Markets Today: Milk it

Milk It is from Nirvana’s third album ‘In Utero’ and starts with the line ‘I am my own parasite, I don’t need a host to live’. It references Kurt Cobain’s frustration with fame and drug addiction.

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Well Winston Peters might be milking it as negotiations to form a new NZ government drag interminably on, but he clearly does need a host to live. The NZD sits close to the bottom of the G10 scoreboard this morning, weighed down not just by ongoing domestic political uncertainty, but also forecast downgrades to Fonterra’s milk pay-out for the current season. BNZ reduced its projection from $6.75 to $6.30.

The JPY has pipped NZD for the G10 wooden spoon overnight, USD/JPY up 0.60% to ¥112.89 having earlier in the night traded up to its best level in almost two weeks at just above ¥113. Higher US Treasury yields are the proximate cause, with 10-year notes adding about 4ps to 2.34% and about 6bps higher than where they ended last week. This has not sufficed to lift the US dollar in overall terms though with the DXY index finishing in NY -0.1% on modest gains for the CAD, EUR and GBP.  The AUD sits virtually unchanged on this time yesterday at 0.7847

CAD – but not the Mexican peso – looks to have been helped by suggestions that negotiations on reforming NAFTA could drag on until well into next year. GBP got a minor lift from slightly higher than expected growth in average earnings in yesterday’s labour market report (2.2% against an expected 2.1%) which at the margin is seen playing in favour of the Bank of England raising rates before year-end.

As for EUR, source reports suggesting that the ECB might slash its bond buying to as little as €20bn per month from January (from €60bn now) seemed to support. The  counterargument against EUR strength here is that this would allow the ECB to maintain QE for longer and in doing so further delay the process of lifting rates off their current -0.4% floor (remember the ECB has said rates will not rise until well after its Asset Purchase Programme (APP) has been completed).

The highlight of Fed speak overnight came from NY Fed President Bill Dudley (who has always been in sync. with the big hitters on the Fed Board). He said the Fed is ‘on path’ to achieve its 2017 rate forecast and to achieve three rate hikes in 2018. He says the real question is how far the so-called neutral rate will rise. This cuts to the heart of the current excitement about whether if John Taylor gets the nod to lead the Fed rates would necessarily be higher than otherwise. The original specification of Taylor’s rule assumed a 2% neutral real rate. Janet Yellen currently thinks it’s close to zero – hence policy is deemed properly calibrated – but will rise over time. We continue to believe that the ‘right’ trade will be to fade whatever short term volatility Trump’s pick for Fed chair produces. Reports as we got to press suggest the announcement could be ‘in coming days’.

Coming Up

September local labour force survey and China September activity numbers the economic focus. NZ First says they will tell us this afternoon whether it has or hasn’t agreed to jump into bed with either Nationals or Labour (in practise Labour and Greens). For the NZD, our consistent view, still valid, is to fade whatever is the knee-jerk response to NZ First leader Peter’s announcement – assuming of course that he has decided who to crown king or queen, even though we may be about to enter what proves to be a more unstable period in NZ political history.

In the wake of Chinese Leader Xi Xing Pin’s 3-hour+ address to the 19th national party Congress yesterday – now that’s milking it – today brings the official Q3 China GDP and, of greater interest, the slew of September activity reading from industrial production, retail sales and fixed asset investment. The GDP data is uninteresting in so far as we have already been told (by the likes of the governor of the PBOC) that growth will remain near 7% in H2 (therefore it will).  Q3 should be 6.8 or 6.9% in both year on year or year-to-date growth, vs. 6.9% in Q2.

Any market volatility will come from the monthly numbers, where industrial production is seen recovering somewhat from the August dip – to 6.5% from 6.0% in yr/yr terms, with retail sales an investment little changed on the August numbers (which last printed 10.1% and 7.7% yr/yr respectively).

For today’s Australia Employment report, leading indicators, including the Employment Index from the NAB Business Survey, point to yet another strong employment print.  NAB’s model points to what’s turned out to be an above-consensus pick of +25K (market +15K).  Such growth would arithmetically be sufficient to push the unemployment rate lower, except that it may well come from a lift in workforce participation.  The risk on the unemployment rate is to the lower side of our (and the market consensus) forecast for an unchanged 5.6%.

Offshore, it’s UK retail sales (relevant to the debate about whether interest rates will go up in the next few months) and in the US, weekly jobless claims and the Philadelphia Fed survey.

Overnight

On global stock markets, the S&P 500 was +0.13%. Bond markets saw US 10-years +3.95bp to 2.34%. In commodities, Brent crude oil +0.54% to $58.19, gold-0.2% to $1,280, iron ore +0.0% to $62.72, steam coal +1.0% to $97.10, met. coal -0.1% to $181.50. AUD is at 0.7847 and the range since yesterday 5pm Sydney time is 0.7819 to 0.7858.

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