November 22, 2017

Markets Today: Get Back Up

A rather uninspired song title (from a band whose name might not make it through the filters) from your somewhat sleep-deprived scribe (Lorde concert at the Opera House on a school-night, and at my age).

It’s nevertheless appropriate on several levels: risk sentiment, together with US equities, is up (the VIX is back below 10 for the first time in two weeks, S&P up 0.7%). And RBA Governor Phil Lowe last night re-iterated the view that the next move in rates will likely be up.  Because of both of these, the Aussie dollar is back up, by almost 0.5% to a high of 0.7590.

AUD has though been outbid by the Scandinavian currencies, SEK benefiting from a central bank talking its currency up not down (a very rare sight) and the NOK from modestly higher oil prices.  The CAD and Mexican peso are also both stronger, less to do with oil, more on the ‘no news (yet) is good news’ with regards to preservation of NAFTA in its current guise, though that of course could yet all change in coming months.

Amongst the so-called commodity currencies, even the NZD has pushed higher, seemingly on the coattails of AUD strength, despite another poor GDT dairy auction where average prices fell 3.4% (this following a 3.5% drop two weeks ago). This reinforces downward pressure on Fonterra’s current $6.75 milk price forecast (BNZ already forecasts this coming down to $6.30). On another day the NZD could have suffered quite badly (as indeed it did following the previous auction). Testament perhaps to our view that the flightless bird had become rather oversold in the aftermath of the election.

As for the Lowe speech last night, the Governor presented a positive picture of growth with the mining investment cycle seen to be well and truly behind us, while dwelling at length on the possible causes of low wages and which he equates to low inflation, low interest rates and high asset prices.

Competitive pressures figured prominently here (with employees concerned about job security from either overseas labour markets or technology) and employers under pressure to keep a ‘laser-like’ focus on costs (in retailing especially, including food) of which of course wages are the biggest component for most firms.

Yet in reiterating that the next move in rates should be up, and that the current highly accommodative policy stance was appropriate for the ‘near term’, he didn’t give any succour to the view that the RBA was likely to be on hold indefinitely (e.g. for at least a year, as the IMF suggested after releasing its latest ‘Article IV consultation on the Australian economy earlier this week).  Dr Lowe also made no reference to the currency, whereas there has been some thought he could have taken the opportunity to try give the AUD a nudge in the direction it has recently been travelling. Not so.

In other markets, the US Treasury yields curve continues to flatten, the 2-10s spread by another 3bps overnight driven from both sides – slightly lower 10-year yields but another 2bp rise in the 2-year note, weighing on the USD in the process. This has served to push the spread between Australian and United States’ 2-year swap rate decisively into negative territory, amid largely unchanged yields at the front end of the Australian curve.

Coming Up

There hasn’t been a huge amount for markets to get their teeth into so far this week. Being the day before Thanksgiving, this may well remain the case today. That said, there’s a fair bit of calendar interest, commencing at 10:00 AEDT with outgoing Fed chair Janet Yellen in conversation with ex-Bank of England Governor Mervyn Kong.  Hopefully it will be moderated, or else it risks descending into a mutual admiration society affair.

Local data interest comes courtesy of Q3 construction work done. NAB has a high conviction of upside risk due to some large LNG facilities being imported in the quarter. The market consensus is -2.3% q/q while NAB is going for a +14% print (NAB isn’t alone in expecting a high print with another of the big local banks picking +25%). If a jump of this magnitude does materialize, it should be seen for what it is – an aberration.

Offshore, the UK Chancellor Philip Hammond deliver his Budget speech to parliament at 12:30 local time (23:30 AEDT), which comes on the heels of reports Monday night that Prime Minister Theresa May won support from members of her Cabinet to double Britain’s exit payment offer to the European Union to 40 billion pounds (~€45bn), though reportedly for some of the pro-Brexit ministers, a sum which could be withdrawn if the EU does not offer an acceptable Brexit deal). Let’s see if this number appears in the Budget arithmetic, or at least rates a mention in the speech.

Ahead of the Thanksgiving holiday, the US releases data on durable goods orders (+0.4% seen for headline), weekly jobless claims and the final University of Michigan consumer sentiment survey. The preliminary reading unexpectedly fell to 97.8 from 100.7 and is expected to print a final 98.1.


On global stock markets, the S&P 500 was +0.67%. Bond markets saw US 10-years -0.53bp to 2.36%. In commodities, Brent crude oil +0.58% to $62.58, gold+0.4% to $1,281, iron ore -1.5% to $62.50, steam coal -0.4% to $95.90, met. coal +0.0% to $186.00. AUD is at 0.7579 and the range since yesterday 5pm Sydney time is 0.7532 to 0.759.

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