A further slowing in growth
As song titles go, Sweet Dreams by the Eurythmics probably sums up overnight price action the best.
It was a night of limited market moves with markets treading water ahead of key risk events later in the week (ECB Thursday and US GDP Friday). US dollar strength continued (DXY +0.2%), bond yields barely moved (USTs ‑1.6bps), while equities were mixed (S&P500 -0.4%; Eurostoxx +0.1%). Speculation over the next US Fed chair also continued with Trump stating he was “very, very close” to naming a nominee.
In FX, US dollar strength continued with the DXY +0.2% following on Friday’s 0.5% rise. The US dollar has been supported following better prospects for tax reform and continued speculation on the next Fed chair being more hawkish. Last Friday President Trump said he was considering wither Powell, Taylor and Yellen, while a combination of chair/vice-chair was also a possibility. Today he said he was “very, very close” to announcing a nominee. Who he chooses remains to be seen, but betting markets still place Powell at the top (59c), followed by Taylor (15c) and Yellen (15c).
For markets, the key point is that both Taylor and Powell should be seen as more hawkish than Yellen, while Taylor is also seen as more hawkish than Powell. How hawkish? A hybrid Taylor Tule recently used by Yellen suggests the Fed funds rate should be around 2.25% – that is currently 100bps higher than it currently is. If Taylor is nominated then don’t be surprised to see a bond sell-off and further US dollar strength.
Other FX moves were largely contained. The Yen was lower (-0.2%) following the very convincing election win for PM Abe. The win is seen as supportive for ‘Abenomics’ which increases the likelihood of ongoing monetary and fiscal policy and also increases the odds for BoJ Governor Kuroda’s term being extended when his term expires in April. It is no surprise then to see Japanese stocks up with the Nikkei up 1.1% yesterday.
As for Europe, the Euro was lower (-0.3%) overnight ahead of the ECB meeting on Thursday. While concerns over Catalonia could have contributed, someone forgot to tell Spanish bond investors where bond yields actually fell (10 years down 4bps to 1.62% and 2 years flat). As for the ECB meeting Thursday, some form of a tapering announcement is expected. A Bloomberg survey suggests the ECB will reduce monthly bond purchases to €20-30bn a month, down from the current €60bn.
Across the Ditch, the NZD has found support at the 0.6965 level after having fallen 2.3% against the USD over the past couple of days. Our own short term fair value models of the currency suggest a figure of around 0.73 so we view the currency as being a bit oversold at the moment. As for how the market has interpreted the prospective government, 2-year swap rates fell 4bps to 2.17% on Friday, 10-year swap rose 1 bps to 3.21%, while inflation breakevens rose. Pricing for the next RBNZ move was also pushed out a few months to Feb 2019. It seems therefore the rates market is expecting lower real rates, but higher inflation. As we go to print, Jacinda Ardern has confirmed that the vast majority of her initial 100 day plan will be implemented.
Domestically we get second-tier Weekly Consumer Confidence which does not tend to excite too much. The prior week was 112.4 and a small bounce could be expected in reaction to last week’s very strong employment figures.
International focus will be on the PMIs. These tend to get more traction in Europe, but are largely ignored in the US due to the more important and long-established Manufacturing ISM (release 1 Nov). As for the PMIs, first up is Japan (11.30am AEDT), then it is over to Europe (7.00pm AEDT) where the market looks for a still strong but slightly more moderate read for Manufacturing at 57.8 (from 58.1) and for Services at 55.6 (from 55.8).
Of the second-tier data, the Richmond Fed Manufacturing Index might be worth a casual observation as an indicator for the more important Manufacturing ISM next week. Company reporting season also heats up with AT&T, General Motors and McDonalds posting results. Political events will also be in focus with China’s 19th Communist Party Congress wrapping up.
On global stock markets, the S&P 500 was -0.40%. Bond markets saw US 10-years -1.63bp to 2.37%. In commodities, Brent crude oil -0.66% to $57.37, gold+0.3% to $1,281, iron ore -0.7% to $62.00, steam coal -0.6% to $96.55, met. coal +0.3% to $181.50. AUD is at 0.7805 and the range since yesterday 5pm Sydney time is 0.7796 to 0.7835.
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