Markets Today: Too Much [Brexit] Heaven?

The Bee Gees 1979 classic “Too Much Heaven” pretty much sums up overnight news, with UK GDP printing much better than expected at 0.5% q/q against expectations of a 0.3% print.

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The Bee Gees 1979 classic “Too Much Heaven” pretty much sums up overnight news, with UK GDP printing much better than expected at 0.5% q/q against expectations of a 0.3% print. The better than expected UK GDP figures, along with a very strong Retail Trade Survey and Nissan committing to build two new car models at its UK factory, helped put the kybosh on any thoughts of further Bank of England easing, with UK Gilt yields up 10 basis points to 1.25%. At first glance it seems the UK has shrugged off the Brexit cloud, but as our European colleagues note, the devil is in the detail with the GDP figures showing an unbalanced economy with declines in Industrial Production and Construction – both likely to be further affected by the initialisation of a formal Brexit.

The rise in Gilt yields bled through to other markets, and combined with the underlying theme of central banks being less enamoured with ultra-low rates in the background, saw German Bunds up 8.5 bps to 0.17%. US Treasuries also ended the day up by 5.2 bps to 1.84% with a higher oil price also helping.

The oil price rose by around 1% overnight with the WTI measure at $US49.66 a barrel with reports that OPEC and Saudi Arabia are willing to cut 4% from their recent peak production levels. The next formal OPEC meeting is on November 30 where it is expected OPEC members will formally agree to a production freeze. The recent moves in the oil price have helped lift market measures of inflation expectations and in turn have also helped drive nominal bond yields. As for other commodities, Australia’s two key exports – coal and iron ore – both continue to move higher with Thermal Coal up 0.6% to US$94.1 a tonne, Coking Coal up 0.2% to US$237 a tonne and while Iron Ore was unchanged overnight it is currently sitting at US$63 a tonne. That should see Australia’s terms of trade continuing to pip higher in the following quarters.

As for other data overnight, US Jobless Claims remain at low levels (printing at 258k) and is suggestive of a solid labour market and an OK payrolls print next week. US Durable Goods orders were mixed, with the headline around expectations, but the core non-defence ex-aircraft capital equipment orders falling 1.2%.

In the FX space, despite the UK’s more positive data the Pound fell 0.6%. Some of that fall reflects the broad US dollar rally, with Bloomberg’s US dollar index up 0.3%. Amongst the currencies, the Norwegian Krone was the outperformer, up 0.1% – likely helped by the higher oil price. Amongst the bottom of the G10 currency board were the Aussie and the Swedish Krona. For the Aussie, there does not seem to be a firm catalyst with Aussie falling consistently since reaching its 0.77 resistance level following Wednesday’s CPI; overnight it was down 0.8% to US$0.7582.

The Swedish Krone fell by a hefty 1.8% following a dovish Central Bank Statement where the Riksbank said its policy rate meeds to “be held at -0.5% for six months longer than was forecast in September. The probability that the rate will be cut further has increased” and goes against the recent themes of central banks having less appetite for ultra-low rates.

Coming Up

The two biggest events this morning will be Japan’s Monthly CPI and US Q3 GDP. In terms of Aussie data it’s all second-tier, with only HIA New Home Sales and the PPI.

As for Japanese CPI, the market is looking for a core print of 0.1% y/y, a rate that would show inflation remaining well below the Bank of Japan’s target. Japan also releases September labour market data with the Jobless Rate expected to be unchanged at 3.1%.

Tonight the US releases advanced Q3 GDP figures. The consensus for this data is very spread (from 1.3 to 3.6%) and thus has the potential to surprise markets. The Atlanta Fed’s GDP Now series pegs Q3 GDP at 2.1% in saar terms, which is considerably weaker than the Bloomberg consensus of 2.6% and well below the overnight “whisper” that the number could print closer to 3%. The Atlanta Fed notes that while net exports will make a strong contribution, that contribution will be largely offset by a decline in the forecast contribution of inventory investment. We wait for the data.

Other international data out today includes German October CPI – which could be of interest, while the US releases its Employment Cost Index

Overnight

On global stock markets, the S&P 500 was -0.15%. Bond markets saw US 10-years +5.16bp to 1.84%. In commodities, Brent crude oil +0.76% to $50.36, gold+0.2% to $1,268, iron ore -0.0% to $63.04. AUD is at 0.7587 and the range since yesterday 5pm Sydney time is 0.7583 to 0.7635.

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