October 6, 2023

Markets Today – It’s Oh So Quiet

Markets mark time ahead of payrolls tonight. Core global yields trade in narrow ranges, the USD loses a bit of altitude while US equities end the day little changed.

Todays podcast

  • Markets mark time ahead of US payrolls tonight
  • UST yields little changed while curve retains steepening bias
  • US jobless claims remain subdued. US trade deficit extends narrowing trend
  • After opening lower US equities recover into the close
  • USD on the back foot, AUD and NZD the outperformers
  • Oil prices slide again, weak gasoline demand not helping
  • Coming Up: Japan leading index and cash earnings, US and Canada’s labour market update

Events Round-Up

AU: Trade Balance ($m), Aug: 9640 vs. 8700 exp.
US: Trade Balance ($bn), Aug: -58.3 vs. -59.9 exp.
US: Initial Jobless Claims (k), Sep 30: 207 vs. 210 exp.

It’s oh so quiet, shh shh…
…And so peaceful until – Björk

Markets mark time ahead of payrolls tonight. Core global yields trade in narrow ranges while US equities end the day little changed after trading lower at the open. The USD losses a bit of altitude with the AUD and NZD at the top of the leader board while oil prices slide again.

US Treasury yields range traded overnight, following yesterday’s decline from recent highs. After trading to a high of 4.86% on Wednesday, 10y UST yields traded within a 4.71% to 4.76% band and now look set to end the NY session at the lower end of this range . Front end UST yields are also a couple of basis point lower (2y rate now at 5.024%) while the long end of the curve is a tad higher with the 30y bond up 2bps to 4.877%.

UST yields tested range highs following the release of US weekly claims, but in the end the move proved short lived. Ahead of the all-important US payrolls report tonight, US weekly claims were little changed and remained at a subdued level, suggesting the US labour market remains in a tight spot. Initial claims rose to 207k from 205k, marginally below the consensus, 210k.  If we think about the US economy as primarily driven by services sector, then the resilience of the ISM services (in September ISM services index fell to 53.6 from 54.5) would be consistent with low claims, looking ahead however cracks are appearing with a sharp decline in the new orders sub index ( a reliable leading indicator, down 5.7 points to 51.8) suggesting we need to be mindful that it is likely the full impact from the cumulative Fed tightening to date ( higher borrowing rates and tighter access to credit) is yet to fully work its way through the economy. So resilient for now, but for how much longer?

The US trade deficit narrowed to $58.3bn in August, its lowest level since June 2020 . Exports rose 1.6% m/m and Americans reduced spending on goods from overseas with imports falling 0.7%m/m which points to softer domestic demand following rapidly rising borrowing costs. There is now evidence of steady narrowing trend in the deficit, suggesting a move back to pre-covd levels remains on track (a pre-covid average of around $45bn). Net trade is now set to deliver a larger than expected contribution to Q3 GDP.
Bloomberg noted overnight how comments by current and former Fed officials this week have seemingly fuel a drive for both short and long interest in the Fed Futures November contract . Open interest for the November contract climbed to nearly 600k  the most in the market’s three-decade history. The record number represents $25m at risk per basis-point change in the rate. The market is currently pricing about a 22% chance of a hike in November, over the past 10 days pricing has range between 18% to 30%.

Speaking overnight, San Francisco Fed Mary Daly said policymakers can hold interest rates steady if the labour market and inflation continue to cool or financial conditions remain tight. Daly’s comments followed those from Fed Mester‘s earlier in the week noting her support for a November rate hike if the economy maintains its pace.

Core European bond yields traded lower overnight with the 10-year Bund yields closing the day down 4bp to 2.88%. Bank of England (BOE) Deputy Governor Broadbent warned that there are ‘clear signs’ that higher rates are creating a drag on the economy and causing unemployment to pick up. Front end gilt yields fell 6bp while 10-year yields ended down 4bps at 4.54%. The market is pricing about 15bp of additional hikes by the BOE and a 30% chance of a 25bps hike at the next meeting in early November.

Moving onto the FX market. The USD has lost a bit of altitude over the past 24 hours, showing corrective action within what still looks like a steady upward trend . The steadiness in both the bond and equity markets overnight provided breathing space for other currencies to make some inroads against the greenback with the AUD and NZD at the top the G10 leader board.  The kiwi is up 0.88% over the past 24 hours while the aussie is up 0.67%. The intraday charts show both antipodean pairs rising steadily during the overnight session and now the AUD starts the new day at 0.6372 while NZD is at 0.5965.

After initially trading in a narrow range, the euro also enjoyed gains against the USD, rising from low 1.05 levels to 1.0549 where it currently trades. Yesterday USD/JPY gapped lower after the Tokyo fix, sparking some speculation of MoF/BoJ intervention.  USD/JPY now trades at 148.437, close the range lows over the past 24 hours.

Recent price action has seen the USD and UST yields rise whenever we get positive surprises from key US economic data releases. Thus, the market looks to be taking a breather ahead US non-farm payrolls and other labour market data releases tonight (see details below), another positive surprise and we wouldn’t be surprise to see both USD and 10y UST testing recent highs.

After opening lower US equity indices staged a decent recovery to close the day almost back above positive territory. The S&P 500 closed ~ -0.1% while the NASDAQ was ~ -0.12%. The S&P 500 now trades at 4257, the recent move up in yields has rattled equity investors and ahead of payrolls tonight many are now looking at whether the index can stay above its 200-day moving average, which currently sits around 4,204.

Lastly, looking at commodities, most of the complex is showing loses over the past 24 hours, notwithstanding USD weakness. Lead is notable outperformer (+0.85%) while oil prices and thermal coal are at the bottom of the pile, down ~1.20% and 3.24% respectively . Oil prices were not helped by EIA reporting weak demand for gasoline in the US. Stocks of the fuel rose by 6.5-million barrels last week even as production dropped as some refineries went on maintenance.

Coming Up

  • This morning Japan gets August leading and coincident indices, labor cash earnings and household spending (September). The leading indicators will be an important gauge that might help confirm or negate the resilience noted in the Q3 Tankan survey. As for labour cash earnings the market is looking for a 1.5%yoy outcome, up 2 tenth from August, if right the stats would support the BoJ patience approach on any possible policy change.
  • Later today, Italy publishes August retail sales and Germany releases August factory orders. All ahead of tonight’s US September labour markets figures.
  • September US nonfarm payrolls are expected to print at 170k, down 17k relative to August. Average Hourly Earnings are seen at 0.3%mom, up one tenth from the previous month while the unemployment rate is seen down one tenth to 3.8%, partly reversing the three tenth jump recorded in August.
  • Canada also publishes its labour market report early tomorrow morning (Net Change in Employment +20k exp. vs 39.9k prev., unemployment rate 5.6% exp vs 5.5% prev.)

Market Prices

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