Markets Today: Running on Faith

While equity markets had a day of consolidation, the USD and US Treasury yields had a decent move higher aided by increasing hopes over US Tax reform.

By Rodrigo Catril

Like Eric Clapton would say the market is running on faith, nothing concrete has been announced, but there is a growing feeling that something will be done amid Trump’s bipartisan approach along with the need for Republican to score some runs ahead of next year’s election. Meanwhile quietly in the background, commodities had another mixed day, oil is up, but copper and nickel are down.

The USD range traded early in the overnight session, but then tweets and news reports over a possible Republican announcement on US Tax reform lifted the USD across the board.

Kevin Brady chairman of the House Ways and Means Committee, told the chamber’s Republicans that White House leaders and congressional leaders “ will release a consensus document with the core elements of big, bold tax reform” during the last week of September. White House Budget Director Mick Mulvaney said the target date is September 25.

The news lifted USD indices (BBDXY +0.40% and DXY +0.61%) and saw the big dollar outperform across the board. The CAD managed to only lose 0.05% thanks to an uptick in oil prices (see more below), but all other G10 currencies fell between 0.4% and 0.90%.

After trading to an overnight high of 0.8044, the AUD drifted down to an intraday low of 0.7971 and now it has settled around 0.7985. The overnight dip in the currency tested the upward trend established since mid-May and now the AUD is sitting on the trend line. AU Labour force today and US CPI tonight are important data releases (see coming section below) and could have an influence on the near term direction of the currency. US CPI numbers have printed below expectations for 5 months in a row and another soft print tonight would raise serious question over the possibility of a Fed rate hike in December.

GBP fell 0.65% to 1.3209 despite the fact that UK unemployment (ILO measure) dropped to another new all-time low at 4.3%. Earnings for July were lower than forecast at +2.1%y/y (vs +2.2% f/c) and unchanged vs June. This after yesterday’s spike in (Aug) CPI to 2.9%, meaning real incomes are lower still. The lack of real income growth muddies the waters for the BoE which meets tonight (see more below).

NZD is down 0.78% to 0.7241, weighed down by broad USD outperformance and as our NZ strategist notes there is nothing more to say other than the currency seems to be well contained within a range of around 0.7150-0.73. The Euro also suffered the same faith, dropping almost one big figure from 1.1980 to 1.1885. At the margin Euro’s underperformance is also explained by the small decline in 10y Bunds, 1bps to 0.40% against a the rise in 10y UST yields to 2.188%, from 2.155%

SEK was the big underperformer overnight (-0.93%) given back all of its CPI gains after the final 2Q GDP reading showed that Sweden grew 1.3% q/q versus the preliminary figure 1.7%.

Looking at commodities oil prices are up between 1.6% and 2.3% aided by reports from the IEA and OPEC forecasting stronger demand. Meanwhile copper fell 1.7% to $2.9835, the lowest in more than three weeks and Nickel had another bad day, dropping 5.3%. Gold ended 0.5% lower and iron ore was essentially unchanged at $76.6.

Coming Up

We have a busy day today with important items in the domestic and offshore calendar. RBA Deputy Governor Debelle speaks at 9:15 this morning ahead of the release of Australia’s labour force report and then just before midday China releases its activity indicators for August. This evening the BoE makes its policy rate announcement and later on the US releases its CPI figures for August as well as the usual weekly jobless claims.

RBA Deputy Governor Debelle speaks at a King and Mallesons Workshop and at this stage there’s no speech title available on the RBA website. That said our economists note that with the RBA Board meeting now out of the way, Debelle does have a bit of freedom to offer his view on the economy, monetary policy and the AUD.

As for the labour force report, NAB (and the consensus) looks for another solid report with a steady unemployment rate of 5.6% and around 20,000 new jobs created. This month’s release also includes the latest quarterly reading on underemployment. The latter will be just as important as the headline numbers as RBA officials, including Harper yesterday, have noted the lack of improvement in the under-employment rate as a concern.

Also this morning, China releases its August readings for Fixed Asset Investment, retail sales and Industrial Production. We think the data will likely simply confirm the picture of mildly slowing growth.

Looking at the Bank of England policy rate decision, the consensus view is for an unchanged outcome, however recent media stories suggest the Bank is likely to warn investors, businesses and households that they underappreciate how soon rates may rise in the UK. That said, after yesterday’s stronger than expected CPI reading, the market has brought forward expectations of a BoE rate hike to May 2018 from December 2018.

The 5% uptick in gasoline prices after hurricane Harvey suggests there is upside risk to the 0.3% rise in US headline CPI expected by consensus (1.8%yoy exp. vs 1.7% prev.). After five soft prints the core reading is expected to rebound to 0.2%mom (1.6% yoy vs 1.7% prev.). If there is no rebound in the core reading, however, the market is likely to further question the likelihood of a December rate hike (currently priced at 32% probability).

Lastly the US weekly jobless claims are likely to be a bit of a lottery. The market is looking for an essentially unchanged 300k print, but after Hurricane Katrina in 2005, jobless claims jumped by more than 100k. So even if we get an unchanged number this week, a big number is due to show up in the coming weeks.

Overnight

On global stock markets, the S&P 500 was -0.03%. Bond markets saw US 10-years +2.63bp to 2.19%. In commodities, Brent crude oil +1.58% to $55.13, gold-0.5% to $1,322, iron ore +0.2% to $76.56, steam coal +0.6% to $100.30, met. coal +0.0% to $206.00. AUD is at 0.7981 and the range since yesterday 5pm Sydney time is 0.7971 to 0.8044.

Good luck.

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