Reading the US FOMC Minutes I couldn’t help but think of Lady Gaga’s hit 2009 song Bad Romance. The main disagreement between the hawks and the doves are on their views of the degree of spare capacity in the labour market, and the degree of confidence that inflation will pick-up to the Fed’s 2% target. Despite that difference, the two camps are not so far apart with the Minutes noting the September decision was “a close call” (as had already been flagged by Fischer) and “that a reasonable argument could be made either for an increase at this meeting or for waiting for some additional information on the labor market and inflation”. Consequently, a December rate hike still looks highly probable assuming the labour market continues to improve. Against that backdrop, the market now prices an 81% chance of a rate hike by December according to OIS, only marginally higher than yesterday.

While the FOMC Minutes captured the market’s attention, for your scribe the most instructive comments came from the Fed’s Dudley who serves as the FOMC vice-chair in his fireside chat overnight. He noted that “there’s more slack in the labor market than is suggested by just the unemployment rate” and with inflation below target “we can be quite gentle as we go in terms of gradually removing monetary policy accommodation”. That suggests after a likely December hike, it’s going to be a very gentle tightening cycle until the Fed see’s evidence of inflation picking up to 2% or wages growth at or exceeding 3% (Fischer has echoed similar words in recent weeks).

Against that backdrop, US Treasury yields were 1.2 bps higher to 1.78%, with an earlier increase up to 1.80% unwound following Dudley’s remarks and the Minutes. Other major sovereign bond yields essentially followed the moves by Treasuries the previous day, with German Bund yields up 4.2 bps to 0.1%. UK Gilt yields rose by a greater magnitude, up 6.4bps to 1.0% helped along by comments by Prime Minister May.

There was little data out overnight, with only US Job Opening figures (JOLTS) which fell 6.7% August. Although below consensus, it was viewed as merely compensating for extraordinary levels and importantly, the quit rate was unchanged at 2.1% – suggestive of a tight labour market

In the FX space, it’s a story of very slight US dollar strength with the US dollar up 0.2% across the board. Amongst G10 currencies, the outperformer was the British Pound, up 0.7% and unwinding some of yesterday’s sharp 1.9% fall. Most of that price action occurred in the Asian time zone following a report that PM May had accepted that Parliament should be allowed to vote on Brexit. That story was later clarified with Parliament not voting on trigging Article 50 (the formal Brexit instrument), but rather on having a discussion on the plans for Brexit.

The AUD also outperformed, holding onto its gains, up 0.3%. That move was helped by a higher CNY fix against a fairly stable RMB basket, along with reports that the Q4 Coking Coal Contract price in Australia had been set at $200 a tonne, a massive 100% increase on Q3! Very rough back of the envelope calculations suggest that could boost export earnings by up to $1bn a month, and potentially halve the monthly trade deficit.

Equities were mixed overnight. US equities rose with the S&P500 up 0.2%, but European equities fell with the DAX down 0.5% and the FTSE also down 0.7%. Oil fell another 1% last night, to $US50.27 (WTI measure), with doubts over the OPEC production cap and Russia’s participation, despite OPEC indicating that talks with Russia had been “very constructive”.

Coming Up

This morning in Australia we get Consumer Inflation Expectations. While not usually market moving, it is worth watching out for given that inflation expectations has been grinding lower and is important for the outlook for monetary policy.

Across the ditch there is a swath of data, though mostly second tier, including: ANZ Job Advertisements; Manufacturing PMI; Food Prices; and ANZ Consumer Confidence. The REINZ House Sales was out as this goes to print and was down 9.5% in the month.

As for the international data, the pick will be Chinese trade figures. Otherwise a very quiet session ahead.

Overnight

On global stock markets, the S&P 500 was +0.16%. Bond markets saw US 10-years +1.24bp to 1.78%. In commodities, Brent crude oil -0.93% to $51.92, gold+0.1% to $1,254, iron ore -0.9% to $57.16. AUD is at 0.7568 and the range since yesterday 5pm Sydney time is 0.7552 to 0.7588.

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•  Markets Today:  13 October 2016(PDF, 197kb)

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