Markets Today: The long and winding road (to Brexit)

It’s been an overnight session marked by generally limited moves in currencies – the Pound the exception – bond yields have been steady-to lower on net, equities down smalls with commodities mixed.

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Oil has given up some of the gains from earlier this week, iron ore and Chinese steel prices rose yesterday, as did base metals overnight, pretty much across the board in a solid session.  After testing into the 0.78s yesterday, two way trade saw Aussie maintain a 78 handle overnight and this morning remains in yesterday afternoon’s range, the USD also hovering ahead of the CPI.

There has also an earthquake/tremors in North Korea, an earthquake registering 2.9 on the Richter scale (the quake was 6.3 when the H-bomb was detonated last month) suggesting perhaps natural forces. The USGS could not say whether it was caused by natural forces or man-made.

US Treasury yields were somewhat higher in the wake of a higher than expected print on core Producer prices for September (0.4% vs 0.2% expected) ahead of CPI tonight, but then bonds rallied again.  That upstream domestically-produced goods inflation measure also came with a lower than expected reading on US jobless claims at 243K, back into its pre-Hurricane range.

Speaking overnight have been Fed Governors Powell and Brainard separately, Brainard on a panel with Draghi and Bernanke at the Peterson Institute in Washington.  She noted that temporary factors have been at work holding back inflation of late, but they were last year pushing inflation up.  She was downplaying the importance of the Phillips curve (wage vs unemployment). Draghi likewise spoke of some improvement in the European labour market and wages, but it’s not been enough.  He reiterated the ECB’s guidance on QE and interest rates.  This had me wondering whether the market might be expecting too much in the way of tapering at the upcoming October 26 ECB meeting.  Bernanke was suggesting that with low rates and trouble missing inflation targets, CBs target the price level not inflation, essentially keeping rates lower for longer to account for inflation misses.

Powell has been speaking, but on emerging markets and not saying much at all directly on US monetary policy.  He of course is one of the candidates to replace Yellen.  Speaking to reporters today, White House Chief of Staff Kelly said that those interviewed were first round choices but that “we still have more to come”, decision timing “some time away”.  Mnuchin said in a CNBC interview that it should happen within a month.  Trump interviewed John Taylor Wednesday.

Back to the Pound.  As the London market opened, Sterling was under some pressure as the currency focused back on the Brexit divorce bill/trade deal impasse, Barnier reporting.  But it did a swift about turn on a report in German newspaper Handesblatt that Barnier may offer the UK a two year transition period to remain in the EU.  Sterling has had a 1-1½ big figure range and is up a net 0.67% from yesterday’s APAC levels.

Coming up

Ahead of tonight’s US CPI comes this morning’s RBA Financial Stability Review and Chinese trade data for September ahead of their main monthly activity and GDP reports next Thursday, coming then hot on the heels of the 19th Party Congress.

There’ll be some housing focus today from two sources, from the RBA’s six-monthly Financial Stability Review (FSR) and NAB’s Q3 Residential Property Survey, both out at 11.30.  The FSR is a report card on general market stability and on household and business balance sheets.  The RBA harbours concerns that mortgage debt is still rising ahead of income growth.  The RBA might be taking a degree of comfort from some signs of cooling Sydney and Melbourne housing markets but mortgage credit growth has not eased (to August), confirmed yesterday by hints of revival in mortgage finance approvals.

Today’s NAB Residential Property Survey for Q3 will also likely draw interest, containing as it does surveyed estimates of foreign buyer home sale shares in state capitals.  In the new market, in Q2 in Sydney it was 12% and Melb at 21%.  This week’s Credit Suisse reported found it was 25% in Sydney and 17% in Melbourne with Chinese interest not falling away since China tightened capital controls.

China’s own trade numbers are far from the most sensitive prints for the A$ but can add a measure of support or a mild headwind if there’s a material out-performance or miss.  They are watched for what they imply about growth, the higher the numbers generally positive for the Aussie.

Markets tonight will be fixated on the US core CPI (the new payrolls in the importance stakes).  Headline CPI is expected to have risen 0.6% form gasoline prices.  Core is forecast to rise 0.2% for the second month after a run of lower growth.  What will the CPI say about the extent of recent “transitory” influences?  And are there other hurricane effects beyond gasoline. Along with US Retail sales, there’s another slug of central bank speakers tonight, 13 by my reckoning and including central bank heads Yellen, Kuroda, Zhou, and Patel on panels.

Overnight

On global stock markets, the S&P 500 was -0.17%. Bond markets saw US 10-years -2.86bp to 2.32%. In commodities, Brent crude oil -1.00% to $56.37, gold+0.6% to $1,293, iron ore +0.7% to $60.09, steam coal -0.9% to $95.15, met. coal -0.5% to $181.00. AUD is at 0.7819 and the range since yesterday 5pm Sydney time is 0.7807 to 0.7834.

Good luck.

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