A further slowing in growth
A broad risk on rally that started in the Asia continued overnight driven by expectations of a lower damage bill from Hurricane Irma and the absence of geopolitical headlines with North Korea not launching an ICBM on Saturday as many had feared it would.
Equities rose (S&P 500 +1.1%), bond yields gapped higher (US Treasuries +8.0 bps), gold fell (-1.5%), while the US dollar was stronger (DXY +0.7%). For the rates (and FX) market the key question is whether the risk on rally represents a genuine Start me up moment (title courtesy of the Rolling Stones) given where US Treasury yields and the US dollar are at the moment.
First to Hurricane Irma. As the sun rose on Monday it revealed that while Hurricane Irma was no doubt devastating, it was likely to cause less damage than many had feared. Munich Re forecasts that worldwide insurance losses from the event are likely to be in the order of $20-30bn, well below the initial fears of more than $65bn. Equities rose in response led by financials and insurers – the S&P500 insurance sub-index rose 1.6% – with the overall S&P500 up 1.1%. Also in the background was the upcoming United Nations vote on North Korea where the US has moderated proposals for an oil embargo and a naval blockade in order to garner support from China and Russia – instead it looks there will be a cap on oil imports.
US Treasury yields gapped higher, finishing up 8.0 bps to 2.13% and back at the levels where they were early last week instead of plumbing the lows seen in November. Market pricing for a December rate hike has also edged back to a 46% probability whereas on Friday it was 33% with the lower damage bill now less likely to weigh on the Fed’s December meeting. There is though still only one rate hike fully priced by the end of 2018 compared to the Fed’s dot points of four and it is likely a run of better CPI or wage numbers will be required to get the market to shift pricing any higher – that makes Thursday’s CPI figures very important.
In FX, the typical risk on rally theme dominated. The safe havens fell sharply with risk aversion unwinding: Yen ‑1.4% and Swiss Franc ‑1.3%. The US dollar rallied (DXY +0.7% to 91.95) while other major currency pairs were lower: Euro (-0.7% to 1.1954); Aussie (-0.4%); Kiwi (‑0.1%); CAD (-0.4%).
Comments by ECB speakers had little impact on the Euro. Coeure gave mixed soundings on the exchange rate. He noted that “there are three forces, of roughly equal strength, that help to explain the euro’s marked appreciation in recent months: improved euro area growth prospects, an exogenous component and a tightening in the relative monetary policy stance vis-à-vis the U.S.” and that “pass-through is likely to have been lower in recent years”. Nevertheless if “exogenous shocks…persistent [it] can lead to an unwarranted tightening of financial conditions with undesirable consequences for the inflation outlook”. Overall it seems the ECB is ok with the recent strength in the Euro, but would be cautious of it going any further. Other ECB officials overnight mainly emphasised it was time to withdraw some monetary stimulus in a gradual and well telegraphed manner.
The other big FX move occurred in USD/CNY which rose 0.5% to 6.53. Supporting was a report that the PBoC was removing its reserve requirement for financial institutions trading in FX forwards by cutting it to 0% from 20% currently. The change makes it cheaper to buy dollars and sell Yuan. The PBoC also announced the removal of reserve requirement on foreign banks’ yuan deposits.
As we go to print the UK Parliament looks set to pass the Brexit Bill which will allow the government to copy EU law into domestic law and then allow the UK to edit that law once it has left the EU In 2019. Finally for Krone watchers, Norway looks to have re-elected Erna Solberg as PM with 82% of the vote counted.
Domestic focus will be on the NAB Business Survey (11.30am AEST). No hints here as usual and your scribe only points out the obvious, that markets will be interested in the extent to which Business Conditions and the Employment sub-index have sustained their recent improvements – and whether Business Confidence and Consumer Confidence continue to diverge. Also out is the usually second-tier ANZ-Roy Morgan Weekly Consumer Confidence (9.30am AEST).
Otherwise it’s mostly quiet in the Asian timezone with the only significant event being Chinese Premier Li Keqiang hosting an economic roundtable which will include heads of the IMF, World Bank and WTO. Potential headlines could be possible.
The UK CPI is next up (6.30pm AEST) with a sharp tick up expected driven by higher transportation costs. The market looks for headline inflation at 0.5% m/m from ‑0.1% m/m in July, taking the y/y rate to 2.8% (from 2.6%). The core measure is also expected to tick higher by one-tenth to 2.5%. While two Bank of England officials (Saunders and McCafferty) are likely to continue to argue for rate hikes on the back of the data, the other six officials are keen to hold rates amid an uncertain economic outlook and declining real wages growth. Governor Carney noted in August that two rate hikes could be expected over the coming three years with the first hike not likely to occur until the Q3 2018. The market is currently similarly priced.
Finally in the US we get the JOLTS and NFIB figures. US Treasury Secretary Mnuchin also gives a keynote address to CNBC and Institutional Investor Delivering Alpha Conference.
On global stock markets, the S&P 500 was +1.08%. Bond markets saw US 10-years +7.99bp to 2.13%. In commodities, Brent crude oil +0.20% to $53.89, gold-1.4% to $1,328, iron ore +0.2% to $74.49, steam coal +1.1% to $99.55, met. coal +0.0% to $200.00. AUD is at 0.8028 and the range since yesterday 5pm Sydney time is 0.8019 to 0.8073.
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