December 6, 2016

Markets Today: La Dolce Vita

The market’s knee jerk reaction to “no” outcome from the Italian referendum saw the Euro fall back by over a big figure for an hour or so, but that was it.

The market’s knee jerk reaction to “no” outcome from the Italian referendum saw the Euro fall back by over a big figure for an hour or so, but that was it.  Well at least the polls were right this time!  And so the Italian people have voted “no” to the constitutional referendum to streamline passing legislation and PM Renzi has, as promised, fallen on his political sword.  After initially dropping, the Euro stabilised during most of the Asia session and has rebounded overnight.  Italian politics is Italian politics after all.

Italian bonds have not performed materially different from bunds overnight, but the Milan SE has dipped 0.21% against a 0.56% rise in the Eurostoxx 600 index. (Banca Monte dei Paschi di Siena shares closed down another 4.21%.)  Adding a little more European political news, French PM Valls threw his hat into the Presidential ring to bolster the chances of the left, standing for “an independent France”.  The market will certainly be focused on those elections, set for April-May next year.

The overnight data reads from the US were strong.  While the Fed’s composite (and Yellen favourite) Labour Market Conditions Index change for November rose a stronger than expected 1.5 points (+0.2 expected), it was a stronger than expected 57.2 print on the Non-Manufacturing ISM for November that caught the market’s eye as perhaps the final piece of top tier data ahead of next week’s FOMC sealing the deal.  It was the strongest reading on services for 13 months with the employment component at 58.2 was within 2 points of its 60.2 all-time high.

While the print was undoubtedly strong, the USD has overall lost some ground overnight, though this looks to be mostly Euro-inspired.  The Treasury market continues to fully price in a hike next week, but added a little more into the front of the US curve, the 2y Treasury up a net 2.4 bps yielding 1.12%.  10s are also closing a little higher, net.

Three Fed speakers have been on the wires overnight, the erstwhile and cautious NY Fed’s Bill Dudley saying that he favours somewhat tighter policy over time, noting that it is premature to make judgments about 2017.  One interesting comment he made though was it would be important for fiscal and monetary policy to be aligned going forward.  This is clearly something the Fed is beginning to address.  While it’s early days as far as knowing the magnitude of what President-elect Trump’s fiscal policy, Charles Evans also said that with unemployment at 4.6% and an expectation that the economy will be strong, you don’t need explicit stimulus from the government.  Put that one into the memory banks for 2017.  Evans currently does not have a vote on the FOMC, but does next year.

Speaking from a not dissimilar hymn book in the past hour, “one-and-done” Fed President James Bullard (a voter this year, not next) said that Trump’s policies could impact his low rate views, his point being that “new policies brewing in Washington may have some impact on the low-safe-real-rate regime” if they’re aimed at improving productivity growth in medium term.  So also not averse to the idea of more tightening that might follow fiscal stimulus.

Coming up

Yesterday’s AU profits and inventories partials suggest a slight upside risk to NAB’s -0.2% pick for Wednesday’s GDP, perhaps to -0.1%.  There are some more pre-GDP quarterly partials today at 11.30 with the release of the Q3 balance of payments with the net exports contribution to real GDP growth.  NAB’s estimate is for a 0.3% point detraction.  On the other side of BoP ledger is the impact on nominal GDP from a rise in the terms of trade of around 4% that should result in positive Q3 nominal GDP.  There’s also the government spending estimate out today revealing whether public spending (infrastructure spending?) might yet bring home the bacon and avert a fourth individual quarter of negative GDP since the early 1990s recession.

Then comes the RBA Board announcement at 2.30 and whether there will be any inkling of a change in emphasis from its November views, with its review of the labour market and housing in particular, having described the labour market last month as “mixed”, still appropriate and housing prices last month as “rising briskly over the past few months” in some markets; if anything that might need a little tempering.  Governor Lowe’s statement could well note the recent rises in some bank mortgage rates and that approvals to build apartments were noticeably lower in recent months, a hint of a passing peak.

It’s not a huge night for data with the release of US trade for October, US factory orders and Canada’s IVEY PMI.


On global stock markets, the S&P 500 was +0.56%. Bond markets saw US 10-years +0.55bp to 2.39%. In commodities, Brent crude oil -0.07% to $54.42, gold-0.5% to $1,170, iron ore +1.1% to $78.62. AUD is at 0.7474 and the range since yesterday 5pm Sydney time is 0.7415 to 0.7495.

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