Markets Today: Blowin’ in the wind

Time will tell whether the softer tone over the past 24hr is just a small correction or a sign that a bigger change is coming.

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Well like some of you, perhaps, my university years were marked by learning about economics and acquainting myself with Bob Dylan and other great artists like Bowie. Overnight Bob Dylan was announced as the new Nobel Prize winner of literature ‘for having created new poetic expressions within the great American song tradition.” and as such today’s MT title is a humble tribute to the big fellow.

Now bearing in mind that I have to think about a title before a 6 am and coffee, I am sure many of you will be able to come up with a much better reference to Bob Dylan than me. That said, there is potentially a bit of change ‘blowin in the win’ with the market over the past 24hrs unwinding some of the move we have seen over the past fortnight. With no real new news, European and U.S markets took the lead from Asia where the softer than expected Chinese data was the main contributing factor for the negative tone in the region. Yesterday China’s exports fell 10% yoy  (in USD terms) while imports were down 1.9% yoy and the market has interpreted the numbers as a sign of weak global demand triggering a bit for safe haven assets and a selloff in risk assets.

Time will tell whether the softer tone over the past 24hr is just a small correction or a sign that a bigger change is coming. In that regard we would note that history tells us that the recent positive correlation between the USD, equities, bonds and commodities typically doesn’t last long, so this is something we should keep an eye on.

Looking at currencies in more detail, the USD is softer across the board on the back of a pullback in expectations of a Fed hike in December with the OIS market current showing a probability 76% compared to 81% two days ago. JPY is one of the top performers, showing its preeminent safe haven attributes, but NOK and CAD have also performed supported by the steadiness in oil prices. Meanwhile, the AUD has been the G10 underperformer gaining just 0.2% against the USD reflecting its close ties with China’s economy.

10y US Treasury yields have not recovered since their decline post the FOMC minutes and are currently trading at 1.74%, practically unchanged from Sydney’s closing levels.  and 2y UST are a little bit lower, consistent with the moves seen in the OIS market.

On a more positive note, jobless claims were unchanged at 246K, below the 253k expected and the lowest reading since November 1973 (adjusted for population growth). The numbers imply that further improvements in labour market conditions should be in the offing; however caution is also warranted given that jobless figures can be volatile over short periods of time.

Coming Up

The RBA Financial Stability Review is out this morning and given its acknowledged importance in the newly minted agreement between the Governor and the Treasurer, the report might garner a bit more attention than what it has done in the past. Our economists will be looking for any commentary around the housing market and specifically the apartment sector as a potential threat to stability.

Also this morning Japan releases its PPI figures for September (-0.1% vs-0.3% prev.) and then at 11:30am China follows with its own PPI and CPI numbers. The market is looking for China’s CPI to print at 1.6%yoy, up from 1.3% in August with many commentators suggesting the uptick in prices may reflect food inflation as the main driver.

Moving on to Europe, Italy and Spain publish their final September CPI readings and the UK gets the BoE credit conditions survey along with construction output for August. Given the BoE measures post the referendum the survey is likely to show credit conditions remain accommodative while construction figures (0.0% exp vs 0.0% prev.) should also be of some interest as the sector accounts for 5.9% of GDP output.

Later in the US, Fed Rosenberg gives the opening remarks at the Boston Conference and followed by potentially the big event of the day with Fed Chair Yellen speaking at the same conference.

As for US data releases, the advanced September US retail sales figures should give us a good gauge as to how the US consumer was traveling at the end of Q3 ( sales ex auto mom +0.5% vs -0.1% prev.).  September PPI figures (0.2% exp. vs 0.0% prev.) are also out along with business inventory numbers for August (0.1%exp. vs0.0% prev.) and the University of Consumer confidence survey. The preliminary survey reading for October is expected to be practically unchanged from the previous month (91.9 exp. vs 91.2 prev.), however if last week’s labour market figures are any guide, then the risk is that we get an improvement in consumer confidence too.

Overnight

On global stock markets, the S&P 500 was -0.25%. Bond markets saw US 10-years -2.63bp to 1.74%. In commodities, Brent crude oil +0.72% to $52.03, gold+0.3% to $1,257, iron ore -0.9% to $56.67. AUD is at 0.7568 and the range since yesterday 5pm Sydney time is 0.7509 to 0.7579.

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