Markets Today: Talking Heads

Caution remains the main theme in markets with equities softer on both sides of the Atlantic weighed down by the energy and materials sectors amid softer oil and metal prices.

By

Ahead of US CPI tonight the USD and longer dated UST yields are lower while solid EU GDP data has helped European currencies outperform. Meanwhile a Central Bank Heads panel discussion on forward guidance left us none the wiser on the outlook for monetary policy.

Oil prices fell just under 2% overnight after the International Energy Agency said that recent price gains were unlikely to be sustained amid warning that the supply surge from US shale fields will be bigger than anything the oil and natural gas industry has ever seen. Metal prices were also softer with copper off 1.8%, aluminium -0.9% and zinc -2.3%. Iron ore was one exception up 1.6% to $63.2. Yesterday’s softer than expected activity readings from China seemingly weighed on commodities overnight.

EUR is the strongest currency over the past 24hrs, jumping from 1.1670 to just over the 1.18 mark, before settling just under the figure. Solid EU GDP data releases were the main trigger for the jump in the euro. German Q3 GDP powered on to +0.8% q/q or 2.8% y/y in revised data. Q1 was revised up to +0.7% from +0.9%. The Economics Ministry said investments and exports led the gains, despite the stronger EUR at the time. Italian GDP was also a little higher at +0.5% q/q and 1.8% y/y from 1.5% y/y. Same time German inflation remain fairly benign at 1.5% y/y.

GBP also managed to outperform the big dollar despite underwhelming UK CPI data. UK CPI for October came in at 3% y/y versus a 3.1% consensus, with core inflation also unchanged at 2.7%. Cable dropped to on overnight low of 1.3076 following the data release, but euro strength and broad base USD softness now sees the pair at 1.3161.

AUD and NZD did not benefit as much from the weakness in the USD with softness in commodity prices one hindering factor for the antipodean currencies. After a very strong NAB business survey, the softness in China’s activity readings capped the AUD gains. The pair traded to an overnight high of 0.7650 before heading south again following the move lower in oil prices. AUD traded to an overnight low of 0.7613 and although it now trades at 0.7633, it still looks vulnerable to the downside. Meanwhile, despite the lack of new news, NZD has been the G10 underperformer over the past 24r, down -0.28%. The pair traded to an overnight low of 0.6845, but in the last few hours with the big dollar heading south the kiwi has recovered some ground and now trades at 0.6883.

EU data effectively overwhelmed US data releases overnight. NFIB small business optimism did rise in October, but not as much as expected and ultimately a disappointing bounce post the hurricane impact. US PPI inflation did print higher than expected even after excluding food and energy components, but only met expectations after excluding other volatile components.

The ECB-organised central bank conference of communications did not provide much new news for markets, despite two hours or so of Draghi, Carney, Yellen and Kuroda in panel discussions. There seemed to be some back-patting in terms of recent policy pronouncements (Yellen on balance sheet) though also some acknowledgment that so many voices can be confusing to the public. Meanwhile Draghi said that forward guidance had become a full policy instrument (as opposed to protective rather than proactive when it was first used).

Lastly the White house is said to be considering the nomination of Mohamed El-Erian for Federal Reserve Vice Chairman. There is a range of candidates under consideration and this time apparently the selection focus will be on monetary policy experience for the post.

Coming Up

We have a packed calendar today with US October CPI and retail sales data the main focus for markets. Australia’s monthly consumer confidence reading is the first cab off the rank ahead of the Q3 Wage Price index. Also this morning Japan releases its preliminary Q3 GDP reading ahead of Industrial production and capacity utilisation data this afternoon. US retail sales and Business inventories are also out tonight along with UK labour market data. Central bank speakers are also on the menu starting with RBA Ellis early this evening followed by Fed Evans, ECB Hansson and Praet as well as BoE Haldane.

Australia’s wage price index reading for Q3 is out at 11:30 this morning (AEST) and the market along with the RBA will be checking if subdued wages growth has bottomed in Australia . The market expects wages to increase 0.7% q/q and 2.2% y/y, boosted by the increase in the minimum wage which was hiked 3.3% on July 1. Our economists have pencilled in an outcome somewhere in between 0.6% and 0.7%, slightly below the market consensus. Their analysis of prior minimum wage increases suggests this last increase could add an extra 0.1% to wages growth, slightly softer than the market and the RBA’s estimate of a 0.2% boost. The cut in the penalty rate is also a dampening factor in their analysis.

The market is looking for the US headline CPI to rise 0.1% in October (2% yoy exp. vs. 2.2% prev.) weighed down by a dip in gas prices.  Meanwhile the more important core measure is expected to rise 0.2% in the month, keeping the yoy reading unchanged at 1.7%. Given how well priced a Fed December hike is at the moment (90%), we suspect that we probably will need to see a number sub 1.6%yoy in order for the USD to get hurt. Conversely an upward surprise could well be the trigger that helps DXY make a decisive move above 95 and push 10y UST yields above their technical level of 2.42%. The latter scenario would also see the AUD finally break through the 76c barrier.

Lastly anaemic domestic demand should drag Japan’s Q3 GDP to a still decent 0.4% print from 0.6% in Q2 and in the UK, the market is looking for unchanged unemployment reading of 4.3% in September while wages growth are  expected to slide to 2.1% from 2.2% previously.

Overnight

On global stock markets, the S&P 500 was -0.39%. Bond markets saw US 10-years -2.84bp to 2.38%. In commodities, Brent crude oil -1.58% to $62.16, gold+0.4% to $1,284, iron ore +1.6% to $63.17, steam coal +0.2% to $97.80, met. coal +0.0% to $187.50. AUD is at 0.7633 and the range since yesterday 5pm Sydney time is 0.761 to 0.765.

For full analysis, download the report:

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets