September 18, 2017

Markets Today: Fly!

Another day on and the Pound has again been the star performer in the currency markets.

Following on from Carney’s warning that the BoE might have to adjust policy in coming months, MPC member Gertjan Vlieghe – regarded as dovish till now – said along the same lines that “the evolution of the data is increasingly suggesting that we are approaching the moment when the bank rate may need to rise,” in a speech at the Society of Business Economists in London. If the economy continues apace, “the appropriate time for a rise in the bank rate might be as early as in the coming months.”

The Pound soared, up another 1.46%, trading at one stage over 1.36, before settling back into the 1.35s.  AUD/GBP is this morning trading back under 0.59, having traded in the 0.605-0.61 range before last week’s MPC.  UK rate markets also reacted, UK 10 year gilts up a net 8 bps for the session to 1.309%, up 32 bps last week.  UK OIS markets lifted the priced-in probability of a move at the 2 November meeting (the next meeting) to a 64% chance, fully priced by Feb ’18 with another priced by September 18, six months out from Brexit.

US data was on the disappointing side of expectations, but with the rider that Hurricane Harvey had at least significantly affected Industrial production, Retail Sales likely less so.  Retail sales for August disappointed, down 0.2% in headline terms, coming also with downward revisions. Both the “ex autos and gas” (-0.1%; +0.3%E) and the Control Group (-0.2%; +0.2%E) underlying measures also disappointed.  These also came with adverse revisions and the Atlanta Fed revised down its estimate of GDPNow from 3.0% to 2.2%.

At least part of that cut in growth expectation came from the downside surprise in Industrial production for August that slumped 0.9%, the Fed attributing ¾% point of this fall to the effects of Harvey (e.g. oil production taken off line.)  US Consumer Sentiment retained a strong reading for the preliminary September survey, printing at 95.3 against expectations of 95.0, coming also with a slight uptick in the 5-10 year inflation expectations to 2.6% from 2.5%.  The Empire State Manufacturing Survey for September was similarly strong at 24.4 (18.0E).

The other out-performer Friday was the Euro on the back of hawkish comments from ECB member Lautenschlaeger who said that now is the time to start scaling back scaling back QE.  She said that the conditions for inflation to pick up are “all in place”.  As a counter – with the Euro opening somewhat lower this morning – was ECB Chief Economist Peter Praet.  He said in press interview that it is “not yet” the time for the ECB to reduce monetary accommodation measures, though he reiterated that the decision on next year’s policy will be taken “this fall” (October 26 is the next ECB meeting.  (Draghi is speaking on Thursday in Frankfurt.)

The DXY finished 0.27% lower and BBDXY -0.25%. So after lifting from a low of 91.0 last Friday week to a high on Thursday of 92.7, DXY’s 91.8 close means it gave back half of its Monday-Thursday rally.

While the AUD/USD was side-lined again, still hugging 0.80.  The NZD outperformed Friday on no news, though risk sentiment was re-engaged less than 24 hours on from another NK missile.  The NZD/USD rose 1.07% and opens this morning at 0.7282, AUD/NZD back down just below 1.10 this morning.

Coming up

Aside from elevated North Korean geopolitics understandably drawing continuing interest (if muted market reaction so far), central banks will be the focus. Just on the North Korean situation, the market will be alert to what President Trump has to say when he addresses the UN tomorrow night.

Locally, with little data to speak of, it’s a week of RBA focus. First up is the RBA Board Minutes tomorrow, but most interest is likely in what the Governor says in a speech in Perth on Thursday, speaking on “The Next Chapter”.  RBA Assistant Governor (Economic) Luci Ellis also speaks at a business economists’ function on Wednesday.

Across the Tasman,  Thursday’s NZ GDP report (and before then Wednesday’s balance of payments net exports) will have more eyes than usual, two days ahead of next Saturday’s General Election.  There’s also another global dairy auction early Wednesday morning; our BNZ colleagues have no strong view on price guidance.

Thursday morning, the Fed is expected to formally announce the imminent commencement of reducing its $4½tn balance sheet, though the market interest will be more on whether we see any shift (down) in the latest iteration of the Fed’s dots. US data this week centres on housing and any building activity disappointments could well flow from Harvey.

The BoJ is odds on to stick with current policy when it meets on Friday. Next weekend sees elections in NZ and Germany.  OPEC’s production monitoring committees also meet.

It’s a quiet start to the week – as far as we know! – with UK and Chinese property prices today ahead of final August Eurozone CPI tonight.  Mark Carney speaks at the IMF tonight.


On global stock markets, the S&P 500 was +0.18%. Bond markets saw US 10-years +1.76bp to 2.20%. In commodities, Brent crude oil +0.27% to $55.62, gold-0.3% to $1,321, iron ore -2.5% to $72.13, steam coal -0.8% to $99.20, met. coal -0.5% to $206.00. AUD is at 0.8002 and the range since Friday 5pm Sydney time is 0.7956 to 0.8035.

Good luck.

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