November 18, 2021

Markets Today: Caution after UK inflation surprise. Will Aussie wages ratchet up?

Some in the market were positioned for an upside surprise in Australian wages data, but that wasn’t forthcoming, with the data bang in line with expectations at 2.2% y/y, back to pre-pandemic levels.

Todays podcast

Overview Killing a Little Time

  • US equities set to end day lower, Europe little changed
  • Lower oil prices and decline in longer dated UST yields weigh on Energy and financials
  • Biden calls on regulator to probe gasoline prices. US-China discuss oil supply release
  • GBP and JPY outperform. AUD lags, consolidating yesterday’s decline
  • Coming Up: RBA Ellis, US Jobless claims, Philly Fed

I’m fading, man

Just killing a little time – David Bowie


US equities trade in and out of negative territory struggling to find a directional theme. Lower oil prices and a flatter UST curve weighed on energy and financials respectively with the former not helped by President Biden’s call on the on regulator to probe gasoline prices. GBP and JPY are the G10 outperformers, higher than expected UK inflation cementing BoE rate hike expectations. AUD lags, consolidating yesterday’s decline, now trading at 0.7261.

It has been a shilly-shally session for US equities with the S&P 500 trading in an out of positive territory . The S&P 500 now trades at -0.22% with Energy (now -1.36%) and Financials (-1%) the underperformers (NASDAQ is -0.20%). The former not helped by a 2.4% decline in WTI Oil (Brent -1.77%) following President Biden’s call on the regulator to probe gasoline prices. Media reports also noted Presidents Bidden and Xi Jinping discussed the possibility of a joint release of crude supplies. Meanwhile a decline in longer dated UST yields probably didn’t help financial stocks. European equities ended the day mixed and little changed, the UK’s FTSE 100 an outlier, down 0.5%.

New US home construction unexpectedly slowed down in October, driven by a drop in single-family projects. Residential starts fell 0.7% last month to a 1.52m annualized rate after a downwardly revised 1.53m pace in September. Supply constraints an ongoing theme.

Moving onto the FX market, cable and JPY are at the top of the leader board, up 0.5% and 0.7% against the USD over the past 24 hours. GBP’s gains are linked to the market’s reaction to the higher than expected UK inflation, cementing BoE rate hike expectations. UK CPI inflation was much stronger than expected in October, with the headline rate rising to 4.2% y/y and the core rate at 3.4% y/y. The retail price index, which is used to price index-linked gilts (a quarter of UK government debt), rose to a 30-year high of 6%. Following the stronger labour market data yesterday and CPI print overnight, the Sonia continues to virtually price for the BoE to hike on December 16 by 15bps and a further 100bps in the curve for the next 12 months , a directional view that is understandable given BoE noises and the run of data, but a very aggressive view given the energy and tax growth headwinds facing the UK economy, plus an increasing likelihood the government will trigger article 16. Yesterday PM Johnson insisted he wants to negotiate a solution to the post-Brexit issues affecting Northern Ireland but said over-riding parts of his deal with the EU would be “perfectly legitimate”.

The reversal in USD/JPY is explained by the slight risk aversion in the air with US equities struggling while a decline in UST yields has also aided JPY strength. The UST curve is lower across all tenors with the 5y down 3.5bps to 1.232% while the 10 and 30y tenors are down 2bps to 1.609% and 2.008% respectively. The 20y UST auction tailed once again overnight (2.065 vs prevailing yield of 2.051%), but the bid to cover ratio was in line with the year average at 2.34. The 20y part of the UST curve remains the cheapest point in the curve.

Canadian CPI was the other data release to watch overnight with the numbers printing in line with expectations . Annual CPI climbed to an 18-year high of 4.7% in October, while core inflation (the average of three series that the Bank of Canada closely monitors) was steady at 2.7%. Tighter monetary policy by the BoC is well priced by the market, with close to 125bps priced in over the next 12 months, with the expected tightening cycle beginning from March. CAD didn’t get much support overnight down 0.34% to 1.2601.

The AUD has been the G10 underperformer over the past 24 hours with the bulk of its 0.5% decline (now at 0.7262) recorded during hour session yesterday . It looks like some in the market were positioned for an upside surprise in Australian wages data, but that wasn’t forthcoming, with the data bang in line with expectations at 2.2% y/y, back to pre-pandemic levels. The 3-year bond future saw a 10bps fall in yield after the release before consolidating overnight. That said, it’s probably worth noting too that the S&P/ASX 200 didn’t have a good day yesterday with the 1% intraday decline during our morning, following CBA underwhelming trading update, certainly not helping the AUD.

NZD is little changed at 0.6994 and the euro is back above 1.13, after yesterday’s mini collapse that saw the pair gap towards 1.1264, quickly recovering shortly after. The European economy is facing a few challenges at the moment and the euro is certainly been affected by them. Europe, and the UK for that matter, are still facing a meaty energy crisis, overlaid with Russia-Ukraine and Belarus-Poland geopolitics tied up with gas supply. Meanwhile covid is becoming an increasing concern, overnight outgoing German Chancellor Angela Merkel said Germany is in the grip of a “dramatic” fourth Covid wave, daily infections hit a new German record of 52,826 on Wednesday. The Netherlands, now under partial lockdown, also reported record cases. Austria imposed a lockdown on an estimated two million unvaccinated people on Monday and other European states are weighing up their own restrictions.

Coming Up

  • This morning New Zealand releases inflation expectations figures and this afternoon RBA Assistant Governor (Economic) Ellis speaks on “Innovation and Dynamism in the Post-pandemic World” at 3:00pm Sydney time.
  • Quiet day in Europe and the UK, then tonight the US gets jobless claims, the October Conference Board leading index as well as the Philly Fed (24 exp. vs 23.8 prev.) and Kansas City (28 exp. vs 31 prev.) surveys, both for November.
  • ECB’s Centeno, Fed’s Bostic, Evans and Daly are on speaking duties.

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