Markets Daily
Bond yields and the US dollar rose after some hawkish Fedspeak, while equities softened slightly. AUD/USD slipped below 0.6700. The UK confirmed sharp fiscal tightening. Today’s calendar includes Japan October CPI and UK October retail sales.
Yesterday
Australia total employment rose 32k from -4k (revised from +1k), while the unemployment rate slipped to 3.4% from 3.5% as the participation rate: held at 66.5%. It was a strong update even though holidays, sickness and floods continue to hold back the recovery. Unemployment is now the lowest rate since November 1974. AUD/USD paid little attention, wandering around 0.6740. It later slipped below 0.6700 before stabilizing, with some reports of new strains in Chinese banking. Equities were mixed but mostly negative, the ASX 200 outperforming with a 0.2% gain.
Currencies/Macro
The US dollar rose against most G10 currencies on the day. EUR/USD fell from 1.0400 to 1.0365. GBP fell half a cent to 1.1865. USD/JPY rose 0.5% on the day to 140.15. AUD/USD fell as far as 0.6634, then trimmed losses to 0.6690. Similarly, NZD fell from 0.6170 to 0.6065, then recovered to 0.6130. AUD/NZD fell 50 pips to 1.0915.
US housing starts and permits in October were slightly higher than expected at 1.425m and 1.526m (est. 1.410mn and 1.514m). Weekly initial jobless claims were close to estimates at 222k (est. 225k), with continuing claims at 1.407m (est. 1.510m). The Philadelphia Fed’s business survey fell to -19.4 (est. -6.0, prior -8.7) due to a decline in general activity, with new orders at -16.2 (prior -15.9) and employment at 7.1 (prior 28.5). Prices received were elevated at 34.6 (prior 30.8). The Kansas Fed’s survey was also weak at -6 (est. -8, prior -7), with new orders at -16 (prior -12), export orders at -11 (prior -5), and production at -10 (from -22).
Hawkish St. Louis Fed president Bullard reiterated rates will need to be increased further as they are not yet in restrictive territory, with his Taylor-rule based estimates indicating somewhere between 5% and 7%: “In the past I have said 4.75% to 5%.... based on this analysis today, I would say 5% to 5.25%. That’s a minimum level. It’s easy to make arguments that before this is all over, you’d have to go to much higher levels of the policy rate than 5.25%, but for now I’d be happy to get to the minimal level and that’s why I think the committee is going to have to do more.”
Eurozone CPI for October finalised with little change, at +1.5%m/m and 10.6%y/y (initially 10.7%y/y). Core was unchanged at 5.0%y/y.
The UK Fiscal Update included spending cuts and the largest increase in taxes for 30 years. The OBR assessment estimated that the tax burden will rise to 37.1% of GDP (a post war-record), debt would peak at 97.6% of GDP in 2025, and inflation would run at 9.1% in 2022 and 7.4% in 2023. GDP is expected to contract in 2023 (-1.4%).
Interest rates
US 2yr treasury yields jumped from 4.35% to 4.48% after FOMC member Bullard’s hawkish comments, while the 10yr yield rose from 3.68% to 3.80%. The 2-10yr curve inverted further to -68bp – lowest since 1981. Markets currently price the Fed funds rate to be 53bp higher at the next meeting in December, peaking at 5.00% in March 2023.
Australian 3yr government 8ond yields (futures) rose from 3.19% to 3.28%, while the 10yr yield fell from 3.58% to 3.61%. Markets currently price the RBA cash rate to be 22p higher at the next meeting in December, and to peak at 3.79% in September 2023.
New Zealand markets are pricing the RBNZ OCR to be 63bp higher at the next meeting on 23 November, and to peak at 5.06% in May 2023.
The recent rally in credit took a breather last night as indices closed wider (Main out 2bp to 98, CDX a bp wider at 84), albeit CDX remains within a couple of bp of it series lows that were recorded this week, and cash credit remained firm to be flat to a bp better. Euro primary markets remained open with PACCAR leading the corporate ticket with its EUR500M 3yr deal at MS+55 (BBSW+107), however the US saw a zero session as issuers assessed the evolving landscape.
Commodities
Fed speakers talk of 5%+ rates plus rising ‘mild recession’ chatter sent crude to 6-week lows with the December WTI contract down $3.73 at $81.86 as we write while the January Brent contract is down $3.03 at $89.83. Despite missiles landing in Poland, an Israeli ship being hit by an Iranian drone, the Druzhba pipeline being temporarily shut, China announcing a 16-point plan to support the construction industry and some easing of China Covid restrictions, WTI is down 5% this week, emphasising how much impact global growth expectations are having. The Dec22 Dec 23 WTI spread has dropped below $6, approaching lows back to February.
In gas news, the Commonwealth LNG plant in Louisiana’s Gulf Coast received FERC approval despite strong opposition from environmental groups. The plant will add 8.4mta of US liquefaction capacity with operations projected to begin Q3 2026. Meanwhile in Europe, Germany effectively hit 100% full in terms of gas in storage while the EU is at 95.5%. EU energy ministers will meet next Wednesday to try to advance a plan that would see a fixed ceiling for the TTF contract being reviewed monthly and deactivated if triggers no longer apply. The December TTF contract is down 45% so far this quarter and at lows back to June.
Metals slumped on recession talk with copper down a hefty 2.1% at $8,118 and zinc down 1.5% at $3,008. However, nickel was hit the hardest, down 7.5% at $25,450 and is down 1.9% over the last 5 days despite having been up 20% between Friday and Tuesday. Rusal welcomed the LME decision not to ban new Russian metal but raised concerns that a monthly report of the origin of metal on warrant at LME warehouses would refer to Russian metal only. Rusal requested that “any future reports would contain the split of metal from all regions, similar to the annual release”.
Finally note that iron ore markets were mixed at 1-month highs despite news from Mysteel that sintering plants in Tangshan cut production by 30% from the 15th of November for 10 days due to low profitability and persistently high levels of steel inventory at major steel mills. The December SGX contract is down 20c versus the same time yesterday at $97.60 but the 62% Mysteel index is up 30c at $98.15. The SGX contract is up 26% so far this month.
Day ahead
Japan: Imported components of inflation will feature prominently in the October CPI given the sustained depreciation of the Yen over the month (market f/c: 3.6%yr).
UK: Inflation and interest rates will continue to weigh heavily on GfK consumer sentiment in November (market f/c: -46). Although small bounce in retail sales is anticipated in October, the underlying weakness in consumers’ real spending capacity is set to persist (market f/c: 0.5%).
US: Declines in existing home sales will be sustained in October as interest rates continue to rise (market f/c: -6.6%). The leading index will continue reflecting a materially weak growth outlook in October (market f/c: -0.4%). The FOMC’s Collins is also due to speak.
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