Overview: The big bond and stock market seen yesterday has continued today. The Reserve Bank of Australia’s reversion to a quarter-point hike stokes hope that the aggressive tightening cycle more broadly is set to slow. The UN’s Conference on Trade and Development became the latest to warn that the synchronized tightening risks a global recession and a prolonged period of stagnation. The large equity markets in the Asia Pacific region rose 2.0%-3.75%. Europe’s Stoxx 600 gapped higher and its is up around 2.2% in late morning turnover, while US futures point to a gap higher opening. Benchmark 10-year yields are off 14-18 bp in the eurozone while 10-year Gilts are off more than 20 bp. The US 10-year Treasury yield is near 3.56%, having peaked on September 28 a little above 4%. The greenback is mixed. The dollar bloc and the Japanese are softer, with the Aussie off around 0.4%. Emerging market currencies are firmer, with the notable exception of the Turkish lira. There is nothing like lower yields to help gold. A week ago, the yellow metal hit $1615 and today it is pushing above $1700 to reach almost $1711. The next target may be near $1730. Oil is firm ahead of OPEC+ decision tomorrow, where a sharp output cut is expected. December WTI is near yesterday’s highs around $83.50. US natgas is stabilizing after falling nearly 6% of the past two sessions on strong US production. Europe’s natgas benchmark is off 1.6% after rallying 2.4% yesterday. Iron ore also firmed. It gained nearly 1.5%, its biggest advance in a week. December copper recover to trade near $350 before stalling. December wheat is consolidating after rising almost 4.7% last week.
Asia Pacific
The Reserve Bank of Australia warned that after four half-point hikes, it
would consider reducing the pace to quarter-point. However, the
market still leaned (60%) in favor of a 50 bp move. The RBA hiked by 25
bp to 2.60%. The smaller move spurred the largest intraday drop in
three-year yields since October 2008 and a 3.75% rally in the equity market,
the largest June 2020. The Australian dollar was sold to about $0.6450
after settling in North America around $0.6515. It recovered and set new
session highs a little shy of $0.6550 before meeting new sellers. The RBA has
two more meetings this year. Governor Lowe indicated that rates and not
peaked. Still, yesterday, the market saw a peak in Q2 23 between
4.00-4.25%. Now it sees the peak closer to 3.50%. The next meeting
in November 1 and the market has about a 70% chance of a quarter-point
move.
Tokyo's September CPI stood at 2.8%, down a notch from 2.9% in
August. However, the underlying measures firmed. The core
rate, which excludes fresh food rose to 2.8% from 2.6%. While that was in line
with expectation, the measure, excluding fresh food and energy, was a little
firmer than expected at 1.7%, up from 1.4%. The government's is using
fiscal policy to help blunt the impact of higher energy and some food prices
through subsidies for energy and wheat. Also, the new travel subsidy
begins next week. The net impact is that there may still be some upside
pressure on prices (especially processed food), but price pressures may ease
starting next year.
The dollar poked above JPY145 yesterday for the first time since the BOJ
intervention on September 22, but today has held in a narrow range below
it. The low was recorded in early Asian turnover near
JPY144.40. On the back of the sharp drop in US yields, the dollar had
slipped through JPY114.20 yesterday. Yields are still falling and that
may help cap the greenback. The Australian dollar rose to a
five-day high near $0.6550 but has faltered in the European
morning. Support is seen in the $0.6450-60 area. On the
daily charts, the momentum indicators are turning from oversold
territory. A base appears to be being forged. Mainland
Chinese markets are closed for the rest of the week and Hong Kong is also on
holiday today. The broad dollar pullback is giving the offshore
yuan a lift. It is up slightly more than 0.5% for the second consecutive
day. The greenback approached the 20-day moving average near
CNH7.05. It has not closed below this average since mid-August.
Europe
The UK continues to recover from last week's dramatic moves. Sterling
has recovered to September 20 levels, having trading to almost $1.1430 today
(the historic low was set seven sessions ago near $1.0350). The 10-year
Gilt yield peaked on a closing basis near 4.50% a week ago and is falling for
the third session to around 3.84%. On the eve of the mini budget, the yield was
closer 3.50%. The Bank of England has bought a fraction amount of bonds
it was prepared to and has now requested that banks identify who is selling the
bonds to it amid ideas that it could be other parties and not the pension funds
and insurance companies that the program meant to help. Since last
Wednesday through yesterday, the BOE bought about GBP3.6 bln of long-dated bond
compared with the capacity to have bought GBP20 bln. The BOE's operation
is scheduled to run until October 14.
For its part, the government dropped its plan to cut the top income tax
rate, which among the most controversial components though it accounted for
about 5% of the GBP45 bln effort. Kwarteng also will bring
forward the full budget announcement from November 23, and there are some
reports suggesting it could come as early as this month. Meanwhile, the
Tory Party Conference is underway and Prime Minister Truss will speak at it
tomorrow. The next focal point may be whether the government proposes an
increase in transfer payments outside of pension that keep up with
inflation. Lastly, note that following its downgrade of the UK credit
outlook to negative, S&P followed up with a cut next year's growth forecast
to -0.5% from 1.0%. The market (median, Bloomberg survey) had it at
-0.2%, while the IMF projects 0.5%, the OECD looked for a flat
performance.
Eurozone producer prices continue to soar. They rose 5% in
August alone and are up 43.3% year-over-year after a 38% pace in July.
Tomorrow the final September services and composite PMI will be reported.
The preliminary estimate saw the services PMI fall to 48.9 from 49.8, which is
the lowest since February 2021. The composite estimate was 48.2. It
was the third consecutive reading below the 50 boom/bust level. The
composite has not ticked up since April. The swaps market continues to
favor a 75 bp hike later this month but the odds has lessened. Last
Monday, it was nearly completely discounted and today, only about 70% chance is
priced. The year-end rate was seen around 2.05% last Monday and is now
closer to 1.88%.
The euro approached $0.9900, its highest level since September 22. The
next target is near $0.9950. However, this may remain out of reach.
The momentum has waned a test on the $0.9800-20 area may be seen in North
America. Sterling closed above its 20-day moving average
(~$1.1295) yesterday for the first time since mid-August. Follow-through
buying lifted it to almost $1.1430 today, where it has stalled. Initial
support is seen in the $1.1280-$1.1300 area. The euro had spiked to
GBP0.9265 at the start of last week, its best level since September 2020.
It has been coming off sharply and today tested the GBP08650 area, its lowest
since September 15. Although the next area of chart support is around
GBP0.8600-10, the move seems nearly complete.
America
The upward revision of the US manufacturing PMI to 52.0 from 51.8
preliminary estimate and 51.5 in August was quickly cast aside, even though it
confirms the first increase since April. The ISM represents
fresh news and here the news was less favorable. It is not so much the
headline fell to 50.9 from 52.8, but the details were poor. New orders
slumped to 47.1 from 51.3, the weakest since May 2020. Export
orders stayed below the 50 boom/bust level for the second consecutive month,
and China and Europe were cited as constraints. The backlog of orders continued
to soften. Employment fell to 48.7 from 54.2. It is the fourth time
in five months that it was below the 50 boom/bust level. Lastly, we note that
the ISM prices paid sub-index has been falling since the 87.1 peak in
March. It stood at 51.7 in September, the lowest since July 2020.
On tap today are the durable goods orders/factory orders. Factory,
excluding transportation, were holding up well this year. They posted a
monthly average of 1.3% in H1 22 after averaging 1.1% a month in H1 21.
However, it was like a wall was hit, as some other time series suggest and
factory orders, excluding transportation collapsed by 1.1% in July. The
median estimate in Bloomberg's survey for a 0.2% gain suffers from the lack of
participation. There were three survey responses. Action Economics
survey had 14 respondents and a median of zero. At the same time, the US
releases the JOLTS report on job openings, and this will garner the market's
attention. In the first seven months of the year, job openings have risen
three times and fallen four. The July reading of 11.24 mln was about 200k
lower from December 2021. No fewer than five Fed officials speak.
The views of most officials are known, but the market is just getting know
Logan in her new capacity as Dallas Fed President and Governor Jefferson how
joined the Board in late May.
Canada reports August building permits, which likely fell for the third
straight month. It also reports August merchandise trade
figures. Through July, it recorded a C$23.6 bln trade surplus. For
the year ago period, it registered a trade surplus of C$525 mln. The
combination of slowing world growth and softer commodity prices warns the best
news has likely passed. The trade surplus is expected to fall for the
second consecutive month.
Mexico reported stronger worker remittances ($5.12 bln) and a move above
50 in the manufacturing PMI and IMEF survey. The
non-manufacturing IMEF survey softened to 50.9 from 51.5 (revised from
51.9). Mexico's data highlight is the CPI figures at the end of the
week. Both the headline and core are expected to have risen further and
this will underscore that Banxico has more work to do. It can be expected
to match the Fed's 75 bp hike when it meets next on November 10. The
risk-on mood helped the peso about 0.60%. Brazil though was the belle of
the dance. It soared nearly 5%, the biggest move in four years ago.
The risk appetites helped but this seemed to be a reaction to the
election. The economic data disappointed. The manufacturing PMI weakened
(51.1 vs 51.9) and the trade surplus was smaller ($4.0 bln vs. $4.1 bln and a
median forecast in Bloomberg's survey for $4.5 bln). Hopes for
privatizations helped lift the Bovespa by 5.5% yesterday, nearly doubling the
year-to-date gain.
The US dollar was turned back from CAD1.38 yesterday and plunged to about
CAD1.3620. Follow-through selling took it slightly through
CAD1.3570. It recovered in the European morning to almost
CAD1.3650. There is scope for additional, albeit limited gains (maybe
CAD1.3670-80), but the intraday momentum indicators are getting
stretched. After the RBA's move, there is some speculation that the Bank
of Canada is next. The swaps market has downgraded the chances of a 50 bp
hike on October 26 to about 55% from almost 90% a week ago. The
greenback fell 0.5% against the Mexico peso yesterday to reach almost MXN19.95.
Recall, last week it jumped to around MXN20.58. There has been no
follow-through dollar selling today. There is scope to retest the
MXN20.05 area but that might be sufficient to hold back stronger gains
today. The US dollar tested the 200-day moving average against the
Brazilian real yesterday (~BRL5.16). Follow-through buying today may be
limited and after yesterday's big move, consolidation may be in order
today.
Disclaimer
Reviewed by Marc Chandler
on
October 04, 2022
Rating:
