November 19, 2015

Markets Today: Oil Drilled

Hat tip to one our London traders for plagiarising today’s title.

Hat tip to one our London traders for plagiarising today’s title.

FOMC October meeting minutes are gabbling the headlines as we write, but ahead of that it was the latest fall in oil prices – with WTI crude below $40 for the first time since 27 August – that captured much of the market’s attention and ensured that NZD, AUD, CAD and NOK occupy four of the five bottom places in the G10 scoreboard of the past 24 hours. The ever-mercurial Swiss France is actually the worst performer on the day – even as expectations for a cut to the ECB’s deposit rate on 2 December ramp higher. Indeed, CHF is vying with NZD for the FX wooden spoon in terms of performance over the past week. Perhaps the view here is that ‘anything the ECB can do, we (the SNB) can do better’.

GBP is a touch firmer after the BoE MPC’s Ben Broadbent said he sees a solid recovery in domestic demand and that output is much closer to potential to than in 2012. He also notes that the gap between market and economists’ forecasts for rate rises tends to widen when risky assets do poorly.

Oil’s latest drop (since partially retraced) came on news that US inventories had risen to their highest level for this time of year since 1930 (according to Bloomberg). Accompanying the oil price drop, industrial traded metals are all lower again, though iron ore is actually a touch firmer, +$0.77 to $46.35 for the 62% fines grade imported by China. In terms of potential strengthening in Chinese demand, we’d note that at the nationwide (weighted average) level, Chinese property prices turned positive in year-on-year terms last month.

As for the Fed minutes, while we often characterise these as offering something for everyone, our immediate take is that there were somewhat fewer two-handed economists/policy makers in evidence at the October meeting than we are used to. The minutes indicate that ‘most’ Fed officials said lift-off conditions could be met by December’ with only ‘some’ members suggesting that a reference to December was too strong an indication. But the minutes play up the recently softer labour market reads as the key reason for inaction in October, and by implication play up the relevance of the subsequent numbers (very strong) as a the key factor governing policy disposition between October and December. In short, it is going to taker either a disastrous November payrolls report or major sell-off in US/global risk asset, to stop the Fed going next month.

As for market reaction to the Fed minutes, though we saw a knee-jerk move higher in the US dollar (taking the narrow DXY index to within a whisker of 100 (99.853) and to its best level since April) this was quickly reversed. DXY is now lower on the day. 2-year Treasury note yields added 1.5bp to a new cycle high of 0.8940 but have also since more than fully retraced the gain. More evidence here that December lift-off is fully priced and highlighting the risk that the dollar falls and rates markets rally out of the 17 December meeting.

On this point, newly installed Dallas Fed President Richard Kaplan spoke last night and while not rejecting the notion of December lift-off, has marked himself out as on the dovish side of the Fed spectrum. He indicates that the Fed will use its ‘dot-point’ forecast in December to signal the gradualist nature of the expected path for the Fed funds rate post lift-off.

Coming Up

As the dust settles on the Fed minutes, today we have the ECB’s account of its 22 October meeting following which President Draghi dropped the very heavy hints that more stimulus is being planned and to be decided at the next (2 December meeting). We might not learn a whole lot more than what Mr. Draghi told us then, namely that all options for further easing were to be considered.

The Bank of Japan meets today, in the immediate wake of this week’s news that Japan had re-entered recession for the fourth time since the start of 2011 (essentially, Japan has spent half of that time in technical recession). We still doubt that is going to draw a response from the BoJ as early as today, especially with USD/JPY trading well above ¥120 and with no evident desire from either the BoJ or the government to see the yen significantly lower at this stage (and which would be an inevitable consequence of more easing).

The BoJ announcement will be precede by latest (October) Japan trade data. Locally, just ANZ job ads today, plus the RBA’s FX transactions for October, while New Zealand releases Q3 PPI.
In China we get the MNI November Business Indicator and in the US, the Philly Fed survey and jobless claims top the calendar. Lockhart and Fischer are the rostered Fed speakers.


On global stock markets, the S&P 500 was +1.10%. Bond markets saw US 10-years +0.53bp to 2.27%. On commodity markets, Brent crude oil +1.54% to $44.24, gold+0.1% to $1,069, iron ore +1.7% to $46.35. AUD is at 0.7106 and the range was 0.7069 to 0.7118.

  • US Oct Housing Starts -11.0%% (-3.8% E, +6.5%P); US Building Permits +4.1% (3.8%E, -5.0%P).
  • Weakness in starts driven by the volatile multi-family (apartment blocks) sector with single family starts and permits both showing ongoing strength
  • ECB’s Mersch sees no indication of economic pessimism after Paris terrorist attacks

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