Today’s podcast:

https://soundcloud.com/user-291029717/deal-or-no-deal-transatlantic-edition?in=user-291029717/sets/the-morning-call

Overview: Little lies

• Stocks fall in front of next round of Pelosi/Mnuchin fiscal stimulus talks
• GBP market doesn’t believe UK rhetoric re ‘no basis’ for resuming trade talks
• AUD lags USD weakness elsewhere as RBA QE speculation intensifies
• RBA’s Chris Kent speaks at 10:00, September RBA Minutes at 11:30 AEDT

No more broken hearts, We’re better off apart, Let’s give it a try. Tell me lies, tell me sweet little lies  – Fleetwood Mac 

US stocks were softer an hour ahead of the NYSE close

Losses accelerated during the last ‘hour of power’, just as Nancy Pelosi and Steve Mnuchin were scheduled to hold another round of talks aimed at bridging the divide between the two sides’ fiscal support proposal. This is at the same time as Senate Republicans were scheduling a vote on a $500bn support bill that isn’t going to fly in the White House let alone the House of Representatives. US index futures were firmer in the APAC day Monday after Mrs Pelosi at the weekend set a Tuesday deadline for agreeing a deal and President Trump indicated he was willing to go beyond the White House’s latest $1.8tn headline offer. The S&P has just close down -1.6%, the NASDAQ -1.7% and the Russell 2000 down 1.2%.

The next 36 hours or so promise to be crucial in so far as we probably should take Pelosi at her word here, unlike UK PM Johnson (see below).  While markets for the most part continue to perform on the basis that ‘if not now (fiscal support) then soon after’ on an assumption Joe Biden wins the White House and the Democrats take control of the Senate following the 3 November elections, it’s worth noting that betting markets have somewhat pared the odds on Democrat victories. Real Clear Politics currently has Biden at 58.6%, the first time below 60% since late September, while PredictIt has the odds of the Democrats taking control of the Senate as well as retaining the House in to 63%, down from a peak of 69% 10 day ago at the peak of the hysteria surrounding President Trump’s covid-19 diagnosis.

The US bond market is weaker

Notwithstanding  stock market falls, the 10 year US Treasury yield currently +1.5bps to 0.76% (compared to yesterday’s Australian cash market close of 0.75%). This follows a mixed night for European bonds where UK Gilts and German Bunds saw yield declines of +/- 1bp but other European yields were higher.

In FX markets

The standout feature of G10 FX moves is that despite generalised USD weakness, reflected in a roughly 0.3% fall in the DXY index, the AUD is a clear underperformer, currently -0.25% on Friday’s New York close at 0.7062. This is despite the USD/CNY rate dropping back below 6.70 yesterday, so fully retracing (and then some) the weakening we saw straight after the end of the China holidays after PBoC actions that seemed to imply displeasure at the pace and magnitude of recent RMB appreciation, and yesterday’s Q3 and September China activity data. China GDP at 4.9% up on a year ago and up from 3.3% may have been a touch softer than expected, but tells us that not only has China fully recovered the hit to activity in H1 2020, but is actually back a bit above its trend growth trajectory. That is what a ‘V’ shaped recovery really looks like.  At the same time, industrial production growth accelerated in September (6.9% from 5.6% in August) and the recovery is clearly broadening out to domestic consumption where retail sales are now 3.3% up on a year ago from 0.5% in August.

So why the weaker AUD? The most logical (fundamental) explanation is intensifying speculation of the RBA announcing a sizeable QE bond buying programme on Melbourne Cup day, on top of the now widely anticipated reduction in the Cash Rate and 3-year ACGB YCC target, from 25bps to 10bps. Certainly AUD weakness at present is consistent with observations from other small open economies where a good chunk of the impact of moves into QE territory show up in the currency as much or more so in anticipation of the announcement rather than after the fact. This said, latest AUD/USD weakness still leaves the pair quite comfortably  inside the 0.70-0.73 range that we have suggested should contain most of the price action this side of the US elections. AUD/NZD meanwhile has slipped below 1.07, to its lowest level since late July.

The other curio in currency land is the strength of GBP, +0.2% albeit outpaced by gains in EUR, NOK and CHF.  Here, it is fairly obvious that markets don’t believe the assertions from the UK side in EU-UK trade talks that following a phone call between negotiators overnight, described as a “constructive discussion”, there was still no basis for talks to resume. So while this game of chicken continues, perhaps more noteworthy are the reports yesterday morning that the UK was prepared to ‘water down’ its controversial Internal Market Bill, which is one of the outstanding obstacles to a trade deal, as part of negotiations.

Economic news

The only piece of economic news of note overnight has been the US NAHB index, which improved to 85 from 83 and above the 83 expected, confirming  the ongoing veracity of the housing market recovery.

Commodities

Finally a mixed night for commodities with oil down 25-50 cents but industrial commodities mostly higher (bar aluminium) and gold up just under $3 consistent with a modestly weaker USD.

Coming Up

• RBA Assistant Governor (Financial Markets) Chris Kent speaks at an IFR virtual webinar at 10:00 AEDT on ‘The Stance of Monetary Policy in a World of Numerous Tools’.  Hard to see what more he can add to what we’ve heard from Governor Lowe and Deputy Governor Debelle of late, but let’s see. Kent is also the RBA official who is intimately involved in its AUD currency modelling, so we could get some snippets of interest there. The speech comes just in front of the September RBA Board Minutes (11:30 AEDT)  which should echo Governor Lowe’s recent speech and will be watched closely for any hints on the details of a likely easing package come November. Today also sees Payroll data for the week to October 3, where a positive read is possible given some Victorian COVID-19 restrictions were eased from September 17.
• Offshore, China announced what should be unchanged 1 and 5 year Loan Prime Rates of 3.85% an 4.65% respectively, at 12:30 AEDT. This evening, we get Eurozone Current account (not a market mover) and US Housing Starts and Building Approvals (seen +2.8%/+2.0% m/m respectively) . Bank of Spain Governor and ECB Governing Council member Hernandez de Cost speaks (22:50 AEDT)

Market Prices

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