November 23, 2017

Markets Today: Slip slidin’ away

The UK Budget was handed down overnight and UK growth estimates have been marked down from low productivity.

Growth for 2017 was cut down from 2.0% to 1.5%, 1.4% growth expected for 2018, then to 1.3% for 2019 and 2020.  As my London colleague Gavin Friend reminded us overnight, that’s a far cry from the 2½-3% growth not only in the US but now in Europe.  There’ll be a reminder of this tonight with the second estimates of UK and German Q3 growth, the UK’s initially pegged at 1.5% y/y and Germany’s at 2.8% y/y.

A cut to official UK growth forecasts into the lower “1s” and deficits as far as the eye can see picked up a large measure of understandable UK press coverage and saw some initial selling of Sterling.  (Consensus forecasts for the UK are around 1½% this year and the next two years, so somewhat less dour.) Trading though was choppy and Sterling was supported by an emerging softer USD after Yellen’s comments in her “fireside chat” yesterday with ex-BoE chief King with wider audience Q&A in NY.

Yellen said yesterday in a warning that tightening too quickly risked stranding inflation below the Fed’s 2% target.  She also called out the continuing heightened level of uncertainty over the inflation outlook, even though she said that most FOMC members were using a working assumption that the downside mystery on inflation this year (including from idiosyncratic factors) would not re-appear next year.  Such a low conviction view didn’t impress the USD market, the USD falling back, as have US Treasury yields overnight. The AUD/USD has popped its head back above 0.76 this morning.

The Fed has just released the 2 Nov Minutes suggested that a December hike (baked into pricing) is still on (“many Fed policy makers saw `near term’ rate hike as warranted”), a “few” opposing it on the grounds of weak inflation.  The quote that “many officials observed that low inflation `might reflect not only transitory factors, but also the influence of developments that could prove more persistent” suggests that FOMC members might be on the verge of wavering on their dot point forecasts for 2018.  They may well hang tough in December; the outlook for the Fed funds will be determined by the data runs.  In the end, the Minutes noted that “nearly all participants” reaffirmed the view that gradual rate hikes would be warranted.

US Durable goods orders for October was a little softer than expected for both headline and core orders, though the trend remains positive.  Jobless claims in the week of 18 Nov fell back from 252K ti 239K, consistent with a still strong job market.

Coming up

With the US now largely out for the rest of the week for the Thanksgiving Day holiday and Black Friday sales, there’s very little data and scheduled market sensitive events scheduled there.  What attention there is in the US will likely be on the success or otherwise of the Black Friday sales, pcp comparisons and so on.

NZ has its Q3 retail sales volumes this morning at 8.45 AEDT.  BNZ expects it to drop 1.0%, payback after the boost to the June quarter (+2% q/q) was lit by the big sports events NZ hosted in April through June. Q3 will also probably suffer a correction in auto sales, after their big outturn in Q2.  Market consensus is for +0.1%;  any positive outcome should be viewed very positively.

There is quite a bit of European focus first with another vintage of Germany’s Q3 GDP (L: 0.8%/2.8%) along with the UK’s (L: 0.4%/1.5%).  Then it’s the German/Eurozone preliminary PMIs for November, the consensus looking for another month of solid readings.  As far as Germany is concerned, market observers are paying closer attention to whether Angela Merkel can actually cobble together a working coalition and avoid another elections, such hopes re-flickering again overnight.

There’s quite a bit of ECB/policy focus with the release of the ECB’s October 26 Governing Council Minutes at which the decision to continue with QE without specifying an end date was not unanimous, let alone the issue of reversing negative rates.  There are several opportunities for the French to voice their concerns with the BdF Governor Villeroy scheduled to speak twice along with a speech from the ECB’s Benoit Coeure.  Canada has its September Retail Sales report too, sales expected to bounce by 0.9% in the month after a 0.3% decline in August.


On global stock markets, the S&P 500 was -0.06%. Bond markets saw US 10-years -3.54bp to 2.32%. In commodities, Brent crude oil +1.10% to $63.26, gold+0.9% to $1,293, iron ore +4.3% to $65.17, steam coal +0.3% to $96.20, met. coal +1.5% to $190.25. AUD is at 0.7613 and the range since yesterday 5pm Sydney time is 0.7558 to 0.7618.

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