October 23, 2017

Markets Today: Taylor?

US bond yields ended the NY session on the day’s highs.

US bond yields ended the NY session on the day’s highs, 10 year treasuries at 2.385%, their highest close since 12th July (they were last above 2.40% on May10th). The US dollar ended close to the highs, DXY +0.47% to 93.70, its best close since Oct 6th. This was accompanied by new record closing levels for the S&P500, Dow and the NASDAQ, up 0.5%, 0.7% and 0.4% respectively. Momentum from Thursday night’s passage by the Senate of a Budget resolution allowing for a $1.5tn addition to deficits over the next 10 years was added to in Friday NY trade after Fox News pre-released an excerpt from an interview with President Trump, to be aired on Sunday.

Asked if bringing John Taylor and Jerome Powell together was an option, Trump says ‘It is in my thinking, and I have a couple of other things in my thinking but I like talent and they’re both very talented people’. Fox reported Trump may appoint a Fed chair and vice chair together. Asked who he’s like to see running the Fed, Trump responded ‘Most people are saying it’s down to two, Mr Taylor, Mr Powell.  I also met with Janet Yellen, who I like a lot.  So I have three people that I’m looking at, and there are a couple of others – I’d say I will make my decision very shortly’.

Betting odds on Friday night were: Powell58 cents, Yellen 19 cents and Taylor 18 cents.

Janet Yellen delivered a speech to the National Economists Club in Washington on Friday evening after the NY close.  The Two key takeaways were that:

  1. She does not expect the bond term premium – the compensation demanded by investors for bearing the interest rate risk on longer term securities – to rise appreciably as the Fed proceeds with balance sheet normalisation given its slow and predictable nature compare to the pace of QE and its various surprises.
  2. If the currently estimated neutral policy rate of 2.75% (the median Fed longer term ‘dot’) doesn’t rise over time, the chances of the Fed having to again resort to unconventional policy measures is ‘uncomfortably high’.

In Q&A, Yellen said “We’ve had a series of weak, soft readings on inflation, core inflation, beginning in March and the reasons for that are not immediately clear”. Reasons for low inflation were “pretty understandable until this year. This year has been a surprise”.

In FX, continuation of NZD losses post Thursday’s political news (-1% to 0.6963) was eclipsed by CAD (-1.1%) after lower than expected CPI (1.6% vs. 1.7% expected) and retail sales (ex-autos -0.7% vs. +0.3% expected). These are seen to take additional BoC tightening off the agenda this week (and probably for December too). AUD/USD closed 0.8% down at 0.7817.

GBP was the only currency to buck the stronger USD trend (+0.2%) the story here a sense that EU sensitivity to the fragility of UK PM May’s political position is prompting a slight softening in their hitherto hard-line approach to Brexit negotiations (recall that German chancellor Merkel on Thursday night said that the ball was not just in the UK’s court) .

In US rates markets the Treasury curve bear steepened, 2yrs +4.6bps to 1.578% (+8.3bps w/w) and 10s +6.6bps to 2.385% (+11.1bps w/w).

In commodities, gold took a hit from the rebounding dollar, -$9.50 to $1,277.40, for a loss of $24 or 2% on the week.  Oil was little changed, WTI +20 cents to $51.47 and Brent +50 cents to $57.75. Iron ore recovered from its mid-week dip, +$1.60 to $62.46 to be flat on the week.

Coming Up

NZ is on holiday today, likely mean less price action in all things NZD that we saw in the latter half of last week.  Since the AUD drew some support from the strength of AUD/NZD demand at the end of last week, in the absence of fresh demand here, AUD/USD is now more vulnerable to any extension of USD strength.

This is likely if the market buys into the prospect of a Taylor/Powell Fed Chair/VC combo and on improved prospects for tax cuts after Thursday night’s Budget Resolution passed by the Senate.

Local CPI data on Wednesday is obviously a swing factor, for the local rate market perhaps more so than the currency, but barring direct AUD support from this, a look back down at the 0.7733 6th October lows on AUD/USD wouldn’t surprise later in the week.

The ECB is also a swing factor this week (Thursday) where consensus is for a €20bn per month QE taper for January. Before that Catalonia developments threaten to keep the Euro on the back foot, after Spanish PM Rajoy on Saturday said he will dismiss Catalan President Carles Puigdemont and his government, and take control of the regional police force and public television and radio channels, subject to Senate approval this week.

There’s nothing much of note on today’s calendar. Digestion of Sunday’s Japan election, that sees Shinzo Abe’s LDP returned to power with a 2/3rd majority albeit on low voter turnout, is unlikely to be a big market mover, albeit the Yen might weaken a bit. China property prices will rate a mention, while in Europe and North America the only thing of note is the UK CBI industrial trends survey.


On global stock markets, the S&P 500 was +0.51%. Bond markets saw US 10-years +6.67bp to 2.38%. In commodities, Brent crude oil +0.91% to $57.75, gold-0.7% to $1,277, iron ore +2.6% to $62.46, steam coal +0.4% to $97.15, met. coal -0.5% to $181.00. AUD is at 0.7815 and the range since 5pm Sydney time on Friday is 0.7810 to 0.7856.

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