September 29, 2023

Markets Today – Closing Time

Todays Podcast UK gilts lead global bond yields higher, Italy and France also up a lot, budget news hurts Treasuries recoil ~10bps from new (4.685%) high ahead of expected government shutdown tomorrow This plus reduced UAW pay demands, news of possible Xi-Biden meet, boosts US equity sentiment, AUD/USD recovers more than 1% of recent losses […]

Todays Podcast

  • UK gilts lead global bond yields higher, Italy and France also up a lot, budget news hurts
  • Treasuries recoil ~10bps from new (4.685%) high ahead of expected government shutdown tomorrow
  • This plus reduced UAW pay demands, news of possible Xi-Biden meet, boosts US equity sentiment,
  • AUD/USD recovers more than 1% of recent losses on better sentiment, USD/CNY back below 7.30
  • US government shutdown likely from midnight Saturday
  • US PCE deflator tonight, EU CPI. China PMIs (official and Caixin) on weekend, ahead of next week’s week-long China holiday (and most of Australia out Monday).

Good morning

And it’s hell to pay when the fiddler stops, It’s closing time, (Closing time), (Closing time), (Closing time) – Leonard Cohen

Thursday’s Economic releases: 

NZ: ANZ activity outlook (net%), Sep: 11 vs. 11 prev.
AU: Retail sales (m/m%), Aug: 0.2 vs. 0.3 exp.
EC: Economic confidence, Sep: 93.3 (unchanged) vs. 92.4 exp.
GE: CPI EU harmonised (m/m%), Sep: 0.2 vs. 0.3 exp.
GE: CPI EU harmonised (y/y%), Sep: 4.3 vs. 4.5 exp.
US: GDP (saar q/q%), Q2: 2.1 vs. 2.2 exp.
US: Initial jobless claims (k), Sep-23: 204 vs. 215 exp.
US: Pending home sales (m/m%), Aug: -7.1 vs. -1.0 exp.

Another day another rise in bond yields Thursday, though in the case of US Treasuries there has been a big recoil from a high of 4.685% down to 4.58% in afternoon New York trade. This is in contrast to Europe where yields rose sharply then stayed there. Gilts are up 12bps on the day and Eurozone benchmarks, both core and periphery, by between 8 and 10bps, including the Italian BTP spread over equivalent German Bunds blowing out to 200bps – its widest since March. Here, Italy’s new budget now envisages a 4.3% deficit next year, up from 3.7% projected in April, with France also blowing out – projected at 4.4% next year and not returning to within the old 3% Maastricht EMU treaty limit before 2027. In contrast, German, Spain, and Dutch deficits are projected to be inside the 3% limit. Quite why gilt yields have done as much as they have is a bit of a mystery, but they have of course been a big outperformer in the wake of last week’s BoE no-change rates decision.

Higher Eurozone yields came despite German inflation falling to a two-year low and slightly below market expectations at 0.2% m/m and 4.3% y/y, the latter plunging from 6.4% due to base effects (the reversal of the last July’s rail fare subsidy which boosted the August 2022 figures). Annual CPI inflation in Spain also undershot expectations by 0.1% at 3.2%, albeit up from 2.4%. This is ahead of pan-Eurozone, later today (see Coming Up below).

US economic data was mixed. US Q2 GDP was unrevised at 2.1% but there was a significant revision in the composition, with consumer spending up an annualised 0.8%, its weakest pace in a year, and revised down from 1.7%, offset by an upgrade to business investment. Initial jobless claims remained low, rising just 2k to 204k. Pending home sales, a leading indicator of existing home sales, plunged 7.1% m/m in August, a much greater fall than expected and raising question marks about the health of the housing market in the face of higher mortgage rates (in contradiction of claims made by Federal reserve Board member Michelle Bowman last weekend).

Incoming Fed speak is from Chicago Fed President Austin Goolsbee, who noted “The unwinding of supply shocks, the composition of demand returning to more stable patterns, and Fed credibility are central to why I think it might be possible today to reduce inflation while avoiding a deep recession,” he said. He went on to warn about the risks of the Fed overtightening but didn’t say whether he favours another increase or not, though he called progress so far on inflation “really excellent.”

Note Fed chair Powell is delivering a Town Hall as we write – his prepared remarks contained no reference to the economy or monetary policy.

US equities have finally had a decent ‘up’ days and here, news of progress in narrowing the worker/employer gap in the current UAW dispute has helped, and too news reports suggesting a possible visit to the United States by China’s President Xi in November. On the former, Bloomberg reports UAW union officials reducing its pay demand from 40% to 36% (employers have so far offered 20%) but also that union officials want to emerge from the strike with ‘at least’ a 30% rise.  Auto stocks rallied on this news.

FX markets have been lively , with AUD/USD pulling up from Wednesday’s 0.6332 (new) low to as high as 0.6432.  Better risk sentiment, the fall back in US Treasury yields (but not in Australia overnight) and USD/CNY back down through 7.30 all look to have had a hand.  Being the last day of the month/quarter, there will be some speculation of hedge-adjustment related supply of AUD/USD today/tonight, but given the scale of equity market declines this month, we wonder whether much of this may have bene done dynamically already? Currency gains elsewhere have ranged from 0.1% (CAD) to 0.7% for the CHF (beyond another outsized (+1.4%) jump in the SEK

Yesterday, local Retail Sales rose 0.2% m/m in August. While this is a subdued pace of growth, the industry splits were more mixed and suggests resilience in discretionary retail categories. There were relatively strong increases in ‘cafes, restaurants and takeaway food services’ (+0.7% m/m), ‘clothing, footwear and personal accessory retailing’ (+1.3% m/m), ‘other retailing’ (+0.7% m/m), and department stores (+0.4% m/m). Weakness was concentrated in ‘food retailing’ (-0.3% m/m) and ‘household goods retailing’ (-0.4% m/m).  (Much) warmer than usual August weather was cited by the Statistician as having a hand in boosting discretionary spending (e.g., clothing) with the Women’s World Cup also cited as a positive influence.

Coming Up

  • Barring a last minute ‘miracle’ today in the form of Congressional approval of a stop gap funding bill, nonessential government departments will shut at midnight Saturday, and all government employees, non-essential or otherwise, will cease to be paid until the shutdown ends.  The 2018-19 dispute, lasting 35 days, saw 800,000 US employees furloughed, and the loss ot the economy estimated to be as much as $11bn.
  • Before that, US August core PCE deflator is the most important release in what is a packed economic calendar (globally).  Consensus is for a 0.2% monthly rise (same as July) which should see the annual rate dip to 3.9% from 4.2% (if so, the first time there will have been a ‘three’ in front of the number since September 2021).
  • Eurozone September CPI is due, which prior to yesterday’s German and Spanish numbers is expected to show a 0.5% monthly rise with core y/y down to 4.8% from 5.3% and headline to 4.5% from 5.2% (a 1.2% monthly rise last September drops out of the calculation).
  • Final UoM Consumer Sentiment (inclusion the 5–10-year inflation expectations reading, which unexpectedly fell to 2.7% from 3.0% in the preliminary release, seen nudging up to 2.8% in the final).
  • In the APAC time zone, Tokyo September CPI is the highlight, where headline is expected to be down to 2.7% from 2.9%, core (ex-fresh food – the BoJ target measure) to 2.6% from 2.8% and core-core (ex food and energy) 3.9% from 4.0%.
  • Locally, we have August RBA credit statistics, where overall business and consumer credit is expected to have expanded by 0.3%, where it has averaged for the past three months.
  • Saturday brings the Official China PMIs, where manufacturing is seen edging back above 50 (50.1 from 49.7) and non-manufacturing up to 51.5 from 51.0, then on Sunday the Caixin vintages (Manufacturing see 51.1 from 51.0, Services unchanged at 51.8).  These come ahead of a week-long China holiday starting Monday.

The AUD in November 2023

The AUD in November 2023

1 December 2023

The AUD in November AUD/USD returned to ‘normal’ levels of monthly volatility in November.

The AUD in November 2023