September 28, 2023

Markets Today – Aint No Mountain High Enough

It’s the same story again today – equities hurting, the US dollar higher and bond yields reaching 16 hear highs. What’s changed today is a sharp rise in oil prices. NAB’s Tapas Strickland says there’s a great deal of nervousness that supplies in the US have been destocked too far, down to levels last seen in 2014

Todays Podcast

  • Yields continue to rise, US 10yr yields hits a high of 4.64%, now 4.61%
  • Term Premium estimates turn positive – ACM +3bps and KW +6bps
  • Oil surges (WTI +3.6%) with US crude inventories running very low
  • USD up (DXY +0.4%) with risk sensitive AUD (-0.8%) the weakest
  • Coming up: AU Retail & Job Vacancies, German CPI, Fed’s Powell

GE: GfK consumer confidence, Oct: -26.5 vs. -26.0 exp.
US: Durable goods orders (m/m%), Aug: 0.2 vs. -0.5 exp.
US: Durables ex transport. (m/m%), Aug: 0.4 vs. 0.2 exp

Don’t cha know that there; Ain’t no mountain high enough”, Marvin Gaye and Tammi Terrell 1967

Yields rose again overnight with the US 10yr hitting a fresh 16 year high of 4.64%, and currently trades at 4.61% (+7.4bps). With no top-tier data to drive (only durable goods; core +0.4% m/m vs. 0.2% expected), the moves likely reflects the higher for longer central bank messaging of last week. US Fed Funds pricing saw a marginal lift in terminal (to 5.458% from 5.443%) and pricing of cuts in 2024 were pared back to -72bps from -78bps yesterday and well down from -117bps at the beginning of September. The move higher in nominals continues to be reflected in real yields with the 10yr TIP yield +4.4bps to 2.26%, while the implied inflation breakeven has been broadly steady over recent weeks (albeit breakevens did rise overnight by 3.0bps to 2.35%; WTI oil surged 3.7% with US crude inventories running very low). With yields having moved higher over recent months term premium estimates have turned positive – the widely cited ACM now 0.03% and KW 0.06%.

Equities were resilient to the move higher in yields. European equities were range bound and the Eurostoxx50 close +0.1%. US equities were more volatile. The S&P500 ended flat, after having traded as low as -0.8% and as high as +0.4%. Industry segments showed strength in energy (+2.6%) and resilience in tech (IT +0.2%; NASDAQ +0.2%). Driving energy was the 3.7% surge in WTI oil to $93.72. Inventories at Cushing Oklahoma – the biggest crude hub in the US – dropped just below 22 million barrels, close to operational minimums and lowest since the seasonal lows of 2014, highlighting just how low inventories have become. This is adding to some angst in the oil market on top of record demand and world supply constrained by curbs on Saudi Arabia production.

Data was sparse. Second-tier US durable goods beat, but with downward revisions to prior months. Headline durables were 0.2% m/m vs. -0.5% expected, though the prior month was revised lower to -5.6% m/m from -5.2%. Core durables also beat, but by less at 0.4% m/m vs 0.2% expected, and again the prior month was revised down. Capital goods shipments (non-defence, excluding aircraft), rose 0.7% m/m after a couple of soft months. Stepping back from the monthly noise, the trend is one of slowing growth in business investment. Meanwhile in the euro area, there continues to be strong evidence of higher interest rates biting, with borrowing by companies up only 0.6% y/y in August and lending to households down to 1% y/y, both around the slowest pace in eight years.

In FX, weaker risk sentiment and further signs that the US economy is showing more resilience than Europe continues to support the USD . The DXY index was up 0.4% to a fresh high for the year. EUR (-0.6%) traded just below 1.05 and is currently trading at 1.0504. GBP (-0.3%) has also weaker at 1.2136. The AUD (-0.8% to 0.6353) is the worst performing out of the G10 and is trading near its lowest since November 2022. Ditto the NZD. Higher oil prices have supported NOK (USD/NOK -0.6%) and CAD (USD/CAD -0.1%). USD/JPY continues to push higher, getting ever closer to the 150 mark and currently trades at 149.62. Finance Minister Suzuki’s comments that he is watching FX markets with a “sense of urgency” has become a daily ritual, but he has so far stopped short of intervention. Not that urgent, evidently.

Finally in Australia the Monthly CPI Indicator for August rose to 5.2% y/y from 4.9% (NAB 5.2%; Consensus 5.2%). Seasonally adjusted the y/y increase was stronger at 5.5% y/y from 4.9%. While the headline outcome was in line with our forecasts and consensus, the details show sticky services inflation, and suggests the upside risks to the RBA’s inflation profile is being realised. In our view that should see the RBA lift rates again by November. Markets should be thinking about whether one more is enough given the RBA’s August SoMP already assumed one further hike, the labour market remains tight and real rates in Australia are deeply negative compared to positive real rates offshore.

Coming up:

  • AU: Retail Sales & Job Vacancies: NAB sees retail sales up 0.4% m/m, slightly more than the 0.3% consensus. Our transactions data has show resilient consumer spending through July and August. As for job vacancies we expect a further fall in vacancies, which remain exceptionally elevated. There were just 1.2 unemployed people per job vacancy, compared to around 3 prior to the pandemic.
  • NZ: ANZ Business Survey: No consensus available. Our BNZ cousins note the own activity indicator turned sharply higher in August. We would not be surprised if it nudged higher still this time around. The price indicators will be important to watch to see if they continue to show reduced inflation pressure.
  • EZ: German CPI (also Spain and Belgium): Ahead of the wider Eurozone measure on Friday, Germany has its CPI figures today with consensus for 4.5% y/y. Elsewhere Eurozone wide confidence figures are out, and there are two ECB speakers (Holzmann and De Cos).
  • UK: BoE’s Greene: BoE MPC member Greene is talking as a panellist on ‘what s the effect of climate change on our understanding of macroeconomic and financial stability.  Greene voted to hike rates last meeting, where the BoE held rates in a 5 vs. 4 decision.
  • US: Fed speakers, Jobless Claims & Final Q2 GDP: Jobless Claims are expected to be little changed at 215k from 201k the week prior. Final Q2 GDP is expected to be 2.2% annualised. As for Fed speakers, we have Goolsbee, Cook, Powell and Barkin all talking. Chai Powell is hosting a town hall with educators with questions from the in-person audience and virtual participants.

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The AUD in November 2023

The AUD in November 2023

1 December 2023

The AUD in November AUD/USD returned to ‘normal’ levels of monthly volatility in November.

The AUD in November 2023