Today’s podcast

https://soundcloud.com/user-291029717/us-gdp-bounces-back-and-so-do-equities-for-now?in=user-291029717/sets/the-morning-call

Overview: Hooked on a feeling

• Equities rebound sharply with IT leading gains ahead of key tech earnings that came after the close
• Political momentum shifts back towards Biden and the Democrats gaining a Senate majority
• ECB signals December for easing, smoke signals suggests an even more aggressive easing package
• S&P500 +1.2%, US 10yr +5.5bps to 0.83%, USD (DXY) +0.6%, Gold -0.6%, Brent Oil -3.4%
• Coming up today: AU Credit, JN IP; EZ Q3 GDP; US Chicago PMI and PCE

“When you hold me; In your arms so tight; You let me know; Everything’s all right; I’m hooked on a feeling; I’m high on believing; That you’re in love with me”, Blue Swede 1974

Equity markets bounced sharply overnight with the S&P500 +1.2% after yesterday’s -3.5% decline. Momentum was overwhelmingly driven by tech stocks ahead of key earnings that were just reported after the close by Amazon, Apple, Facebook and Alphabet, with the tech-heavy NASDAQ +1.6%. So far Alphabet, Amazon and Facebook have reported with earnings beating expectations with Alphabet up 8% in after-market trade and Amazon up 1.5%; Facebook is down 2% after closing up 5%.

Buy the dip was also evident with 10 out of 11 S&P500 sectors up. Helping to boost sentiment at the open (though only marginally) was a small beat on US Q3 GDP (+33.1% annualised v. 32.0% expected) and a further decline in Jobless Claims (751k from 791k). US yields moved higher in synch as well as perhaps on some notion political momentum is shifting back towards Biden and the Democrats taking the Senate (US 10yr yields +5.5bps to 0.83%).

In contrast on the other side of the Atlantic

Southern European yields moved sharply lower as the ECB signalled further policy easing in December being more aggressive than markets had first thought (e.g. Italian 10yr yields -7.4bps to 0.69%).

The USD rose across the board, but appears to be still largely driven by EUR weakness and global growth concerns given the French and German lockdowns (note the EUR at 1.1673 is close to its 100d ma at 1.1650). The AUD fell in line with USD strength, down -0.3% to 0.7034 with its high correlation to equities having broken over recent weeks.

The ECB kept policy unchanged as widely expected

But gave a clear signal that it will ease policy in December and perhaps more aggressively than markets had first thought. President Lagarde highlighted that the European economy “is losing momentum more rapidly than expected” amidst the surge in COVID-19 in the region and tighter restrictions, including the lockdowns announced by France and Germany.

Market consensus was that the ECB would upsize its bond buying programme by another €500b in December, but Lagarde hinted at a broader easing package, stating: “We will be looking at all our instruments, how they interact together, what will be the optimal outcome and what will be the mix that will best address the situation.” President Lagarde also noted that “credit conditions on loans to firms [and households] tightened [in Q3]” and that the ECB needs to make sure credit continues to flow and ensure financing conditions remain favourable to support the recovery (see ECB Press Conference for details).

Southern European bond yields fell sharply in response given they would be the biggest beneficiaries of any expanded ECB bond buying program with Italian 10-year yields down -7.4bps to 0.69%, Spanish -4.5bps to 0.13% and Greek -10bps to 0.92%; German 10 year yield -1.1bps to 0.64%. Markets have also nudged up the probability of a 10bp interest rate cut next month to 45%, as well as some speculation the ECB could sweeten terms on its TLTRO (term lending facility for banks).

US yields in contrast rose with the 10yr Treasury yield +5.5bps to 0.83%. The rise in yields largely tracked improved equity market sentiment as well as the momentum in the presidential race shifting back towards Democrats who are seen to want to embark on a large fiscal spending program.

A weak 7yr auction also weighed. Fivethirtyeight have revised higher their probability of Biden winning the Presidency to a new high of 89% (see FiveThirtyEight for details), as well as the probability of the Democrats getting a Senate majority (their Deluxe version gives Democrats an 80% chance of winning between 48-55 seats, while current Republican Senate Majority Leader McConnell said it was a “50-50” chance Republicans lose control of the Senate).

RealClearPolitics also notes Biden has extended his lead in the key battleground states, polling 3.5 points ahead of Trump and is also 1.9 points ahead of where Hillary was back in 2016. The virus resurgence in a number of these key battle ground states are a large factor behind in the shift in momentum back towards Biden (see RCP for details).

US GDP rose broadly in line with expectations, bouncing 33.1% annualised (or 7.4% q/q) after last quarter’s -31.4%. Even with the sharp rebound seen in Q3, the level of GDP remains 3.5% below pre-pandemic levels with a large degree of spare capacity remaining. Higher frequency data also suggests that growth has slowed over recent months, not helped by the resurgence of COVID-19.

US Jobless Claims were again hard to interpret with initial and continuing claims lower than expected (initial claims 751k v 770k expected; continuing claims 7.756m v 7.775k expected), but delayed reporting of the Pandemic Unemployment Assistance showed 387k moving onto the program in the second week of October (note this program offers an extra 13 weeks of federal benefits for those who have exhausted other benefits). Summing all people receiving unemployment benefits totals 22.6m as at October 10.

In FX

The EUR was hit by both COVID-19 concerns and recent French and German lockdowns, as well as the dovish signals from the ECB. EUR is down -0.7% to 1.1673. Note the euro is close to its 100 day moving average of 1.1650 and a break below this could precipitate a further trend now.  The EUR weakness over the past couple of days have precipitated broad USD strength which continued overnight with the narrow DXY +0.6% and the Boarder BBDXY +0.4%..

The AUD and NZD are both around 0.4% lower overnight, in sympathy with the weaker EUR and the softer growth outlook from COVID-19’s resurgence in the northern hemisphere. The recovery in equity markets overnight, and broader improvement in risk appetite, hasn’t provide any immediate support to either currency overnight. The AUD currently trades at 0.7034

Finally

Media with close links to Martin Place reinforced expectations for further RBA easing on Tuesday. The easing package in the words of one journalists entails: (1) cutting rates to 0.10% for the cash rate, 3-year YCC and TFF; (2) cutting the deposit rate that is paid on ES balances to 0.01%; (3) undertaking outright QE by buying both longer-dated Commonwealth and state government bonds (see AFR for details).

This largely aligns with NAB’s own view that the RBA would cut rates and undertake QE in the 5-10 year part of the curve. Our latest analysis of how large a QE program needs to be suggests the RBA would need to buy at least $143bn of bonds, which would equate to around $8bn a month under an 18 month program. The market is already well priced for easing by the RBA, though could be disappointed by the announced size of a QE program after recent comments by RBA Board Member Harper.

Coming up today

A quiet day domestically with only credit/deposit statistics which are rarely market moving. Across the Ditch NZ has consumer confidence figures, while Japan has a trifecta of data including industrial production. Elsewhere the Euro area has Q3 GDP figures that are likely to be seen as dated given the recent lockdowns in France and Germany, and the US has PCE and the Chicago PMI. More details are below:

• AU: Credit & Deposit Statistics: Credit data is rarely market moving, but may garner some interest from analysts for two reasons. (1) The housing market is starting to stabilise, which should translate into improved housing credit numbers; and (2) household deposits have grown strongly since the pandemic with households saving a large share of government stimulus payments and superannuation withdrawals which would provide a fair degree of liquidity for spending once conditions improve – household deposits have risen a cumulative $83.1bn since the pandemic (or 8.4% of Feb 2020 levels). Consensus sees credit growth of 0.1% m/m.
• JN: IP/Jobless Rate/Tokyo CPI: A trifecta of data with industrial production the most important. Consensus sees a further improvement with growth of 3.0% m/m, up from last month’s 1.0%. As for the other pieces, the jobless rate is expected to be 3.1% and the Tokyo CPI is set to be back into deflation with core at -0.2% m/m.
• EZ/GE: Q3 GDP/CPI/Unemployment: GDP figures are somewhat dated now given the lockdowns in France and Germany. For what it is worth Euro area GDP is expected to bounce 9.6% q/q after last quarter’s -11.8% q/q. Belgium reported last night with growth bouncing 10.7% q/q after a revised contraction last quarter of -11.8% q/q and is suggestive of upside risks. Also out is CPI for October with core at 0.2% y/y and unemployment which is expected to tick one-tenth higher to 8.1%.
• US: PCE/Chicago PMI: Core PCE Inflation is expected to tick one-tenth higher at 1.7% y/y, though overall inflationary pressure remains subdued. The Chicago PMI is the last major manufacturing index before the more important Manufacturing ISM next week – consensus is for a tick down to a still very health 58.0 from 62.4.

Market prices

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