Led Zeppelin (1973) for the benefit of a generation younger than this scribe (i.e. most of you).

Yesterday and now overnight, the prospect of the RBNZ ‘only’ cutting rates by a further quarter point, of the RBA potentially cutting rates by another quarter point sooner rather than later in response to Westpac’s 20bps lift to mortgage rates, and a string of US data that makes a quarter point rate hike from the Fed before the end of 2015 an ever-diminishing prospect, have been the proximate causes of much of the latest market price action.

Several respect commentators, including the SMH’s Peter Martin, have followed our own Peter Jolly in downplaying the snap judgment of some in the market that the rising mortgage rates from one – and possibly more – lenders will necessarily draw a response from the RBA in an effort to prevent retail lending rates from rising. The decisions of other major lenders are now awaited before this theme develops further. In the meantime AUD/USD has clawed its way back on to a 0.73 handle having dipped briefly below 0.72 soon after the Westpac news hit. But this is really a broader US dollar story, where last night’s economic and corporate earnings news has taken a significant toll on the greenback (the dollar is currently about 1% lower in index terms since Tuesday).

US retail sales and producer prices both came in significantly weaker than expected (core PPI -0.3% on the month against +0.1% expected, with headline -0.5% vs. -0.2% expected). Retail sales were anywhere between 0.1% and 0.4% lower than expected in relation to headline (0.1%), ex-auto (-0.3%), ex autos and gas (0.0%) and the so called ‘control group’ (-0.1%). The numbers are nominal not real so some attempt is being made to highlight stronger real spending, though the counterpoint is that this further highlights the fact inflation is moving away from, not towards, the Fed’s targets.

The US retail sector has been pummelled after Wal-Mart issued a profits warning, blaming recent wage increases (and which have already been met with job-cuts) and an expected $15bn hit from the stronger dollar. The shares fell 10% with other retail stocks suffering similarly. This was after Wells Fargo and BofA both just beast their earnings and revenue estimates. The Fed’s Beige Book meanwhile notes that while most districts report modest or moderate expansion, manufacturing was generally down since the last survey and wages growth mostly subdued. Post-retail sales, the Atlanta Fed has lowered its Q3 GDP estimate to just 0.9% from 1% (well below the Wall Street consensus). All this comes after Fed governor Daniel Tarullo yesterday joined his fellow Governor Lael Brainard in arguing what policy makers should be doing at present, i.e. sitting firmly on their hands.

The US dollar looks like remaining under pressure near term, with US 10 year Treasury yields back below 2% (1.98%) on what is the one year anniversary of the bond yield ’flash crash’ – also the day of weak retail sales data and when 10s went from 2.23% to 1.86% before bouncing). US equities have just closed firmly in the red.

The New Zealand dollar sits loud and proud atop the FX leader board, up 2.3% on the past 24 hours versus less than 1% for the AUD and meaning NAB’s FX strategy team was stopped out of its long AUD/NZD trade recommendation from 5 October. The British Pound is the other very stronger performer overnight, after the UK unemployment rate unexpectedly dropped from 5.5% to 5.4%.

Coming Up

The Australian labour market release at 11.30am AEDT is traditionally a significant market mover for both the AUD and short dated yields. Better than expected employment outcomes (and business conditions) of late have driven the RBA’s more favourable assessment of the economy and hence economists’ (consensus) expectations for the RBA being on hold for an extended period.

Since yesterday’s move on mortgage rates by Westpac saw market pricing for the RBA move to price one rate cut before March next year (from April previously) and in total over 42bps of cuts (from 35bps) then a weaker than expected employment outcome would doubtless play with the grain of this view, though with so much now priced into the rates market, it will like to take an particularly weak report to produce much by way of fresh AUD downside or still-lower yields.

On the contrary, a strong report should set these expectations back somewhat, so perhaps there’s more upside on a strong report than vice versa. The consensus expectation for employment growth this month is +9.6k m/m for the headline employment change and with the unemployment rate expected to remain at 6.2%, as does NAB. We forecast +11k for headline employment.

Before the employment report, we‘ll get the BNZ/Business NZ manufacturing PMI (08:30 AEDT). Tonight, attention will be on US CPI (where the core rate is seen remaining steady at 1.8% but with some obvious downside risk after PPI) and the Philly Fed and Empire State surveys. Dudley and Bullard are the rostered Fed speakers.

Overnight

• On global stock markets, the S&P 500 is -0.60%. Bond markets saw US 10-years -5.98bp to 1.98%. On commodity markets, Brent crude oil +0.00% to $49.24, gold+1.9% to $1,188, iron ore +0.3% to $55.12. AUD is at 0.7304 and the range was 0.7199 to 0.7308.

For full analysis, download report:
• Markets Today: 15 October 2015 (PDF, 285KB)

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets

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