Markets Today: Talk of the Town

Frankfurt is the town and the great and the good of the global central banking fraternity will be the doing the talking later today at an ECB sponsored conference on central bank communication.

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Yellen, Draghi, Carney and Kuroda are among those scheduled to talk. The message from Yellen will be that the Fed will likely continue to be moving rates up gradually (“with or without me” – see, two songs for the price of one today).  The message from Draghi, meanwhile, will be that we aren’t going anywhere on rates for a long time – a narrative that we expect is likely to change at some point next year if the economy continues to track as strongly as it is right now. We’ve long learned not to trust BoE governor Carney’s communication credentials, while Mr Kuroda of late has been talking dovishly, lamenting the lack of improvement in inflation expectations.

Looking across markets overnight, what stands out is that AUD/USD has bent if not yet decisively broken the effective 0.7625-0.77 range that has held most of the price action since late October. Amid a fairly mixed picture on commodity prices – and a largely stable US dollar – we’d point here to the combination of a fresh rise in US shorter dated yields (2-year treasuries up another 3bp to a fresh cycle high of 1.68%) and the earlier rise in the VIX to above 12 from just over 11 on Friday. The NZD has suffered similarly.

The VIX has since dropped back onto an 11 handle and has helped the AUD pull back up a couple of spreads, but to our mind the damage has been done. Any semblance of US dollar strength in the coming few sessions should be enough to have AUD/USD starting to trade on a 75 handle. Either that or any unexpected weakness in either today’s China data or Wednesday and Thursday’s local wage price index and labour market figures.

Sterling is the weakest currency so far this week, but most of the damage here was done during our time zone yesterday. Indeed, GBP/AUD has pulled back up to 1.72 from sub-1.71 around the time the Sydney market went home Monday.  Suffice to say that in the absence of progress within UK political circles this week and next toward offering up a higher Brexit divorce bill, Sterling could be down another 5% or more by month end. If instead Mrs May does somehow manage to pull a proverbial rabbit out of the hat, it will be 5% or more stronger. The pound will be a very sharp toy in the coming few weeks.

US stock markets still have an hour to trade, currently showing minor gains (~0.1%) despite the 8% hit to GE’s share price after announcing a cut to its quarterly dividend for only the second time since the Great Depression.  Commodities see Brent crude off 36 cents, gold up $4 with most industrial metals stronger as well, save for iron ore which has lost 41 cents to $62.19.

Coming Up

It’s a big day ahead with the NAB business survey this morning, the mid-month slug of (October) China activity readings and as already mentioned, a cast of thousands by way of central bank speakers assembled in Frankfurt for the ECB conference.

As well as Yellen, Draghi and Carney and Kuroda, the Fed’s Charles Evans, and the ECB’s Lautenschlaeger and Nouy are also appearing at the same conference.  On top of this, speakers elsewhere include the ECB’s Villeroy (who some are tipping as Draghi’s successor in 2019), the ECB’s Couere and from the Fed, James Bullard and Raphael Bostic.

The China activity readings cover industrial production, retail sales and fixed asset investment for October. Industrial production usually gets star billing, year-on-year growth seen dipping to 6.2% from 6.6%. Retail sales growth is seen edging up top 10.5% from 10.3% while fixed asset investment slips to 7.3% (YTD YoY) from 7.5% in September.

As for NAB’s Business Survey on Tuesday, as usual we gives no hints here and only state what happened in September. Business Confidence rose by two points to 7 from 5 while conditions fell one point to 14.

In Europe tonight, we get latest UK CPI, latest vintages of German CPI and GDP and also the German ZEW survey. The US has producer prices, ahead of the all-important CPI figures tomorrow night.

Overnight

On global stock markets, the S&P 500 is +0.13%. Bond markets saw US 10-years +0.18bp to 2.40%. In commodities, Brent crude oil -0.55% to $63.17, gold+0.4% to $1,279, iron ore -0.7% to $62.19, steam coal +0.2% to $97.80, met. coal +0.9% to $187.50. AUD is at 0.7625 and the range since yesterday 5pm Sydney time is 0.7617 to 0.7672.

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