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: Total Eclipse of the Heart
It was a very quiet session overnight with little data of note.
The most significant moves were contained to continued USD weakness (DXY ‑0.4%) and ongoing strength in most base and industrial metals. One excuse for the listless session could be the attention many placed on catching the first solar eclipse on US soil since 1979 (though the more probable excuse is the lack of significant data flow which will likely last until the start of the Fed’s Jackson Hole Symposium on Thursday).
As for the eclipse itself, it was estimated to have traversed the contiguous United States for a period of 1 hour, 33 mins and 16.8 seconds – though only visible for 2 minutes at anyone point. President Trump even got into the fever, though we hope watchers had more success with their eclipse glasses given the potential for eye damage. As for today’s title, who could resist “Total Eclipse of the Heart”.
In FX, USD weakness was across the board. We noted in our Global FX Strategist that the USD TWI was now around 8% undervalued according to our short-run model that is based on real interest rate differentials and risk appetite. This undervaluation likely reflects a Trump “discount” given the political chaos over recent weeks.
With USD weakness overnight, other major currency pairs were subsequently higher: Euro (+0.4%), Yen (+0.3%) and Pound (+0.2%). The Aussie and the Kiwi were slightly more subdued, up just 0.1-0.2% respectively with no real reason for the underperformance.
Limited movements also happened in bonds with US Treasury Yields down 1.4bps to 2.18% and German Bund yields were down a similar 1.4bps to 0.4%. As for Fed pricing, markets are only pricing a 30% chance of a rate hike by December and only 1.3 rate hikes are priced by the end of 2018. Comparing that to the Fed’s dotpoints of 4 leaves the market vulnerable to any restatement of the Fed’s commitment to lift rates as currently laid out in the Fed’s dotpoint projections.
As for the Fed’s debt ceiling, Treasury Secretary Mnuchin said he wants Congress to lift the ceiling by the end of September in a “clean” debt-ceiling increase. Senate Majority Leader gave support noting there is a “zero chance” the US government fails to raise the ceiling.
On Bunds, hitting the airways yesterday was an FT story that noted the ECB was getting close to breaking its own self-imposed limit of owning 33% of a country’s government debt. Analysts suggest that limit could be breached as early as February for Germany and Portugal and is another plank in the argument that the ECB should start to taper its bond-buying program – perhaps such a taper may even need to be more selective in order to avoid these limits. NAB still expects the ECB to announce a taper of the Asset Purchase Program in September, but we also acknowledge October is also a possible date.
As for commodities, most base and industrial metals were higher. As for Australia’s key commodity export prices, iron ore rose 2.6% to be at $79.9 a tonne – its highest since April 2017, while futures were up some 6% at the close of Sydney time.
Reports suggest the recent rally in the iron ore price is being driven by concerns of shortages of high-grade iron ore and before curbs on futures come into force. The Dalian Commodities Exchange on Friday said it would limit the daily purchases and sales contracts for delivery in January and February to 6,000 from Tuesday. Steel mills in China are also producing steel with higher grade ore ahead of production curbs that are likely to begin before the start of winter. Typically production levels are lowered in winter in order to reduce pollution – the steel producing providence of Hebei said earlier this month that it would impose capacity limits on steel mills in three cities to tackle pollution.
The other main mover was in Oil with WTI -2.0% to $47.41 (Brent -2.0% to $51.66). The fall in oil likely reflects profit taking after Friday’s sharp rise on the back of a US oil refinery shut down. OPEC’s Joint Technical Committee also met overnight with reports suggesting they found 94% compliance with OPEC’s production cuts, comparing to 98% in June – so some suggestions that not all of OPEC are meeting their pledges.
It’s all quiet domestically with only the normally second-tier Weekly Consumer Confidence out. It’s likely that over the past week Consumer Confidence maintained its soft reading.
The international calendar is also devoid of top-tier data with only the German ZEW likely to be noticed by the market. The ECB VP Constancio also speaks, though this too is unlikely to attract too much attention from markets given it is on “Inequality and the Distributional Impact of Macroeconomic Policies”. As for the US, they haven the lowly FHFA House Price Index and Richmond Fed Manufacturing Index, while Canada has Retail Sales. We will have to wait until he second half of the week to get something meatier. Trump is due to hold a campaign rally in Arizona.
On global stock markets, the S&P 500 was +0.12%. Bond markets saw US 10-years -1.22bp to 2.18%. In commodities, Brent crude oil -1.93% to $51.7, gold+0.4% to $1,291, iron ore +2.6% to $79.93, steam coal +0.1% to $98.35, met. coal +0.3% to $193.75. AUD is at 0.794 and the range since yesterday 5pm Sydney time is 0.7911 to 0.7951.
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