September 27, 2023

Markets Today – The Price You Pay

US equity and FX markets have for once pushed the bond market vigilantes out of the spotlight, albeit the weakness in stocks and strength in the USD doubtless owes something to the lagged impact of the earlier run up in Treasury yields to post 2007 highs

Todays Podcast

  • Australia August CPI today, focus on services sector components  
  • S&P500 and NASDAQ both down over 1.5%, weekly losses extent to 4% or more
  • USD advances further, AUD back <0.64, more on ‘risk-off’ than (barely changed) US Treasury yields
  • House of Reps. goes home without passing funding bill; Schumer about to advance one in Senate
  • US Consumer Confidence 103.0 from (revised) 108.7 vs 105.5 expected
  • US New Home Sales slump 8.7% (-2.2% expected)

Good morning

Oh, the price you pay, oh, the price you pay, Now you can’t walk away from the price you pay – Bruce Springsteen

US equity and FX markets have for once pushed the bond market vigilantes out of the spotlight, albeit the weakness in stocks and strength in the USD doubtless owes something to the lagged impact of the earlier run up in Treasury yields to post 2007 highs (in fact, 2-year yields are now at their highest since 2006). Weaker than expected US data, albeit second tier (Consumer Confidence, New Home Sales) have contributed something to Tuesday’s equity weakness, plus too the growing proximity to a likely US government shutdown from mid-night Saturday. Just in the past 90 minutes though, Senate leader Chuck Schumer has said the Senate will move on a (bi-partisan) stop gap funding bill (to last 4-6 weeks) but which if passed will need to be approved by the House – which has now shut shop for the week after failing to pass its own bill Tuesday, so would have to be recalled by speaker Kevin McCarthy.

While the broader macro stories have been in the box seat driving during bonds, stocks and currencies in recent days and weeks, the first business news headline that greeted me this morning was that Target was closing nine of its US stores in four US states, including New York and San Francisco, because of the rising incidence of theft, including from organised retail crime. One wonders how this will play out in the next quarterly US earnings reporting season (October) as well as the impact on overseas cash earnings from the rise in the US dollar since the end of the Q2 reporting s season, given USD indices are currently some 6% up on their mid-July lows (albeit much less so from end-June). Also coming onto the radar in FX markets is the risk of significant USD demand as Funds here in Australia and elsewhere rebalance FX hedge books given the scale of US equity market losses so far this month (though of course, that may be happening already given the trend toward dynamic hedging – and indeed is a possible contributor to some of the USD strength we’ve already seen in September).

US equities got off to a bad start Tuesday and leaked lower pretty much ever since, the S&P500 closing down 1.5% and the NASDAQ -1.6%.  Consumer discretionaries (-2%) and Utilities (-3%) are the worst performing S&P sub-sectors. Contributing to the early-day weakness, beyond the influence of weaker Asia and European bourses, was US Consumer Confidence (Conference Board vintage) led by a sharp fall in the expectations component, to 73.7 from 83.3 (the ‘Present Situation’ rose to 147.1 from 146.7).   While rising recession concerns concerns feature in the reports’ narrative, we’d also note that student loan repayments are due to commence from October 1, taking a big chunk out of millions of earners’ pay-cheques (26.8 million Americans reportedly have a student loan).

US August New Home sales meanwhile fell by a much larger than expected 8.7%, though July was revised up to 8.9% from an originally reported 4.4%.  We also some had more (mixed) regional central bank surveys, the most significant of which was probably the Richmond Fed manufacturing Index (up o +5 from -7) while the Dallas Fed Services activity index fell to -8.6 from -2.7.

As for central bank speak, the (usually hawkish) Governing Council member Robert Holtzmann said it’s unclear whether the ECB has lifted borrowing costs to their peak ‘There are shocks out there which may force us to go higher’ he said.

It has been a quieter night for US Treasuries, with a possibility a feedback loop from (ever lower) equities are lending Treasuries a modicum of haven support. That said, 10s are about half a basis point higher on Monday’s close, and the 30-year bond up another 2.5bps to a new cycle high of 4.70%. Earlier Tuesday, core Eurozone benchmark bonds were 1-2bps higher at 10-years, Italy a while 8bps. Gilts were flat.

In FX, aside from the ever-volatile SEK (+0.6%) all G10 currencies er weaker against the still rampant USD, where the DXY index is up another 0.2% and the broader BBDXY a larger 0.3%. GBP remains under the pump more so than other majors, GBP/US off another 0.5% to its lowest since mid-March. AUD is not far behind though, -0.4% and consistent with the broad risk-off tone, to a low of 0.6388. USD/JPY has made a new post 21-Octover 2022 high of ¥149.19 but is starting the APAC back a touch from there. In commodities, WTI and Brent benchmark crudes are both up a little less than $1.

Coming Up

The August CPI indicator is front and centre locally.  See our full preview here. In s hort, we expect headline inflation at 5.2% y/y (also the market consensus). Fuel is the main driver, to be partially offset by food disinflation over the past year. More important will be what the details reveal about services inflation, which is better covered in the August month. We expect the detail to indicate upside risk to the RBA’s 0.9% q/q Q3 forecast for trimmed mean, but that they will need it confirmed in the Q3 CPI on 25 October.
Also worth a look (at the same time as CU) will be China August industrial profits. They were -6.7% yr/yr in July, having improved off a cycle low of -19.2% back in March.
Offshore tonight, just US durable goods orders for August (seen -0.5% for headline after a (Boeing Orders depressed) -5.2% in July, with the ex-transport orders number seen +0.2% after 0.4% last time.