have more ground to cover” and they could still hike for “several meetings”. Later reports indicate the council reportedly debated whether to acknowledge “substantial progress” in normalising monetary policy, with some concerned that it may signal slower tightening ahead. It was also later reported that three council members preferred a smaller 50bp increase. On quantitative tightening, a broad strategy, but not a start date, for balance sheet reduction is expected at the December meeting.
US GDP in Q3 rose at an annualised pace of 2.6% (est. 2.4%, prior -0.6%), with personal consumption rising 1.4% (est. 1.0%, prior 2.0%). Exports rose 14.4% and imports fell 6.9%, business fixed investment rose 3.7%, residential investment fell 26.4%, and inventories fell 0.7%. The GDP chain price index slowed to 4.1% from 9.0%, and the PCE price index slowed to 4.2% from 7.3%.
Interest rates
The ECB delivered an expected 75bp hike, with slightly less hawkish rhetoric interpreted by markets when officials dropped the words of hikes continuing for "several meetings". Markets saw this as opening the door to a potential slowdown of the central bank’s rate hike pace. 10yr Bund yields fell 15bps, 10yr Italian bond yields fell 32bps, and 10yr gilt yields fell 18bps on the day. We also saw the Bund and gilt yield curve bull steepen.
US bond yields fell, taking its trend from the rally in Europe, as well as GDP outcomes that showed a strong US economy. 2yr government bond yields fell from 4.46% to 4.31%, and 10yr government bond yields fell from 4.08% to 3.91%. Markets are pricing the terminal rate to be 4.75% in March 2023.
Australian bond yields took trend from global price action, the curve bull steepened overnight. Domestic markets will await next week’s RBA policy meeting, where a 50bp hike is 20% priced in. 3yr government bond yields (futures) fell from 3.50% to 3.35%, and 10yr government bond yields (futures) fell from 3.92% to 3.77%. The AU-US 10yr spread was more inverse on the back of AU outperformance, current at -16bps.
Credit indices were relatively subdued with Main half a bp tighter at 113.5 and CDX a bp wider (93.5) as markets saw a cautious open ahead of the ECB. Cash spreads were little changed, Europe saw a zero session for primary (ECB) and the US saw just the 2 IG deals as Barclays completed a USD5bn post earnings deal including USD1.5bn of 4nc3yr and 6nc5yr and USD2bn of 11nc10yr which required NICs of 15, 25 and 30bp respectively, while GS stuck to the short end with its USD2bn 2yr deal.
Commodities
Oil prices rose as US Q3 GDP confirmed recession had not arrived and as the EU-US plan to cap the price of Russian oil exports reportedly being scaled back. Bloomberg reported that only the G7 and Australia had committed to abide by it. Brent crude oil rose 0.9% to $96.58/bbl, WTI 0.6% to $88.55. Dutch TTF natural gas futures rose 2.9%, the third consecutive daily gain after steep falls in mid-October.
Comex copper closed down -0.5% after Thursday’s 4.4% squeeze. LME base metals were mostly softer, nickel, aluminium, lead and zinc all closing lower while tin and cobalt were little changed.
Gold was little changed at $1663/oz. Iron ore fell -6.2% to $82.25/tonne – the lowest since March 2020. Iron ore has fallen each day since the conclusion of the CCP Congress on Sunday, as gloom over China’s growth outlook deepens.
Day ahead
Australia: Construction input cost inflation will be the key focus of the Q3 PPI release.
The Bank of Japan meeting concludes today with the statement, quarterly forecasts and Governor Kuroda press conference. There is no fixed time for the announcement but the 22 September statement was 12:51pm Syd. Every forecaster in the Bloomberg survey expects the key rates to be maintained, notably the 0% yield target on the 10-year JGB (+/-0.25%). BoJ officials continue to argue that while headline and CPI ex-fresh food (the official target) have risen to 8-year highs, it is a cost-push move and that without wages picking up, it will not be sustained. Still, there will be tension for JPY around the meeting and the press conference.
NZ: The recent pick-up in jobs growth should continue to forge ahead in September with another robust gain in the monthly employment indicator (Westpac f/c: 0.5%).
Eur/UK: European consumer confidence has collapsed to historic lows and will continue to be a major drag on broader economic confidence in October (market f/c: 92.3). Ongoing rate hikes should see annual price growth momentum in the UK’s Nationwide house prices continue to slow in October.
US: The Q3 employment cost index is expected to signal robust wages growth given the historically tight labour market (Westpac f/c: 1.2%). The strength seen in the September CPI report will also appear in the PCE deflator (Westpac f/c: 0.3%mth headline; 0.6%mth core). Indeed, still elevated rates of inflation will continue to pressure real personal income, hence risking further weakness in personal spending (Westpac f/c: 0.2% and 0.3% respectively. Pending home sales should also continue to decline in September (market f/c: -4.0%), and a downward revision is anticipated in the final estimate of October’s University of Michigan consumer sentiment survey (market f/c: 59.6).
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