Markets Today: No killer inflation punch from August PCE deflator

It’s been a combination of factors that have coalesced to weaken the AUD overnight, but it has not been a cathartic move down, just another orderly look under 0.70. There have been weak equity markets in both the Europe and US.

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It’s been a combination of factors that have coalesced to weaken the AUD overnight, but it has not been a cathartic move down, just another orderly look under 0.70.  There have been weak equity markets in both the Europe and US, hard/energy commodities have been soft and there are and more hints overall the Fed is inching toward lift-off, all headwinds for the AUD as it trades below 0.70 in early Asia trade.  The NZD also underperformed in the session, while on the other side of the ledger, the CHF, the JPY and even the EUR strengthened, the ECB’s Sabine Lautenschlager doing her bit to hose down any expectations of more ECB QE in the near term, saying that the basic scenario is still intact with regard to a modest recovery.  .

The US personal income and spending report for August revealed a 0.4% rise in both nominal and real consumer spending in August, a tenth better than expected, aided by a tenth upward revision to July’s spending.  As a result, the Atlanta Fed’s GDPNow estimate for Q3 GDP was upgraded from 1.4% to 1.8%, consumer spending now on track to grow at a 3.5% Q3 pace, upgraded from 3.2%.

While that reflected a continuing material contribution to growth from the US consumer, there was no killer punch on the inflation front from this report that the Fed could hang their hat on.  The headline PCE deflator was flat as expected, up 0.3% y/y and even the core PCE deflator rose 0.1%, for an annual rate of 1.3%, held down by soft energy prices and the strong dollar.

There was more Fed speakers, moderate NY Fed President Bill Dudley interviewed by the Wall Street Journal, saying that every meeting is live, including October, that oil/dollar influences are transitory and that a dollar forecast isn’t going to drive Fed policy.  Charles Evans, another moderate and voter this year was also talking of lift-off but not until 2016.  According to his projections, he sees three 25 bp increases in 2016, noting that while a Fed hike is closer, the path is more important.  “I cannot imagine a path that is not gradual”, he said, “with a path that is somewhere in the median or even the lowest quartile unless the data changes”.

Commodities and biotechnology stock led equity indices lower on both sides of the Atlantic. Commodities giant Glencore lost an eye-watering 29% in London, as analysts warned about its debt load in an environment of low commodity prices.

As we are going to print, San Francisco Fed’s John Williams speech headlines is hitting the wires, adding more fuel to the lift-off in 2015 theme, saying (as Yellen has) that the September call was a close one and speaking of a gradual tightening path.

Coming up today/tonight

There’s only the weekly ANZ-Roy Morgan Consumer Confidence reading first up this morning, this one following last week’s record bounce in confidence that followed the elevation of Malcolm Turnbull as Prime Minister, the weekly index last week up 8.7% to 114.5.

It’s pretty quiet then as far as scheduled local events are concerned.

Tonight there is the EC monthly confidence report that is unlikely to shake markets too much, the markets more interested in the German CPI for September and of course what that means for Euro-zone CPI tomorrow night.  There are the two Canadian industrial product/raw materials prices for August (second tier data), then in the US the main focus will be on the Conference Board’s Consumer Confidence reading and whether it has continued to hold up this month; the market is looking for some retracement given the net weakness in the UoM measure in August/September (down August/ partial retracement in September).

Overnight

AUD back below 0.70: Eurostoxx 600 -2.2%, Dax -2.1%, CAC -2.8%, FTSE -2.5%.  Dow -313 points to 16,002, -1.9%, S&P 500 -1.9%, Nasdaq -3.0%, VIX 27.63 +17.0%.  Shanghai +0.3%, Mumbai +0.3%, Nikkei 225 -3.0% and ASX 200 +1.4%; ASX SPI futures this morning -2.0%.  US bond yields: 2s at 0.67% (-2), 10s at 2.09% (-7).  WTI oil at $44.48 (-2.7%), Brent at $47.37 (-2.5%), Malaysian Tapis (yesterday) $47.86 (-0.8%).  Gold at $1131.30/oz (-1.2%). Base metals: LME copper -1.2%, nickel -0.8%, aluminium -1.0%. Iron ore $56.9/t -0.2% Chinese steel rebar futures -2.0%. Soft commodities spot futures: wheat -0.4%, sugar -0.2%, cotton +0.2%, coffee -2.9%.  Euro Dec 14 CO2 emissions at €7.92/t (-1.0%). The AUD/USD’s range overnight 0.6980-0.7035; indicative range today 0.6950-0.7015; the AUD/USD is 0.6987 now

US personal spending (Aug) 0.4% (L: 0.3%; E: 0.3%); PCE deflator 0.0%/0.3% (L: 0.1%/0.3%; E: 0.0%/0.3%); Core PCE deflator (ex food and energy) 0.1%/1.3% (L: 0.1%/1.2%; E: 0.1%/1.3%)

US pending home sales (Aug) -1.4% (L: 0.5%; F: 0.4%); Dallas Fed manufacturing activity (Sep) -9.5 (L: -15.8; E: -10)

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