Bond markets have been supported by some market-friendly data and while Fed speakers were again mixed, it was the more dovish remarks that captured attention.
Markets Today: Taylor
The USD has continued to eke out small gains amid ongoing speculation over Fed Chair nomination, US equities are flat (DJ briefly traded above 23k for the first time) and commodities are mixed.
Taylor, Jack Johnson’s hit from 2003, is about a girl, but the market focus has been about another Taylor (John) who apparently made a good impression on President Trump. The Stanford economist is considered to be on the hawkish side of the spectrum and therefore the speculation has supported the USD and bumped US rates higher.
So the USD is again a little bit stronger across the board (DXY +0.198%, BBDXY +0.4%), but in addition to the Fed story (more below), the USD to some extent is also winning the least ugly person contest at the barn dance. GBP (-0.48%) has been one of the big underperformers overnight, despite the fact that headline inflation reached 3%, its highest reading in 5 years. Core inflation was unchanged at 2.7% and the retail price index was a tenth lower at 3.9% (4.0%e, 3.9%e). This suggests the market was looking for higher numbers to cement expectations of a November BoE hike. Speaking to lawmakers, BoE Carney reiterated that the Bank is ready to raise interest rates, although he avoided committing to a hike next month. Carney’s comments weighted on the pound and triggered a rally in UK rates.
The Spanish-Catalonia stand- off is still weighing on the Euro ( -0.22%) and the hard US line on NAFTA negotiations remains a negative for the CAD (-0.18%). That said, oil prices have had a volatile night and could be an additional factor weighing on the CAD and NOK ( -0.54%).
Meanwhile antipodean currencies are little changed (NZD -0.03% and AUD -0.06%). Yesterday NZD jumped about 30pips as the Q3 CPI data came in slightly higher than market expectations, but then the pair lost ground after the RBNZ released its favoured core inflation series, which showed annual inflation static at 1.4%, going against the grain of the official core measures that nudged higher. The overnight low of 0.7148 came soon after the latest GDT dairy auction showed an average 1% drop in prices. NZD now trades at 0.7169.
The AUD on the other hand has traded in a 0.7818- 0.7861 range over the past 24hrs and currently trades at 0.7844. Yesterday the RBA minutes didn’t reveal much new on the monetary policy front, but there was a slight de-emphasis on the AUD. The minutes noted that “The appreciation of the Australian dollar since mid-2017, partly reflecting a lower US dollar, was expected to contribute to ongoing subdued price pressures. A material further appreciation of the exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”. The word ‘material’ has been added to the above sentence on the currency, suggesting less concern about slight/modest AUD appreciation from current levels.
Looking at the betting odds on the next Fed Chair it is interesting to note that the emergence of John Taylor (19c, +11c) has come largely at the expense of Warsh ( 18c, -7c), Yellen prospects have also risen ( 21c,+6c), Cohn remains in the running ( 14c(+8c), but Powel is still the man to beat ( 36c, -3c).
In other news, Reuters reports that Senate Rep. are gaining support to pass a budget resolution, if so that would be a positive for the prospect on tax reform.
This morning NAB releases two reports, the relatively new NAB Cashless Retail Sales index for September and the Q3 NAB Commercial Property Survey. Last month the NAB’s Cashless Retail sales Index flagged the weakness in the retail sales number in August, so it will be interesting to see what the index reveals for September.
The big event of the day comes around midday when China’s President Xi Jinping gives the opening speech at the 19th Communist Party Congress which should set out his agenda for the next five year. The market will be watching closely for signals on financial market reforms, anti-corruption drive and deleveraging related reforms.
BoJ Sakurai speaks early this afternoon, then this evening ECB Draghi, Praet and Coeure speak in Frankfurt. Ahead of the ECB meeting on October 26, it will be interesting to see if any of them offer any comments on the potential quantity and length of QE tapering.
The UK gets its labour market figures for August and a solid report should help reinforce the view that a BoE rate hike in November is more likely than not, although politics remains a potential hindering factor.
Moving on to the US, Fed’s Dudley and Kaplan discuss economic development in a panel and in terms of data releases the US gets Housing starts and home building permits ( both for September) and the Fed publishes the latest edition of its Beige Book.
Lastly there is a chance the US Treasury may release its Semi-annual Report on International Economic and Exchange Rate Policies. Back in April the US Treasury concluded that at the time no major trading partner of the US met the conditions for currency manipulation in H2-16. We expect a similar outcome this time around.
On global stock markets, the S&P 500 was -0.01%. Bond markets saw US 10-years -0.18bp to 2.30%. In commodities, Brent crude oil +0.61% to $58.17, gold-1.3% to $1,283, iron ore -0.3% to $62.72, steam coal +0.0% to $96.15, met. coal -0.1% to $181.75. AUD is at 0.7848 and the range since yesterday 5pm Sydney time is 0.7818 to 0.7861.
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