Markets Today: The Price You Pay

The NASDAQ rose by an impressive 0.64. In commodities USD slippage helped gold gain $4 to $1287.7 (up $20 on the week).

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Weaker than expected US consumer prices with core (ex food and energy) CPI up just 0.1% versus 0.2% expected,  did damage to the nascent US dollar recovery on Friday and pulled US short end yields lower (2 and 5 years both down by about 3bps). Soft CPI was seen as another ‘goldilocks’ economic release helped the S&P and Dow post minor gains (~0.1%) while the NASDAQ rose by a more impressive 0.64%. The VIX gave back only a little of the mid-week N.Korea related spike, finishing at 15.51 from 16.04, so still 5 points or 50% up on the week (note though this is still well below the long term average of nearer 20).

The CPI impact might have been bigger still had the year-on-year change in core CPI not held at 1.7% (as expected) thanks to rounding rather than fall to 1.6% and too the fact that the downside surprise was fully accounted for by the ‘lodging away from home’ component (i.e. hotel rates) and which is sharply at odds with the ongoing uptrend in hotel occupancy rates.

For those of us in FX, the more interesting feature of Friday’s news flow was not CPI but the latest CFTC/IMM futures positioning data. Earlier Friday our BNZ colleague Jason Wong noted in a piece on the NZD that speculative long IMM positioning has not reached the sorts of local extremes that it has in recent weeks without historically being followed by a significant correction lower in the kiwi.  Friday’s IMM data shows aggregate USD short positioning versus G10 currencies rising by 60% in the week to last Tuesday, to its most extreme since 22 January 2013. Back then, between late January and mid-March 2013, the DXY rallied by over 5%. EUR/USD positioning is now at its most extreme since 3 May 2011 and before that 2 Oct 2007. During May 2011, EUR/USD dropped 10 big figures to 1.40.  EUR buyers and USD sellers beware!

In FX, across-the-board gains versus the USD for G10 currencies ranged from 0.01% for the JPY to 0.53% for CAD. EUR/USD rose 0.42% to 11.1821; USD/JPY fell to Y109.19 from Y109.20; AUD/USD +0.24% to 0.7894; NZD/USD +0.49% to 0.7311; USD/CAD 1.2677 from 1.2744; GBP/USD +0.29% to 1.3014. The narrow DXY index lost 0.36% to 93.069 (92.55 has been the YTD low so far); the broader BBDXY -0.34%. The Asia-emerging markets ADXY index was little changed, N.Korea concerns seemingly preventing a rally here into the weekend.

In rates US yields fell straight after CPI, rallied then fell away during the NY afternoon.  2s ended the day -3.2bps at 1.296% (-4.5bps on the week) and 10s -0.8bps to 2.19% (-3.2bps w/w).   Money market pricing for a December Fed rate hike has come in to 25% from 38% last Thursday and you have to look all the way to the end of 2018 before even one hike from here is fully discounted.

In commodities USD slippage helped gold gain $4 to $1287.7 (up $20 on the week). WTI and Brent both added 20 cents to $48.82 and $52.10 respectively. Friday’s Baker Hughes US active oil rig count dropped rose by 3 to 768. Iron ore gave back $1.50 to $75.19 but was still $2.26 up on the week.

On Friday, the Fed’s Kaplan said that he wanted to “see continued evidence – or more evidence – that we’re making progress on reaching our inflation objective,” adding that “I’m willing to be patient”, while the Fed’s Kashkari delivered his usual dovish missive.

CoreLogic’s weekend housing market summary shows a preliminary auction clearance rate of 70.5% up from last weekend’s final 68.2% and on relatively strong auction volumes. Melbourne recorded a preliminary clearance rate of 71.0% and Sydney 72%.

Coming Up

The success or otherwise of efforts to dial down the rhetoric on North Korea relative to Trump’s “locked and loaded” tweeting on Friday will obviously be important for risk sentiment this week. Yet it’s also a fairly busy week both internationally and, locally.  Here, RBA minutes tomorrow shouldn’t be a big deal post the August SoMP, but Wednesday’s Q2 Wage Price Index and Thursday’s labour market both will be. The WPI need to print at 0.5% or better to instil confidence that earnings growth has at least bottomed out just below 2%.

The main economic event today is the slug of China July activity numbers at midday AEST.  Both industrial production and retail sales are expected to have eased back slightly in year-on-year growth terms (to 7.2% from 7.6% for IP and 10.8% from 11.0% for retail sales). Fixed Asset Investment is expected unchanged at 8.6%. Japan Q2 GDP is also this morning, expected to print at a strong 0.6% on the quarter.

The main (non-political) US events should be Tuesday’s retail sales which were weak last time and Wednesday’s FOMC minutes where more guidance is sought on the timing of the start of Fed balance sheet reduction.

In Europe, Eurozone GDP on Wednesday (preceded by Germany tomorrow) and ECB July meeting minutes look like being the highlights.

Overnight

On global stock markets, the S&P 500 was +0.13%. Bond markets saw US 10-years -0.87bp to 2.19%. In commodities, Brent crude oil +0.39% to $52.1, gold+0.3% to $1,288, iron ore -1.9% to $75.19, steam coal -0.1% to $95.80, met. coal +0.3% to $194.50. AUD is at 0.7893 and the range since Friday 5pm Sydney time is 0.7839 to 0.7910.

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