October 16, 2015

Markets Today: Core, Blimey

Much of Wednesday’s market price action in currencies, equities and bonds has been reversed. The exceptions here are the commodity currency trio of NZD, CAD and AUD which for the most part are continuing to resist the allure of a weaker US dollar.

Much of Wednesday’s market price action in currencies, equities and bonds has been reversed. US stock indices are heading in to the close all showing gains in excess of 1%, 10 year Treasury yields are back above 2% (2.03%) and the US dollar is overall up about 0.5% higher having lost the best part of 1% on Wednesday. The exceptions here are the commodity currency trio of NZD, CAD and AUD which for the most part are continuing to resist the allure of a weaker US dollar. They are all stronger versus Wednesday’s closing level, and led by the now mighty kiwi – up another 1% in the last 24 hours and came within kissing distance of 0.69 in early afternoon NY trade. This emboldens expectations for the RBNZ moving again on rates at the October 29 window and after Governor Wheeler’s comments earlier this week.

The fundamental catalyst for much of the price action was US CPI, where the core rate rose by 0.2% against the 0.1% consensus (headline was -0.2% as expected, held down by a 9% drop in petrol prices). The core print lifts the annual rate of increase to 1.9% from 1.8% and 1.6% at the start of the year. The biggest driver of the rise was rents, which have a higher weight in CPI than the Fed’s preferred PCE deflator measure; there is no guarantee that the latter will be following CPI higher just yet (see Chart of the Day in the attached pdf).

The other significant market mover overnight proved to be comment from Austrian central bank chief and ECB Governing Council member Nowotny, who’s remarks that the ECB is ‘clearly’ missing its price stability target led some to conclude this increase the odds of the ECB adding to either the intensity or duration of its current QE programme as early as December. EUR/USD dropped from above 1.1440 to below 1.1370 in short order following his comments.

US activity data was quite mixed. Jobless claims dropped to 255k, matching the low last seen in July and bringing the 4-week average down to a new cycle low of 265k – levels fully consistent with further declines in the unemployment rate in coming months. This also impacted market somewhat alongside CPI. Incoming survey data meanwhile was not so flash, with the Empire manufacturing index lifting to -11.36 from -14.67but which was expected to rise to -8.0. The Philly Fed survey also rose, but only to -4.5 from -6.0 against -2 expected, but the new orders index plunged tom -10.6 from +9.4. Five months ago it was 15.2.

NY Fed President Bill Dudley was last night’s rostered Fed speaker, saying that if the economy performs in line with his forecast he’s be in favour of a hike this year, but then acknowledging that recent economic news suggests the economy is slowing. He’s covered his bases there.

Finally, Citigroup beat its earnings estimate but in part thanks to lower legal cost/provisions, while Goldman’s missed its number, citing a slump in FICC revenue.

Coming Up

Friday’s events calendar kicks off at 08:45 AEDT with New Zealand’s Q3 CPI. Our BNZ colleagues expect a rise of 0.2%. This would see annual inflation tick down to +0.3% from (an already revised) +0.4% in Q2. We are in line with the market consensus.

Locally we get the RBA’s Financial Stability Review. This report, while not likely market moving, will be interesting for understanding the RBA’s concerns of medium term financial stability. At front of mind will be the Bank’s thoughts on the housing market, including house price growth, effectiveness of APRA’s recent actions, settlement risk, and any fears of emerging oversupply in certain segments. Given the speculation on an early cut in the Cash Rate unleashed by Westpac’s mortgage rate action this week (and the AFR’s Mitchell’s column yesterday) the FSR will be viewed partly in that context – i.e. does the RBA sound sufficiently concerned about housing market developments that it would not be rushing to offset the hit to households from higher mortgage rates even if the other major lenders do follow Westpac?

Offshore tonight, we get Eurozone trade, US JOLTS (job openings) and the preliminary University of Michigan consumer sentiment. We’ll also get the US TICS (capital flows) report and which is for August – so covering the period of China’s currency move and when speculation of heavy central bank selling of reserve assets from China and elsewhere in Asia was at its peak. It will therefore attract more than the usual scrutiny.


On global stock markets, the S&P 500 was +1.40%. Bond markets saw US 10-years +4.22bp to 2.01%. On commodity markets, Brent crude oil -0.90% to $50.05, gold+0.7% to $1,188, iron ore -2.5% to $53.74. AUD is at 0.733 and the range was 0.7266 to 0.7364.

For full analysis, download report:

Markets Today: 16 October 2015 (PDF, 328KB)

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




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