November 3, 2017

Markets Today: That don’t impress me much

In the last hour, President Trump has announced that Jerome Powell will be the next Chair of the Fed, as has been widely flagged in recent days. So no surprises there.

He is seen as very much the continuity candidate, he hasn’t dissented in his time as a FRB Governor, his thinking seen as very much allied to the status quo data-driven style at the Fed.  The US dollar has been “sharply unchanged” as they say with a similar non-reaction in Treasuries which have had a bid tone despite House Republicans releasing their tax plan.

The plan contains a compression of scales and cuts to personal income tax rates but not to the top over $1m rate from 39.6%, a point that will irk some Republicans seeking across-the-board cuts.  The plan sees the company tax rate cut from 35% to 20% while businesses can immediately expense the cost of new investments.  There is a limit on mortgage interest deductions from $1m to 500K that has US realtors up in arms.

For the USD, there seems to be a bitter pill from the changes to offshore profits/repatriation taxation.  Multinational companies’ accumulated offshore earnings would be taxed at up to 12%, a rate that’s still shy of the proposed 20% corporate tax rate, and one that’s spread over 8 years.  Not enough you’d expect for dollar bulls to get excited and see these measures as a strong enough incentive to spark a flight of such capital back to the US into USDs for those profits still in other currencies.

Reaction to all this news: again, virtually zero also.  The USD has been languid after fading yesterday on further leaks yesterday that Powell was going to get the nod and ahead of the expected House tax plan.  The S&P 500 is flat for the session, though financials outperformed.

What partial residual resilience there has been in the dollar indexes overnight has only been because Sterling has been slammed after the BoE hiked rates by 25 bps, the first hike for decade.  It was very much another in the manner of the dovish taper from the ECB and the BoC stepping back after two hikes.  Sterling is off a tidy 1.77% from levels yesterday afternoon, losing the best part of 2½ big figures in the process.  The FTSE rallied, up 0.9% amid soggy European markets as did gilts.  The 2 year gilt dropped 7.6 bps while the 10 year was down 8.3 bps.  AUD/GBP is trading over 0.59 this morning, up over a big figure.

The takeaway line from the BoE was that “any further hikes (are) to be at a gradual pace and limited extent”.  The BoE anticipates another two hikes, but over the next three years to keep inflation in check  Adding another sour taste for the market were observations from Carney lamenting low UK productivity and that despite declining real wages, unit labour costs are on the rise.

Coming up

Today is a day when local events might again have a larger bearing on the AUD.  Movements in recent weeks have been dominated by Trump/tax/Fed Chair news, the ECB taper, Canadian rate hikes, and the BoE to name some of these.

Today’s Retail Sales is the one to watch.  It’s was down 0.6% m/m in August.  The NAB Cashless Retail Sales Index points to a rebound this month and that’s driven our +0.5% forecast.  If it does bounce-back then this might see a relief rally but then fade if viewed as just payback rather than presenting a fundamentally different complexion on the shape of retailing.  In that way, retail volumes for the quarter that are expected to reveal virtually no growth for the quarter, so no growth from retail to real consumer spending and GDP, reminder that consumer spending is not at the front of the line from a growth perspective.

The China Caixin Services (and Composite) PMI is out at 12.45.  There’s no forecast; in September the Services component was 50.6 and the Composite component was 51.4.

Tonight, first it’s the UK Services PMI (L: 53.6; F: 53.3) and then the US ISM Non-manufacturing release (L: 59.8; F: 58.5), but the release the market is hanging on is Non-farm payrolls.  Of course there’s interest in headline payrolls, the market expecting an over 300K bounce after the Hurricane-affected -33k September decline, confirming again the solid US economic activity story if there was any doubt.  The potential sweetener for the USD would be if there’s another good print on average hourly earnings after last month’s chunky 0.5%/2.9% rise.  The market is looking for 0.2%/2.7%, back to a less inflation-threatening level.  There’s a pretty wide range of estimates from -0.1% to a high of 0.3%, the distribution thus skewed somewhat to the lower side.  So there might well be more price risk from a higher print.  The US releases Factory Orders tonight too, a 1.2% gain expected for September.

CAD watchers also need to be alert to Canada’s October labour market report, another solid, if spectacular report expected with employment up 10K (L:+15K) and steady unemployment at 6.2%.  The CAD has a triad of influences from its own labour market report, payrolls, and oil prices that are testing the top of the range evident for the past 18 months, up further overnight.


On global stock markets, the S&P 500 was +0.02%. Bond markets saw US 10-years -2.71bp to 2.35%. In commodities, Brent crude oil +0.53% to $60.81, gold-0.0% to $1,277, iron ore +0.7% to $59.79, steam coal +0.2% to $100.20, met coal +1.6% to $177.00. AUD is at 0.7718 and the range since yesterday 5pm Sydney time is 0.7695 to 0.773.

Good luck.

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