Today’s podcast

https://soundcloud.com/user-291029717/strong-us-data-with-no-room-for-chicken-lickens?in=user-291029717/sets/the-morning-call

Overview: Wake me up when September ends

• Risk sentiment bounces on hopes for a US stimulus deal and on strong economic data
• Debate fallout sees Biden and Democratic clean sweep odds lift, contested election odds lift too
• S&P500 +0.8% (range +0.1 to +1.7%); US 10yr yield +3.5bps to 0.68%; Gold -0.4%; Brent Oil +1.3%
• G10 FX sees commodity/growth proxies outperform with AUD +0.5% and USD/CAD -0.6%
• Coming up today: AU House Prices, JN Tankan, ECB’s Lane, US ISM/PCE/Jobless Claims

“Summer has come and passed; The innocent can never last; Wake me up when September ends”, Green Day 2005

Risk sentiment bounced overnight on optimism that a US fiscal package can be agreed to, and as economic data came in stronger than expected. However, that optimism was pared somewhat towards the end of the day after US Treasury Secretary Mnuchin said “we still don’t have an agreement”, but hopes have been kept alive with Pelosi and Mnuchin set to meet again tomorrow.

The S&P500 pulled back from session highs on that late headline, though finished still well in the green at +0.8% (range +0.1 to +1.7%) and notably shook off the negative lead from Europe (Eurostoxx 50 -0.6%) and the fallout from the US presidential debate (S&P500 futures in Asia at one point were down -1.3%). Yields also moved higher, with the US 10yr +3.5bps to 0.68%. So ends September with the S&P500 down over the month -3.9%. As for FX, September was the month where the USD rebounded (DXY +1.7%) as Euro fell (EUR -1.8%), while the USD/Yen was little moved. The worst performing currencies over the month were AUD (-2.9%), GBP (-3.5%), SEK (-3.6%) and NOK (-6.8%).

Hopes of a US fiscal stimulus package were buoyed overnight after Treasury Secretary Mnuchin said he was “hopeful that we can get something done. I think there is a reasonable compromise here”, with those comments coming before a meeting with House Leader Pelosi who was also “hopeful” for  deal.

In the end though

No agreement was reached despite more than 90mins of talk, with hopes for a deal pared somewhat but not extinguished. Mnuchin and Pelosi are set to meet again, while Mnuchin continues to be positive “we still don’t have an agreement, but we have more work to do. And we’re going to see where we end up”; “made a lot of progress over the last few days”.

If an agreement between Mnuchn and Pelosi can be reached, Senate Republicans are likely not to step in the way given prior comments. Meanwhile House Democrats meanwhile delayed a vote on their $2.2tn proposal to buy time in talks.

As for the fallout from the US presidential debate

That was notably mixed. Although it was initially “risk off” in the aftermath of the debate (S&P500 futures were down by as much as –1.3% at one stage), the turnaround in stockshas led to a number of high-profile Wall Street commentators stating the stock market doesn’t seem upset with the prospect of a Biden win (e.g. former Goldman’s CEOBlankfein tweeted: “so far the stock market doesn’t seem too upset at the prospect of Biden winning, despite Trump’s more market friendly policies.

Perhaps folks think their stocks and 401(k)s will do better with higher taxes and increased regulation than with nastiness and scorched earth”). It seems what would be more upsetting is a contested election where the result is not known for weeks/month – reinforced in the debate where President Trump’s refused to say he will accept the poll result and continued his criticisms of mail-in-ballots.

That outcome though becomes less likely if Biden wins by a clear majority and in this vein post-debate polls scored in favour of Biden (though remember they did as well for Hillary).

The stock market also is seemingly backing Biden with solar stocks surging overnight on the back of Biden’s energy plan which includes increased use of solar and wind.

US economic data overnight was much stronger than expected

And helped boost sentiment. The Chicago PMI was 62.4 v 52.0 expected, and the highest since December 2018. Together with the other regional manufacturing surveys suggests some upside risk to tonight’s ISM Manufacturing where the consensus sits at 56.4.

There was though one worrying anecdote within the survey and that was firms continuing to mention additional layoffs in September, and thus reinforcing notions of the labour market recovery having stalled. ADP Employment for September also beat at 749k v 649k expected and suggestive of Payrolls printing within the ballpark of consensus on Friday.

Nevertheless

High-frequency data such as HomeBase are suggestive of stalling occurring in the labour market recovery and we will be watching Jobless Claims tonight closely. Finally, Pending Home Sales were strong (8.8% m/m v 3.1% expected) and reinforcing the strength seen in the housing market.

Chinese economic data also points to continued strong momentum in China

And with activity broadening out to the non-manufacturing sector. The Manufacturing PMI beat expectations (51.5 v 51.3) as did the Non-manufacturing PMI (55.9 v 54.7 expected). Note for the next week China will be quiet with the week-long Golden Week Holidays from today to October 9. It is also possible production ahead of the holidays helped spur demand.

FX played into the more positive mood with commodity/global growth proxies lifting strongly

The AUD rose +0.6% to 0.7164 and has made a remarkable turnaround after hitting a low of 0.7006 on September 26. CAD also lifting by a similar amount with USD/CAD -0.6% to 1.3319, as is NZD +0.5% to 0.6618.

Other FX pairs were more mixed with EUR was choppy -0.1% to 1.1726 amid two notable headwinds. Firstly, there could be a delay to the key EU Recovery Fund, the same fund that initially parked the recent rally in the Euro. The controversy surrounds protecting EU funds from fraud in cases where institutions are weak with details yet to be worked out. Overnight the European Commission in a report singled out a few Eastern European countries with law deficiencies to investigate and prosecute high-level corruption.

That met with strong criticism from Hungary and Poland and spokesman for Germany said that “A delay of the EU budget and the recovery fund is becoming increasingly likely”. Secondly, ECB President Lagarde gave some support to looking at the Fed’s new “average” inflation targeting strategy as part of the ECB’s monetary policy strategic review due mid next year. Such a strategy allows for a period of above-target inflation following a period of sub-target inflation (see Reuters for details).

GBP continues to lift even as Brexit negotiations continue

Bank of England Chief Economist Haldane added to the chorus that negative rates aren’t imminent in the UK, saying work is likely to take months. He outlined three conditions before judging whether negative rates should be applied and none were currently satisfied: operational feasibility; macro necessity for further stimulus; and conviction that the benefits outweighed the costs.

Coming up today

A quiet day domestically with only House Price data likely to garner much interest. Weekly data from CoreLogic suggests prices fell -0.3% m/m across the capital cities, largely due to falls in Melbourne with positive price growth in Adelaide, Brisbane and Perth.

Offshore it is also quiet with only the US with top tier data with the ISM Manufacturing, Personal Consumption/Expenditure, and Jobless Claims. For more details, please see below:

• AU: House Prices, Job Vacancies and AIG Manufacturing Index: All second-tier indicators and unlikely to be market moving. House prices are likely to grab the headlines amid signs of stabilisation across the capital cities apart from Melbourne. Job Vacancies are for August and should bounce after last quarter’s -43.2% q/q, given the rise in job advertising seen across SEEK. The state breakdown of the data will though likely show little bounce in Victoria due to the current lockdown.
• JN: Tankan – Q3: Less market moving these days. The Large Manufacturing Index is expected to be -24, only a slight improvement from last quarter’s -34.
• GE/EZ/UK: Final Manufacturing PMIs – September: Worth a look even though they are the final version, with the potential that the final measure picks up more of the angst over the recent rise in COVID-19 infections in Europe. If so, downward revision could be a possibility.
• EZ: ECB’s Lane: The ECB’s chief economist speaks online.
• UK: BoE’s Haldane: The BoE’s Haldane speaks on “The Future of Shareholder Primacy”.
• US: ISM Manufacturing/PCE/Jobless Claims: An important set of indicators where there may be upside risk to the ISM Manufacturing given the regional surveys to date (consensus 56.4 from 56.0). Personal Income/Spending will be watched closely to see what impact the tapering of the unemployment benefit supplement may be having on consumption (spending consensus 0.8% m/m from 1.9%), as will the PCE Deflator given the recent uptick in inflation as relative price moves associated with the pandemic start to reverse out (core consensus 1.4% y/y from 1.3%). Jobless Claims will also continue to be watched closely given stall signs in the labour market (consensus 850k from 870k).

Market prices

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