October 25, 2017

Markets Today: Friday on my mind

US markets right have been caught between 1) the on-going negotiations over tax between the White House and Republicans, 2) who will be the next Fed Chair (the market seems to be positioning for a Taylor-Powell duo but there’s still no news), and 3) the course of the broader economy.

While there has been no announcement yet on the next Fed Chair, there have been some developments on the others.

Just out this morning, it’s been announced that US Republican Senator Jeff Flake will retire at the next election. It’s a prospect that has some thinking of less chances of getting tax reform done if Flake were to be more outspoken against the President with no re-election worries.  There’s been another war of none too flattering words between the President and Senator Corker overnight, Corker speaking of the President “debasing our nation” and the President saying that Corker “couldn’t get re-elected dog catcher in Tennessee (and) is now fighting tax cuts”.

The dollar briefly reacted negatively to the Flake news, but the US 10 year is holding firmly above the 2.40% level this morning.  The Dow is up 168 points (it was over 200 points higher), helped by strong results from 3M (boosting its earnings outlook) and Caterpillar (the CFO speaking of the mining recovery in its “early innings”).  Adding more into the global growth story have been further strong manufacturing PMIs out of the Eurozone and the US (the latter the Markit versions).  Eurozone Manufacturing PMI was a very solid 58.6 up from 58.1, with the Services PMI at 54.9, down from 55.8; still solid.  The US Markit PMIs were both stronger.

While the USD has been steady to somewhat higher for the session, the losers have been Sterling and the Kiwi.  UK Chancellor has apparently stepped back from the push for a two year post-Brexit “business-as-usual” transition, Europeans demanding a cleaner deal.  Sterling is down a big figure from yesterday’s APAC session.  The Kiwi has moved lower still from the announcement of the incoming Government renegotiating the RBNZ agreement, lower migration targets and uncertainty also over other policies, even though policy specifics are scant.  The AUD has been trading below 0.78.  Chinese steady political leadership news came and went with little market impact while commodities overnight are very supportive, except gold that’s marginally lower.

Coming up

It’s all pretty much about the AU CPI today with market reaction centred both on headline and core CPI.  The surge in utility prices (sorry, couldn’t resist it!) is expected to lift Headline CPI by 0.8% q/q and 2.0% y/y (also consensus). Acting as some offset is a fall in petrol prices and a decline in vegetable prices – a mild winter/ early spring leading to bumper crops.  Core inflation in is expected to remain stable, with the Trimmed Mean at 0.5% q/q, 2.0% y/y. NAB sees the Weighted Median as marginally softer at 0.4% q/q, 1.9% y/y. We see steady core inflation 0.4-0.5% this quarter in the context as the third quarter of such ½% growth, tracking at the bottom of the RBA’s 2-3% target range, suggesting it’s bottomed.

As for market reaction, the great bulk of forecasts are hugging the consensus, suggesting potential two-way price risk for currencies and bonds.  All bar two of the 25 economists surveyed by Bloomberg expect headline inflation of 0.7%-0.9%, the remaining two seeing higher inflation (one at 1.0%, the other at 1.2%).  It’s a very similar picture for the Trimmed Mean (often seen as the preferred of the various underlying measures) with a spread of all bar two seeing it in the 0.4-0.6% range, the other two split between one “high” and one “low”.  The Weighted Median forecasts are skewed a little to the lower side (as ours is).  Before then is the weekly ANZ-Roy Morgan Consumer Confidence measure (L: 113.3; average 114.9) and September Skilled Vacancies (L: +0.3%).

Also in the Australian context, yesterday it was announced that the High Court will make its ruling Friday regarding whether sitting “dual national” MPs can remain in Parliament.  Key among these for the Government is Lower House member Deputy PM Barnaby Joyce who could face re-election.  While there could be some “knee jerk” AUD negative AUD reaction if so, elections tend to be less a key factor for the Aussie that is driven more by rates, commodities and global markets.  It’s also conceivable that independents in the Lower House might give the Government support if needed until a by-election is held rather than face the uncertainty of a general election.  An “all clear” should be AUD supportive.

First cab off the rank tonight is the German Ifo Survey, while in the UK there’s Q3 GDP that’s expected to be steady at 0.3% for annual growth of 1.5%.  The US has Durable goods orders and New Home Sales reports.  The BoC is expected to leave rates on hold at 1.00%, the market having priced out most of the 40% chance priced in just after the BoC hiked in September, having also lifted rates in July.  Only 4 bps is priced in.   The tone of Governor Poloz’s press conference will be key, coming just over an hour after the rate decision and the central bank’s Monetary Policy Report.


On global stock markets, the S&P 500 was +0.16%. Bond markets saw US 10-years +5.62bp to 2.42%. In commodities, Brent crude oil +1.71% to $58.35, gold-0.2% to $1,275, iron ore +0.7% to $62.42, steam coal +0.7% to $97.20, met. coal +0.0% to $181.50. AUD is at 0.7779 and the range since yesterday 5pm Sydney time is 0.7771 to 0.7796.

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