Today’s podcast:

https://soundcloud.com/user-291029717/is-the-biden-trump-gap-closing?in=user-291029717/sets/the-morning-call

• Cautious tone persists with equities lower, and interestingly the USD has also bled lower
• Virus news not pretty with rising hospitalisations both sides of the Atlantic, more restrictions
• US data stronger than expected with the Atlanta Fed’s GDPNow siting at 36.2% vs. -31.4% in Q2
• S&P500 -0.3%, US 10yr -2.7bps to 0.77%, USD (DXY) -0.2%, Gold +0.2%, Brent Oil +1.8%
• Coming up today: AU Q3 CPI, US Trade/Inventories, Fed’s Kaplan

“You better knock, knock on wood, baby; Baby; I’m not superstitious about ya; But I can’t take no chance; You got me spinnin’, baby; You know I’m in a trance”, Amii Stewart 1979

Markets remain in a cautious mood given rising hospitalisation rates may require tougher restrictions to contain the spread of COVID-19 and ensure hospitals do not become overwhelmed. CNBC notes in the US, hospitalisation due to COVID-19 rose 5% over the past seven days and curfews and restrictions have been declared in parts of Illinois and Texas. Vaccine hopes though remain with Pfizer noting results from its trials are now likely after the election. As for fiscal stimulus, hopes have faded this side of November so the focus on those hopes rests to after the election. Some 60m Americans have already cast their vote, though a few commenters are noting a late polling surge for Trump which could create the potential for a contested election.

Equities fell amidst the cautious mood

US tech outperformance though has meant a less dramatic decline in the US equities with the S&P500 down -0.3% (after yesterday’s -1.9%) compared to -1.2% for the Eurostoxx50. Note the S&P500 IT sub-index rose 0.5% compared to a -2.2% for the Industrials sub-index. Microsoft reporting at the close beat expectations at 1.82 a share v. 1.54 with shares up 1% in extended trade. The caution tone was also seen in rates markets with yields lower across the board. The US 10yr yield fell -2.7bps to 0.77%.

US data ahead of Q3 GDP on Thursday was mostly stronger than expected. Core Capital Orders rose 1.0% m/m v. 0.5% expected with the level of orders now some 3.3% above pre-COVID trends. Core Durable Goods Orders also beat at 0.8% m/m v 0.4% expected. Partly on the back of that data the Atlanta Fed’s GDPNow tracker was revised higher to 36.2% annualised, which if realised would be a remarkable bounce from Q2’s -31.4%. Also out overnight was the Richmond Fed Manufacturing Index (29 v. 18 expected) with firms reporting improving conditions and growing order backlogs. Interestingly firms said they struggled to find workers with necessary skills. Consumer confidence figures were the exception to the data beats, with the conference board measure at 100.9 v 102.0 expected.

In FX

It was a story of USD weakness with the DXY -0.2%. There were signs of cautiousness with USD/YEN -0.4%, so the USD weakness story appears to be secular. In recent days a number of asset managers have stated their view of a secular decline in the USD with BlackRock the latest saying they see 1-3 years of moderate dollar weakness based on expectations of unprecedented fiscal and monetary stimulus regardless of who wins the US election.

Meanwhile the NZD continues to show puzzling resilience amidst the deteriorating global backdrop with NZD +0.5% and best performing G10 excluding Scandinavian currencies. A higher oil price has no doubt helped commodity linked currencies a little with the AUD +0.2% and USD/CAD -0.3%. As for oil, Brent is up 1.7% on the back of the weaker USD and as Topical storm Zeta approaches the US gulf with producers shutting down almost half of their output – landfall is expected in Louisiana on late Wednesday.

Finally in Europe and ahead of the ECB on Thursday, it appears credit conditions are tightening. The ECB’s quarterly survey of banks showed a tightening of credit standards on loans to firms in Q3: “indicating credit risk considerations due to the coronavirus pandemic”. That may suggest the need for further stimulus which NAB expects in December. The Euro though was little moved, down just 0.1%.

Coming up today

Q3 CPI figures would normally dominate markets, but given the RBA’s explicit forward guidance, it is unlikely to be as market moving as previously. Offshore it is very quiet with only US Trade Balance/Inventories scheduled, while the Bank of Canada meets with no change expected. Details below:

• AU: CPI – Q3: NAB forecasts a sharp rise due to the expiry of government subsidies (especially childcare), along with higher petrol prices. Headline CPI is expected to rise 1.9% q/q and 1.0% y/y. The RBA’s preferred Trimmed Mean measure will also rebound 0.6% q/q, but remain soft overall at 1.4% y/y. We see downside risks to our forecasts and the consensus is a tad softer with Headline at 1.6% q/q and Trimmed Mean at 0.4% q/q. As for the major drivers, most of the headline rise is being driven by two components – childcare prices and petrol prices. Childcare prices are estimated to have risen 1,751% after the end of the government’s temporary free childcare scheme (that scheme saw childcare costs fall 95% in Q2). Petrol prices are the other driver, having risen 9% after their sharp fall in Q2. Combined, these two components add 1.5% points to the overall 1.9% rise in Headline CPI.
• US: Trade Balance and Inventories – September: The last pieces of data before Q3 GDP figure tomorrow (Thursday). Consensus sees the goods trade balance at $84.5bn and retail inventories to rise 0.5% m/m.
• US: Fed’s Kaplan: moderates a virtual panel discussion on global perspectives with former Bank of England Governor Mark Carney.
• CA: Bank of Canada Meets: No change is expected at today’s BoC meeting. The current policy program includes the commitment to keep rates at 0.25% until the 2% inflation target is sustainably achieved. It is also buying a minimum of C$5 billion a week in government bonds under its quantitative easing program. The aggressive QE program now sees the BoC holding 30% of outstanding debt, with markets asking if the BoC will give additional guidance.

Market Prices

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