Today’s podcast

https://soundcloud.com/user-291029717/beige-book-highlights-brisk-rise-in-input-costs?in=user-291029717/sets/the-morning-call

Overview: I knew you were waiting

• Markets remain quiet ahead of Non-farm Payrolls on Friday
• S&P500 +0.1%, BBDXY -0.0%, US 10yr yield -1.9bps to 1.59%
• Meme stocks though surge: AMC +95.2%, GameStock +16.2%
• RBA’ Debelle hopeful 3% + wages growth is possible in 2024
• RBA’s Bullock pushes back on the need for tighter macro-pru
• Coming up today: AU Trade, Final PMIs, US ISM, ADP & Jobless Claims

“I knew you were waiting. I knew you were waiting for me”, Aretha Franklin and George Michael 1987.

Markets were again very quiet overnight as is typical in a Non-farm Payrolls week. The S&P500 is flat (+0.1%), while rates have been little moved with the US 10yr yield -1.9bps to 1.59%. FX has also been quiet with the USD BBDXY -0.0% with most pairs +/- 0.2% (EUR -0.2%, GBP +0.1%, USD/Yen +0.1%). CAD (USD/CAD -0.3%) outperformed on a higher oil price (Brent +1.5% to $71.28), while the NZD (-0.2%) has underperformed slightly. The AUD (‑0.1%) has largely followed USD moves and is currently trading at 0.7753. Data flow has also light with only the Fed’s Biege Book of note and pointing to inflation pressures (“looking forward, contacts anticipate facing cost increases and charging higher prices in coming months”). Investment managers it seems are also worried with BlackRock’s Fink stating that market was underestimating the risk of higher inflation. The Fed’s Harker also restated his call that the FOMC should “at least think about tapering”. Closer to home, Deputy Governor Debelle yesterday gave further hints that the RBA is unlikely to extend its 3yr YCC target, stating he is hopeful wages growth is 3% + in 2024. Meanwhile the RBA also pushed back on the need to tighten macro-prudential rules and played down the recent pick-up in investor housing activity.

We don’t normally start with Australian data in overnight commentary, but the GDP figures yesterday were remarkably strong (1.8% q/q against 1.5% expected; NAB 1.7%) with the level of GDP now 0.8% above pre-pandemic levels. The data adds to the evidence of a strong rebound in the economy and should prompt questions around the appropriateness of current unconventional policy settings. NAB remains comfortable in its view that the RBA will not roll its 3yr YCC target and will also taper QE in a 3^rd round. RBA Deputy Governor Debelle also appeared before Senate Estimates last night and noted the possibility of wages growth at 3% + in 2024 (3% wages growth being seen as needed to have inflation at 2-3% sustainably), which further supports NAB’s view that the RBA will not roll the 3yr YCC target bond from April 2024 to November 2024. Markets are largely there, pricing around a 70-80% chance that YCC will not be extended. Debelle’s colleague Assistant Governor Bullock also pushed back on the need for a tightening in macro-prudential, noting that “lending standards are not being relaxed” and showed no concern around the recent pickup in investor housing credit growth.

As for global markets, it has been a very quiet overnight session. The S&P500 is +0.1% and sits just 0.7% below its record high in May. Below the surface, meme stocks have soared with AMC +95.2% and GameStock +16.2%, while crypto currency Dogecoin is up 30.3%. Frothiness it seems is there, particularly on the retail side, which may be part of the caution being seen in the wider stock market ahead of Non-farm Payrolls on Friday.

Global rates remain largely rangebound having been stuck in a 1.5-1.7% range for a few months. Overnight the US 10yr yield fell -1.9bps to 1.59%. Implied interest rate volatility continues to decline amidst the ongoing range-trading environment, with the MOVE index near its lowest level since February and below its five-year average. The decline in interest rate volatility sits in contrast with the high degree of uncertainty around the inflation outlook. Again, Non-farm Payrolls on Friday could shake things up and until Friday conditions are likely to remain relatively sedate.

As for Fed policy, the Fed’s Harker re-iterated his view that “it may be time to at least think about thinking about tapering”. Meanwhile, the Fed’s Beige Book pointed to growing inflationary pressure. The survey noted “Contacts reported that continuing supply chain disruptions intensified cost pressures. Strengthening demand, however, allowed some businesses, particularly manufacturers, builders, and transportation companies, to pass through much of the cost increases to their customers” and “Looking forward, contacts anticipate facing cost increases and charging higher prices in coming months”. Labour demand was also expected to remain strong, while “a growing number of firms offered signing bonuses and increased starting wages to attract and retain workers” (see the Beige Book for details).  The Beige Book overall does little to dissuade investor concerns around the potential for inflation. BlackRock’s Larry Fink the latest to warn on inflation risks, stating “Most people haven’t had a forty-plus year career, and they’ve only seen declining inflation over the last 30-plus years…so this is going to be a pretty big shock.”

Oil prices have made further gains, with US West Texas crude hitting its highest level since 2018 (+1% overnight). Growing market confidence in the global recovery, this week’s announcement from OPEC+ that it intends to only gradually increase supply going forward and diminished expectations for the removal of Iranian sanctions have boosted sentiment in the oil market. Other commodity prices were mixed, with copper falling around 1%, although it remains above the $10,000/tonne mark.

FX moves have been limited with the USD BBDXY -0.1% and most major pairs are within +/-0.2%.  The CAD and NOK have outperformed over the past 24 hours (USD/CAD -0.3%) on the back of higher oil prices. At the other end of the currency ladder, the NZD is the laggard, down 0.2%. As for the AUD, it is little changed at -0.1% and currently trades at 0.7753.

Across the Ditch yesterday there were some hawkish headlines from the RBNZ, playing to the view of the need to eventually normalise policy. RBNZ Governor Orr warned of the dangers of not raising interest rates, stating asset prices were “very richly priced” due to the historically low interest rates and would be sensitive to changes in rates. And that that not raising rates could see the return of strong inflation, with flow-on effects to economic activity, welfare and intergenerational equity (see Stuff.co.nz interview for details). Deputy Governor Bascand also noted “our big story is, you shouldn’t expect to have these extraordinary emergency monetary conditions forever”.

Coming up today

Domestically a quiet day with only final measures of the Trade Balance and Retail Sales out. Offshore itiss final-PMI day in Europe, though consensus is around where the flash estimate printed. US data is very heavy with two key released being ADP Payrolls and ISM Services. Details below:

• AU: Trade Balance & Retail Sales: Both are final measures and are thus unlikely to be market moving. Consensus for Retail Sales sees it unchanged on the preliminary at 1.1%, while the Trade Balance is expected to rise to $8.2bn with NAB going for upside risks at $9.9bn.
• CH: Caixin Services PMI: Consensus sees the Services PMI little changed at 56.2.
• US: ADP Payrolls, ISM Services, Jobless Claims: A bumper Thursday for the US with ADP Payrolls watched for any hints on Friday’s Payrolls report. Consensus for ADP is for 650k, while the ISM Services Index is expected to rise further to 63.0 from 62.7. Jobless Claims are also expected to continue to fall to 388k from 406k.
• US: Fed Speakers galore: Four Fed speakers are scheduled, including Bostic, Kaplan, Harker and Quarles. Its hard to see them being market moving given they have spoken widely before with Kaplan, Harker and Quarles on the hawkish side, and Bostic on the dovish side. On net, headlines may be hawkish overall.

Market prices

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