Below trend growth to continue
Do It Already is the headline of a Bloomberg article today, but mirrors the sentiment in articles across the press and the discussions on our own floor. Markets are like rabbits in spotlights, uncertain as to which way to shift, just in case there is a move by the Fed.
Do It Already is the headline of a Bloomberg article today, but mirrors the sentiment in articles across the press and the discussions on our own floor. Markets are like rabbits in spotlights, uncertain as to which way to shift, just in case there is a move by the Fed. Even worse, they don’t go and we are having the same discussions a month or more from now. That represents the odd price action in markets overnight, with a lot of position unwinding occurring, but retracements, just in case. We are likely to see that continue through to Friday morning (AEST).
Chinese equities were lower yet again yesterday, but Europe and the US managed gains. Yields were higher, despite mixed data and a general view that the Fed won’t move this week. Commodities were weak, especially iron ore. The USD was supported, with the NZD outperforming, and GBP underperforming.
There was a lot of data released overnight, but not a lot that really convinced us either way. The US retail sales were the most important, and showed that apart from weak gasoline sales (due to falling prices) the underlying state of the US consumer is ok. Not overwhelming, but ok. Unfortunately the industrial production and Empire surveys were not so great. These were brushed off somewhat.
In Europe, the ZEW survey was relatively good, although expectations were soft. This too was dismissed as it tends to track the equity markets. The UK’s CPI was showing little signs of take-off but the core at least was steady around 1%yoy. Not enough to have the BoE trigger happy, but unlikely to get them to back down on the promise to move at some point.
The RBA released its meeting minutes from their September meeting. There was little new information in the release and it had negligible impact on the currency.
Overnight, the NZ dairy price auction showed a strong rebound +16.5%, which seems to have supported the NZD a little. The rebound has been faster than our NZ colleagues expected, and the RBNZ, and while it is somewhat due to lower volumes presented at auction, the forward expectations are not suggestive of excess supply.
First up today is the RBA’s Debelle speaking on “bond market liquidity, long term rates and China” – that should give us a lot to think about if all of that is included. If it is anything but longer term thinking then it has the potential to move markets.
The theme of the day is inflation. Europe releases August CPI, as does the US. In a world flush with liquidity, after years of QE, we find that there is very little pricing pressure. This has recently been exacerbated by the decline in oil prices and strength in the EUR and USD, respectively. The Fed has recently noted that they are now watching inflation more closely, as they are more confidence in their employment criteria. Given this, any significant miss here could weigh on the USD. For EUR, any disappointment would add to the growing thought that the ECB may want to extend its QE program. Although, with inflation, a desired result can often be found if you exclude A, B or C….
Another release tonight may get less immediate attention but will be of great import at least next month. The US TIC data shows the demand for US assets by foreigners. We know that this data has lots and lots of peculiarities; the greatest is that it is recorded by the transacting centre and not the ultimate owner (seller or buyer) of the asset. As such, there is an extraordinarily large amount traded through Belgium for example. That said, there is a lot of guessing about the owners of the assets. This data is one place to hint at if the reserve managers, who have been running down their reserves, are starting to offload their US assets. On the upside, it also shows if other investors, those who perhaps have been crowded out by the reserve managers in the first place, and the Fed in the second, are returning to the market.
This is old data (July), and the big drawdown in FX reserves by China, at least, was in August, so we might have to wait for the barrage of new adherents to this data to get on board. But, a decline in foreign holdings of US treasuries will be enough to raise the chatter about all things reserve rebalancing. We are less concerned on this front for the US, as there are a number of factors at play; but as rebalancing broadens there may be concerns for the smaller reserve currencies such as AUD and CAD.
On global stock markets, the S&P 500 was +1.30%. Bond markets saw US 10-years +9.29bp to 2.28%. On commodity markets, Brent crude oil +0.56% to $47.88, gold-0.3% to $1,105, iron ore -1.4% to $57.28. AUD is at 0.7147 and the range was 0.7086 to 0.7166.
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