Todays podcast

https://soundcloud.com/user-291029717/powell-wants-time-to-heal?in=user-291029717/sets/the-morning-call

Overview Ready to Start

• Powell says time to taper but not to raise rates; echoes others admitting to upside risk on inflation
• US curve bull flattens with 2s unchanged and 10s -7bps post-Powell….
• …but 10yr yields up everywhere on the week, nowhere more so than Australia
• Mixed picture from PMIs in EZ, but overall stronger in US and UK
• AUD flat on Friday, up on week but finishes 1% back from intra-week high
• This week: AU Q3 CPI (Wed), ECB and BoC, US Q3 GDP

Now I’m ready to start, My mind is open wide, And now I’m ready to start – Arcade Fire

There was no singularly consistent theme running through global markets on Friday, though comments from Fed chair Powell engendered a fair amount of intra-day volatility, including a renewed (bull) flattening in the US yield curve. Friday’s main economic events, namely the ‘flash’ PMIs, tell us that while the inflation half of the ‘stagnation’ debate is a real and present danger, there is little reason to fear stagnation, for the time being at least, given still elevated levels for all readings across Europe and the US. That said, the energy crunch is clearly taking a toll on Eurozone services activity – less money to spend on them presumably as energy prices soar – but, surprisingly, not in the UK, and definitely not in the US notwithstanding recent sharp fall-backs in consumer confidence; where the message seems to be ‘watch what they (US consumers) do, not what the say’. See below for a full listing of Friday’s PMI and other releases.

Australia  Q3 CPI and ECB and Bank of Canada meetings are among the coming week’s significant known unknowns, in a week that, contrary to widespread expectations last week, isn’t stating off with news of an Evergrande default, after it reportedly made the overdue coupon payments on dollar bonds on Friday just ahead of the expiration of the 30-day grace period that commenced Sep 23. The latter didn’t arrest the weakness in base metals prices on Friday though and which will surely be a victim of sharply reduced housing construction in the months ahead, the LMEX index losing another 1% to be 6% down on the week, led by a 10% drop in aluminium.

“I do think it is time to taper,” Fed chair Jay Powell said Friday, adding “I don’t think it is time to raise rates,” stressing that the labour market needs time to heal with more than 5 million fewer people employed than before the pandemic. Powell nevertheless failed to offer any explicit protest at market pricing which currently has rates lift off fully priced for Q3 2022.  Indeed, on inflation Powell said that “Supply-side constraints have gotten worse,” and that “The risks are clearly now to longer and more-persistent bottlenecks, and thus to higher inflation.” “We think we can be patient and allow the labor market to heal,” he said, before adding that, “no one should doubt that we will use our tools to guide inflation back down to 2%” if it looked like more persistent inflationary pressures were taking root.

Powell rightly says that Fed tools don’t do much for supply constraints, echoing recent comments from Bank of England Governor Andrew Bailey, that monetary policy can’t put more truck drivers on the UK’s roads.  What central bank policy can, or might, succeed in doing though is reducing risk of second round effects (inflation expectations that then feed ongoing higher wage demands).The latter, though, are of course already very evident in the US and UK.

US Treasuries Friday & Weekly  

Powell’s comments lead us, and the market, to believe that tapering will not only be announced out of next week’s FOMC meeting but more likely than not will commence almost straight away, rather than wait until December. On a $15bn per month tapering each month, already indicated by the Fed as the most likely magnitude, the Fed would be done by June. The effect of Powell’s comments on bond market was to see little change in front end rates (and hence an expectation for Fed rates ‘lift’ off soon after tapering is complete) while 10-year yields fell by 7bps. This can’t mask a fairly uniform upwards shift in the US yield over the week, with 2s, 5s and 10s all up by between 6 and 7bps (albeit the 30 year was up a lesser 3bps).

Benchmark 10yr Bonds Friday & Weekly

Globally it was a mixed picture Friday, while on the week yields are higher everywhere at 10 years with Australian 10s outpacing the rise in the US and elsewhere, up some 15bps. This is after the RBA came in on Friday to defend its 0.1% YCC target by purchasing the April 2024 bond for the first time since February.

Equities Friday & Weekly

Equities ended Friday with most major indices having an ‘up’ week led by Hong Kong’s Hang Seng (+3.1%) with the Nikkei (-0.9%) and to a lesser extent the German DAX the only two to be down on the week. Incoming Q3 corporate earnings continue to provide support to the S&P500 which ended up over 1.6% albeit own slightly on Friday. The ASX 200 ended the week mid-pack, up 0.7%. More US earnings reports arrive in spades this week (See Coming Up, below).

FX Friday & Weekly 

The US dollar was down last Friday and on the week but far from out, the DXY a mere 0.3% lower. At 93.6 (down 1% on its recent highs) the USD is to our mind still traveling essentially sideways inside a broader 93-95 range and, on NAB’s latest forecast, is expected to continue doing so for a while yet. AUD/USD was flat on Friday and 0.6% up in the week, still more than 1% back from its intra-week highs of 0.7459, at 0.7465. the week’s standout performer was NZD, up 1.3% and where after last week’s stonker of a Q3 CPI report, opinions are divided on whether the RBNZ’s next move (Nov 24) will be to lift rates by 25bps or 50bps.

Commodities Friday & Weekly 

Commodities put in a mixed performance on Friday , with energy-related prices – and too iron ore futures – posting gains but base metals continuing their fall with copper and aluminium both off more than 1%. This brings the fall in aluminium to 9.6% on the week closely followed by nickel (-9.1%) with the LMEX index of base metals off more than 5%. It does make you think that commodity markets, outside energy at least, have started to wake up to the what reduced China property construction in coming quarters (and years?) means for commodity demand. Everglade’s surprise completion of an overdue dollar bond market on Friday, so staving off for now a formal default, doesn’t really change this picture.  Incidentally in this respect, Australia’s real time terms of trade index a strickled by Citi on Bloomberg, has now given back more than half of its exceptional mid-September to early October gains.

Fridays’ data:

UK Sep Retail Sales -0.2% vs 0.6% expected
UK Oct Manufacturing PMI 57.7 from 57.1 an 56.0 expected
UK Oct Services PMI 58.0 from 55.4 and 54.5 expected
UK Oct Composite PMI 56.8 from 54.9 and 54.0 expected

France Oct Manufacturing 53.5 from 55.0 and 54.0 expected
France Oct Services PMI 56.6 from 56.2 and 55.5 expected
Germany Oct Manufacturing PMI 58.2 from 58.4 an 56.5 expected
Germany Oct Services PMI 52.4 from 56.2 and 55.2 expected
Eurozone Oct Manufacturing PMI 58.5 from 58.6 and 57.1 expected
Eurozone Oct Services PMI 54.7 from 56.4 and 55.4 expected
Eurozone Oct Composite PMI 54.3 from 56.2 and 55.2 expected

US Oct Manufacturing PMI 59.2 from 60.7 an 60.5 expected
US Oct Services PMI 58.2 from 54.9 and 55.2 expected
US Oct Composite PMI 57.3 from 55.0

Canada August Retail Sales 2.1% vs 2.0% expected, ex-autos 2.8% vs 2.6% expected

Coming Up

• Nothing due locally today (and NZ is out for Labour Day). Facebook reports its earnings after the NYSE close while data wise we get the German October IFO survey where the main readings are all expected to be a point or so down on September’s.
• In Australia Q3 CPI is the key event of the week. We expect the RBA’s preferred Trimmed Mean to print at 0.4% q/q (2.9% y/y) and for Headline to come in at 0.7% q/q (1.7% y/y).  Consensus is 1/10% higher on both counts and we note the risks to our forecasts are tilted to the upside, with the key risk coming from higher than expected new dwelling construction costs which have been restrained due to the HomeBuilder subsidy which is treated as an effective price cut for the consumer.
• The U.S. has its first read on Q3 GDP on Thursday with consensus at 2.8% annualised, a substantially slowing from 6.7% in Q2, while the Atlanta Fed’s GDPNow points to downside risks to a barely visible 0.5%. Before then we get Durable Goods on Wednesday and then the PCE deflators on Friday – Core PCE expected to be 0.2% m/m and 3.7% y/y. After Facebook today, there is another large slug of company earnings due including Twitter and Alphabet (Tuesday), Amazon, Apple and Samsung (Thursday).
• The ECB meets on Thursday with markets looking for no change to policy settings. Views on inflation to be keenly watched in the post-meeting press conference. On the data side, the key release is the first read of Q3 GDP on Friday with consensus at 2.1% q/q.  The Bank of Canada is expected to a further education in its weekly QE bond buying – to $1bn per week, when it meets on Thursday.  The UK Budget is on Wednesday.

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