Markets Today: Party in the USA

It’s been a night in which the US bond market has staged a mediocre rally – not quite a party – for most of the session, tilted to the belly of the curve and the long end. It looks to have been some profit taking after the surge in yields since the US election.

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It’s been a night in which the US bond market has staged a mediocre rally – not quite a party – for most of the session, tilted to the belly of the curve and the long end.  It looks to have been some profit taking after the surge in yields since the US election.  Released overnight, the US retail sales report for October was very solid indeed and this has been bookended by two late-session strong comments from two Fed Presidents.  (Oil was higher too.) Rosengren (a voter, and dissenter till Nov) and Kaplan (a voter in 2017) pointed the market even further to the likelihood of a December 15 rate hike.  The US OIS market currently has a 91% chance of a hike priced, supporting the front end of the curve.

Rosengren said that the November FOMC statement signalled a rate hike (that’s what likely convinced him not to dissent then) while Kaplan said that he would have backed a hike at the September or November meetings.  US retail sales jumped 0.8% (0.6% was expected) and that came with the sweetener of a four tenths upward revision to September.  The Atlanta Fed upped its estimate for Q4 GDPNow from 3.1% to 3.3% as a result, adding 0.3% to its Q4 estimate of consumption to 2.9%.

In the political sphere, running across wires in the past hour is confirmation that Paul Ryan will again be nominated as Speaker of the US House.  The USD is little changed in net terms from yesterday’s levels.

Governor Lowe’s CEDA address last night had little to no impact, speaking on policy/structural “buffers” as providing “options” should a shock arrive.  His closing comments on the outlook suggested the Bank is reasonably comfortable on hold but still very alert to inflation data.  This scribe detected an undercurrent of implicit concern in Lowe’s response to a question on the inflation outlook.  He rightly emphasised flexibility, but noted that inflation is “a bit lower than where they’d like it to be” and that “we should not get worried it’s going to get stuck at these levels”.  Not exactly a clean bill of unremitting confidence about the outlook for inflation.  He did note that in response to Trump’s policies to lift growth that rising inflation would be “a good thing”.  Lowe noted that targeted infrastructure spending had a role to play in the growth outlook. Yesterday’s IMF Article IV annual report on Australia said that the economy is not immune from the “new mediocre”, that policy should remain accommodative given it might take longer than expected to get inflation back to target.

The AUD/USD is trading this morning in the mid 0.75s.  US equities are stronger and the VIX is lower again.  Iron ore dropped back to a still high $72.78 (-$5.09/t), met coal was steady, but thermal coal rose $1.10/t to $106.45. Across the ditch, the Kiwi dollar has lost some net ground in the past 24 hours, though has clawed back some lost ground in the second half of the session in the wake of the latest Global Dairy auction, prices rising 4.5%.

There was a bit more intra-session volatility with the Pound overnight though it sits back where it was yesterday.  A leaked memo to The Times said a report commissioned by the UK Government found there was no strategic plan for Brexit, not that this would really surprise too many people.  UK CPI for October had also underwhelmed (0.1%/0.9%, 0.2% less than f/c) though core PPI was 0.3% higher than expected, indicative of some upstream lower Sterling pressure, even if that pressure has dissipated to some extent recently.

Coming up

The main fundamental data interest locally today is the Statistician’s Wage Price Index for the September quarter, what it says about the momentum of wages growth that’s been slowing until recent quarters, though very recently with signs of levelling out.  NAB and the market look for unchanged q/q growth of 0.5%, that, owing to base effects, would take annual growth back to 2.0% from 2.1% in Q2.  The report will be analysed to assess whether the deflationary momentum in Mining is still slowing the average and what is happening on the wages growth front in the non-mining economy.  New motor vehicle sales data for October is also due at 11.30.

Tonight, Fed President Bullard is speaking on “Monetary Policy after QE” at 19.00 AEDT to open proceedings along with the possibility of more wire stories from ECB and other attendees at Euro Finance Week.  The UK has its monthly labour market report and in the US, Fed President Kashkari (one of the most dovish on the FOMC) is speaking, with the US releasing its PPI, Industrial Production and the NAHB Housing Market Index, all worth a look if not absolute top tier market-sensitive data.

Overnight

On global stock markets, the S&P 500 is +0.65%. Bond markets saw US 10-years -2.30bp to 2.24%. In commodities, Brent crude oil +5.81% to $47.01, gold+0.2% to $1,224, iron ore -6.5% to $72.68. AUD is at 0.7549 and the range since yesterday 5pm Sydney time is 0.7513 to 0.7577.

Good luck.

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