Today’s podcast

https://soundcloud.com/user-291029717/aussie-up-on-trade-hopes-oil-rallies-on-florence-approach

Overview: With a little help from my friends

• After a nervous day, the AUD rallies to 0.7175 on better trade news
• Fed Beige Book talks of widespread labour shortages but no wages breakout and moderate price rises reported
• Bullard urges caution on rates (again) while Brainard suggests rates might need to rise to above 3%, on growth optimism
• Oil lifts higher on another large US crude inventory drawdown, and Florence, Brent testing $80
• But US PPI misses expectations ahead of the CPI tonight, providing some support for Treasuries as does a strong US bond auction
• Brexit mood music also improving, more developing GBP tailwinds
• Aussie employment today, US CPI, the ECB and BoE tonight.

AUD bounces

After teetering on the brink of 0.71 in recent days and looking to test lower levels, the market has been caught short with a sequence of more encouraging news on the trade front over the past 24 hours.  The Brexit mood music has also continued to improve, adding momentum and no doubt lifting PM May’s stocks and a warm tailwind for the Pound.

The AUD sits at the top of the FX leader board, up 1.1% from yesterday’s local close, matched by a 1.1% rise in the NOK from the oil price lift, while the NZD is also up 0.9%.  European equities rallied, but US equities have been choppy.  An already flat US Treasury curve has flattened, 2y yields up 0.4bps but 10s down 1.29bps, capped by a miss on the August US PPI ahead of the CPI tonight and a solid Treasury auction, and notwithstanding oil’s overnight gains.

It’s been a sequence of better trade reports over the past 24 hours – we know that 24 hours can be a lifetime in this market – that’s for now flushed out some AUD shorts and USD longs.  Setting the scene yesterday were words from Trump that the US-Canada trade talks are “coming along very well” and that the Canadians are willing to include dairy in the trade negotiations.  Dairy is a politically sensitive issue for Trudeau and also for Trump who is looking for mid-West support from the likes of Wisconsin dairy farmers.

Mexican Economy Minister Guajardo was also on the wires saying that a US-Canada trade deal was a high chance. Then it was news that the UK and the EU were preparing for a special summit to sign a Brexit deal in November, timing expected to be announced “within days”. There were reports overnight that the EU is redrafting a new Irish border proposal, one that is more digestible to the UK.

Overnight, delivering more trade optimism momentum were reports that US Treasury Secretary Mnuchin was to lead trade talks with his Chinese counterpart Le Hui, supposedly an outreach to Beijing to get talks back on track “in coming weeks”.  Whether this has the support of the man at the top is not known and we remember that the last such Mnuchin talks produced little.  It’s lifted prospects that the $200b tariff rise is being put off.

In the last hour, NZ dairy gain Fonterra has announced its annual results and finalised its 2017/18 milk price at $6.69, down 1c on previous guidance, also confirming its $6.75 guidance for the current 2018/19 season.  The NZD is unmoved.

Oil and commodities

Oil prices surged again as Florence approaches.  WTI lifted 1.5% to $70.30 (up over $1), while Brent was also higher, by 0.83%, testing $80 and sitting just below that level this morning.  While the pull back in the USD would explain some, the weekly US DoE oil report confirmed not just another draw down in crude inventories, but one that was three times market expectations, down 5.3mb after a 4.3mb draw the previous week, the market expecting a 1.58mb draw.  Near term and longer dated futures contracts rose.

Gold rose 0.8%, while the LME had a better day too, the LMEX composite index up 1.99%, copper up 2.36% and nickel up 3.19%.  Bulk prices were also mostly higher.

Economics, the Fed, and bonds

The US August headline and core PPI fell 0.1%, missing market expectations of a 0.2% increase, the miss from lower trade services prices from lower wholesaler and retailer margins, those margins accounting for nearly a quarter of the core.  Whether this is transient or not, it will have made analysts wonder about tonight’s CPI and plays to the still non-threatening threads in the Fed’s Beige Book released overnight.

It reported a somewhat mixed growth report across the 12 Fed districts, that labour shortages were widely reported, but that “wage growth was mostly characterised as modest or moderate, though a number of Districts cited steep wage hikes for construction workers. Some Districts indicated that businesses were increasingly using benefits—such as vacation time, flexible schedules, and bonuses—to attract and retain workers, as well as putting more resources into training”.

Fed President Bullard and Governor Brainard were both speaking, Bullard again urging caution on further raising rates, but Brainard saying the Fed may have to raise rates to above 3% , seemingly on growth optimism.  It was a hawkish comment from her.  She did note that leverage lending was rising but that there was little sign of an inflation breakout.

In the end, the US Treasury curve flattened, the front end yields supported by Brainard’s comments but the PPI proving some support to the longer end on the day as did the solid Treasury auction, and despite the kick up in oil.

Coming up

• NZ Food prices, Aug (L: 0.7%) 8.45 AEST
• UK RICS House price balance, Aug (L: 4%; F: 2%), 9.01 AEST.  This is a reasonably well-followed indicator of UK house price trends.  It’s been steady for a year or so now;
• Japan Core Machine Orders, July (L: -8.8%/0.3%; F: 5.5%/4.3%), 9.50 AEST;
• Aus Labour Force, August (11.30 AEST):  NAB’s models look for a 15K employment rise (market +18K) with a steady unemployment rate at 5.3% (market is also at 5.3%).  Our own in-house employment indicator suggests that recent official employment outcomes have been under-clubbing what we think is a more positive employment level.  An upside correction would therefore not surprise us. Also, keep an eye out for the latest under-utilisation rate, measured once a quarter (L: 13.9%, May);
• Tonight: German CPU, Aug, follow up final release; no revision expected from 0.0%/1.9% (EU Harmonised measure);
• BoE and the ECB meet, the ECB is confirm the QE tapering that will start next month.  They will also unveil refreshed forecasts, wire reports they will leave their inflation forecasts unchanged but shave the growth outlook on lower external demand (trade impact); and
• US CPI, Aug, core CPI (L & F: 0.2%/2.4%).  There’s US jobless claims and two Fed speakers (Bostic and Quarles; both voters) and the US monthly Budget release.

Market prices

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