October 9, 2017

Markets Today: Beautiful Noise

Neil Diamonds’ Beautiful Noise was the working title for today’s missive following the latest US payrolls s report on Friday.

It almost got bumped in favour of Hall and Oats’ Adult Education, after remarks from US Republican Senator Bob Corker, hitting back at Trump’s critique of Corker as a ‘negative voice’ by saying that the White House has become an “adult day centre”(responding to apparent lack of support from Trump for beleaguered Secretary of State Rex Tiller son). Why this is important is that Corker is a deficit hawk, already critical of suggestions that the planned elimination of deductions in the ‘big six’ tax plan could be watered down. The Senate commands just a 52-48 majority of Republicans, and if Corker’s vote can’t be counted on, the tax plan is in more trouble than it otherwise might be.

There was indeed more noise than signal in Friday’s US labour market data. In particular in the 33k fall in employment (more than 200k below recent trends) and a reported jump in average hourly earnings of 0.5% than pulled the annual rate of change up to 2.9% from an (upwards revised) 2.7% in August. The explanation here was that those unable to work because of the hurricanes (and not getting paid) would be mostly lower-paid and casual workers, biasing up the average earnings of those who were at work (or got paid even if they weren’t).

When the individual state data is published on October 20th, we’ll have more clarity on the employment situation, but in the meantime the BLS on Friday claimed that thee were no obvious distortion to the unemployment rate calculations, which fell by 0.2% to 4.2% and to its lowest level since December 2000.

Post-payrolls, FOMC members Kaplan and Boston suggested they’re open minded or in wait-and-see mode re a December hike. NY Fed President Dudley said it’s still appropriate to gradually remove accommodation, while James Bullard remains implacable opposed; he’s getting more concerned the Fed may make a policy mistake.

AUD made its lowest level since a July 14 offshore on Friday (0.7733) before a small pull back. RBA Board member Ian Harper is his WSJ interview on Friday, was s lamenting slow wage growth/household income which he said “if it lost momentum, might be the basis for some sort of policy action”. He also noted that the level of the Australian dollar also remains an inhibitor to growth even after recent falls “You wouldn’t want to be jumping the gun and tightening too quickly” Harper said.

AUD is particularly vulnerable to any break of the 0.7690/00 area this week.  China data and their return to global commodity markets after a week holiday, and local business and consumer confidence reading this week area all important, at a time when speculative position on the AUD remains close to 2013 highs.

Coming Up

By the end of this week we might know a few important things we don’t know today and which are probably more important for markets in the shorter term than they will be in the long run.

One is who will be President Trump’s pick to be next Fed chair, assuming that Janet Yellen is not to be offered a second term, something the predictit.org betting agency currently suggests is no better than  a 13% chance.  As of Friday night, the same organisation had Jerome Powell ahead of Kevin Warsh by 35% to 30% – a significant shift from earlier in the week when Warsh was a good ten percentage points ahead of Powell.  If we had to bet, we’d bet on Powell.

Markets having previously decided – rightly or wrongly (probably wrongly) – that a Warsh-led Fed would necessarily be more hawkish than one led by Yellen or Powell, knee-jerk response to news of someone other than Warsh getting the nod is apt to be a touch US dollar negative. We’d caution though that a Powell-led Fed that, that will now include Randolph Quarles as Fed Governor responsible for banking supervision, will likely be supportive of efforts to toll back some of the post-GFC regulations imposed on banks and which would be good for financial sector stocks and  potentially bond yield – and USD positive – as a result.

While we might not know as early as this week who will be running the Fed next year, we should know who will be running New Zealand. NZ First leader Winston Peters had earlier promised to show his hand by October 12 (Thursday).  The weekend results of the so-called Special votes have left the Nations with 56 seats and Labour/Greens on 54. 62 seats are needed to form a majority and NZ First holds 9. The knee jerk response to news Bill English will still be prime Minister will be to buy the NZD, if it’s to be Labour leader Jacinda Ardern, to sell it.  The uncertainty factor ahead of Peters showing his hand is in itself a NZD-negative, already evident in a relatively sharp 0.5% drop in the NZD this morning.

We might also know this week whether US inflation is finally on the turn up, with Friday’s September CPI release the week’s key data point (US retail sales also due on Friday).  In August headline inflation rose to 1.9% from 1.7% and core held at 1.7% rather than dip to 1.6% as had been expected.  Headline inflation at least will like be hurricane impacted (market sees 2.3%) so interest will be more in the core (seen rising to 1.8%). There are no fewer than 18 Fed speeches scheduled this week, but not one from Janet Yellen.

Here, key events will be Tuesday’s NAB business survey and Wednesday’s Westpac Consumer Confidence readings – the latter of more than usual interest after last week’s weak retail sales report. For AUD, more impact might be seen from today’s Caixin China services PMI (remembering the official version rose to 55.4 from 53.4, but the official and Caixin vintages of manufacturing PMI diverged – former up to 52.4 from 51.7 but the latter down to 51.0 from 51.6).  Similar divergence in today’s services read play with the grain of slowdown concerns already evident in August activity readings. Commodity prices will also be import with China returning from a week-long holiday. Will the 22% fall in iron ore prices since late August resume?


On global stock markets, the S&P 500 was -0.11%. Bond markets saw US 10-years +1.09bp to 2.36%. In commodities, Brent crude oil -2.42% to $55.62, gold+0.1% to $1,272, iron ore +1.2% to $62.24, steam coal -1.3% to $97.35, met. coal +0.0% to $180.00. AUD is at 0.7774 and the range since Friday 5pm Sydney time is 0.7733 to 0.7798.

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets