September 10, 2015

Markets Today: Is the Fed now (i)Pencil dependent?

The RBNZ has just delivered a universally expected 25-point cut to the OCR (to 2.75%) and says both that some further easing seems likely and that further currency deprecation is appropriate. This takes a bite out of pre-RBNZ NZD strength.

The RBNZ has just delivered a universally expected  25-point cut to the OCR (to 2.75%) and says both that some further easing seems likely and that further currency deprecation is appropriate. This takes a bite out of pre-RBNZ NZD strength.

It’s a little confusing (to say the last) making easy sense of last night’s market moves, that saw US stock indices jump 1% at the NYSE open and following on from the Nikkei-inspired surged in Asia and European bourses, only to leak lower throughout the session with the S&P closing down about 1.5%.

For those who have a life outside following the tick-by-tick gyrations in global markets at 5:00am, they would be forgiven for thinking that a surge in US job openings as reported in the JOLTS report (a known Yellen labour market favourite) and to its highest level since at least 2001 (Bloomberg data doesn’t go back further this) caused equity markets to freak out at heightened prospects of the Fed now proceeding to lift rates next week.  That would be plain wrong.  Equity (and bond yield) intra-day highs were in place at least an hour before the report was released.  US data watchers in any event are noting that the rise in job openings (by almost 500,000 in July) was dominated by low paying jobs (i.e. in the retail and hospitality sectors), that the rate of hiring did not improve materially, and too that the ‘quit- rate’ (another Yellen favourite that measures how confident folks are of leaving one job and easily finding another) didn’t rise at all.

In fact, it looks to be no coincidence that equity markets turned lower almost immediately Apple commenced its latest product unveiling, that featured an updated iPhone, revamped Apple TV and  bigger iPad including a new $99 pencil (sorry, stylus).  Stock market investors were clearly unimpressed, marking Apple’s stock down from above $114 to below $110 in the last two hours of New York trade, and dragging the broader indices down with it.  As the Zero Hedge website quips this morning – is the Fed now pencil-dependent?

On the subject of the Fed and after the IMF and World Bank implored the Fed not to lift rates this month, Paul Krugman and Larry Summers the latest to weigh in on the same side of the debate. We suspect Mr Krugman is more like to be proved right on the Fed than his other big call this week – that Australia may be heading into recession and that the RBA should be thinking about cutting rates.  For our colleague Peter Jolly’s rebuff of Krugman, please see our report published yesterday “7 reasons why Paul Krugman is wrong” – or ask us for a copy.

All up US yields – and September Fed ‘lift-off probabilities’ – aren’t much changed over the past 24 hours (2 yr. yields up less than 0.5bp and 10s less than 2bps).  In currencies, The NZD has benefited most from the ‘risk-on’ tone that Europe and the US inherited from Japan and was the standout performer heading into the RBNZ decision. AUD gave back some of its Asia gains to be flat on 24 hours ago, while Sterling eased back after poor industrial production and trade data. CAD lost ground despite BoC inaction.

Coming Up

Post the RBNZ decision, we now have an appearance by Governor Wheeler before a parliamentary committee, testifying on today’s Monetary Policy Statement (11:10 AEST).

The Australian labour market release, due at 11.30am AEST, has of late been a significant market mover, being ranked a top-5 data influence on the AUD/USD and short dated yields in the past year.

Despite the inherent volatility in the data, we expect markets to remain sensitive given they are stilling pricing a 60% chance the RBA will cut rates by December 2015 – not a view NAB shares (we ascribe no more than a 20% chance to further RBA easing this year).

The consensus expectation is for employment growth of +5k m/m and for the unemployment rate to fall to 6.2%. NAB expects employment to print slightly stronger at +6k m/m. We are in line with consensus on unemployment.

We’d judge there to be more upside for the AUD (and money market rates) on a stronger than expected report than downside on a weak one, given the aforementioned state of play regards market pricing for RBA cut(s).

Offshore tonight, we’ll get the latest Bank of England rates decision with the simultaneous release of the minutes and voting record. The market expects to see an 8:1 vote, with Ian Mcafferty again dissenting in favour of an immediate tightenin0067, as he did for the first time in August.

In the US, we just have weekly jobless claims and wholesale inventories.  Note Fed officials have now entered their customary pre-FOMC purdah, with the decision now less than a week away.


On global stock markets, the S&P 500 was -1.40%. Bond markets saw US 10-years +1.07bp to 2.19%. On commodity markets, Brent crude oil -3.63% to $47.72, gold-1.3% to $1,106, iron ore +1.3% to $58.18. AUD is at 0.6991 and the range was 0.6989 to 0.7070.

  • Bank of Canada leaves policy unchanged at 0.5%.
  • UK industrial production -0.4% (0.1%E, -0.4% P); manufacturing production -0.3% (0.2%E, 0.2 %P)
  • UK global trade deficit £11.1bn (-£9.5bn E, -£8.5bn P r)

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