Markets Today: Under (high) pressure

In contrast Janet Yellen’s speech in Boston did – primarily in the form of higher Treasury yields at the longer end of the curve and with that late-day support for U.S. dollar. NY Fed President Bill Dudley said he expects a rate rise this year on current forecasts.

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Friday’s US retail sales data failed to have a significant impact on markets on Friday. In contrast Janet Yellen’s speech in Boston did – primarily in the form of higher Treasury yields at the longer end of the curve and with that late-day support for U.S. dollar. NY Fed President Bill Dudley said he expects a rate rise this year on current forecasts.

Though The Fed chair offered no fresh clues on near term policy decisions, Yellen posed a lot of questions deemed worthy of further research, the one markets jumped on being the suggestion that running a ‘high pressure’ economy could boost labour market participation and ultimately lift the supply side potential of the U.S. economy.

Headline and ex-autos retail sales came in as expected (0.6% and 0.5% respectively) but the Control Group measure that feeds directly into GDP estimates disappointed (up just 0.1%). The Atlanta Fed’s latest ‘GDPNow’ forecast was shaved to 1.9% from 2.1% after the sales data.

In stocks, the S&P500 ended virtually unchanged, +0.02% to 2132.98 while the Dow gained 0.22%. Some support came from Citigroup and JP Morgan, who both beat their earnings and revenue estimates.  The VIX fell by 0.67 points or 3.42% to 16.12 to be 2.64 points or 20% higher on the week.

In US rates the bear steepening theme of recent weeks continued, US 2s +0.1bp to 0.837% (+0.5bp on the week), 10s +5.7bps (+8bps) and the 30-year 8.2bps to 2.559% (+10.8bps). Most of the moves up in the 10-30 year segment of the curve occurred after Yellen’s ‘high pressure economy’ comments.  U.K. gilts continued their sell-off driven by expectations of significantly higher inflation arising from GBP’s fall, 10s +7.3bps to 1.097% (+12.8bps on the week).

In FX, the US dollar was stronger again, with late NY day support coming off the back of the rise in longer dated Treasury yields post-Yellen’s speech.  Leading the dollar higher was the fall in EUR/USD to below 1.10 (-0.76% on the day to 1.0972).  AUD/USD was the world’s strongest currency Friday, +0.65% to 0.7618 and has pushed a little further ahead in early week trade.

In commodities, oil was down just 10 cents for both WTI and Brent, to $50.35 and $51.95 respectively. Gold lost $2 to $1,253, while iron ore was up 60 cents to $57.28 (China 62% fines import price) for a gain of $1.42 or 2.5% on the week.

CoreLogic’s weekend market summary shows another set of punchy auction clearance numbers, 77.9% nationally with Sydney clearing 83.3% up from a final 79.8% last week and Melbourne 78.5%, similar to last week’s 78.4%.

Coming Up

There’s plenty on offer to occupy markets this week both domestically and offshore.

The US earnings season gets fully into its stride with the likes of Bank of America. Morgan Stanley, Goldman Sachs,  Netflix, GE, Johnson and Johnson and Macdonald’s among the household names reporting.

Data-wise, it’s a big week internationally for inflation with latest CPI readings due from the U.S. tonight and both NZ and the U.K. tomorrow. Recall that the uptick in core U.S. CPI last month, to 2.3%, pushed U.S. yields and the USD higher. 2.3% is the consensus for September.  US. Industrial production is also due tonight, expected to rise by 0.2%.

The final Trump/Clinton presidential election debate takes place on Wednesday. http://projects.fivethirtyeight.com/ is currently ascribing Clinton an 86.2% change of winning versus 13.8% for Trump. RealClear politics poll-of poll average is currently 47.2/42,.2 in Clinton’s favour

New Zealand CPI for Q3 is expected to be flat on the quarter and meaning annual CPI growth will be pared to just 0.1% from 0.4%. Enough, we presume, to seal the deal for an RBNZ rate cut next month and also perhaps offering a clue as to what next week’s Australian CPI report may hold, at least in terms of headline inflation.  As for the U.K. numbers may or may not show the initial impact of Sterling’s 20% plunge since the 23 June Brexit vote, amid reports that some at least one major supermarket chains had refused to accept higher prices from a major supplier attempting to pass on higher import costs.  The longer end of the U.K. gilts market is already starting to take fright at the prospect of higher inflation unchecked by the Bank of England.

Domestically, Phil Lowe speaks early tomorrow (08:10 AEDST) tomorrow on ‘Inflation and Monetary Policy’. Money markets seem bound to move on that. RBA minutes are later in the morning and Thursday brings the monthly labour market lottery. NAB sees risk to the +15k consensus forecast to the upside and for the unemployment rate to hold at 5.6% not rise back to 5.7% which is the consensus.

Overnight

On global stock markets, the S&P 500 was -0.03%. Bond markets saw US 10-years +5.66bp to 1.80%. In commodities, Brent crude oil +0.27% to $51.95, gold+0.2% to $1,253, iron ore +0.2% to $57.28. AUD is at 0.7631 and the range since Friday 5pm Sydney time is 0.7578 to 0.7646.

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