October 4, 2017

Markets Today: Waiting

The challenge meted out by some of my colleagues yesterday (many of whom are probably still in bed) was to incorporate as many songs from the now late great Tom Petty into this daily missive.

The challenge meted out by some of my colleagues yesterday (many of whom are probably still in bed) was to incorporate as many songs from the now late great Tom Petty into this daily missive. As it happens, Free Fallin’ is perhaps the most overused Markets Today title in the two years or so we’ve been doing this malarkey, and limited overnight price action across bonds, equities and currencies doesn’t lend itself to repeat usage today. Closed Chinese market this week also means that we can’t use it to reference further falls in the already 20%+ drop in iron prices in the last four weeks or so.

President Trump is in Puerto Rico and has been making some fairly tasteless remarks about this unincorporated United States territory putting the US budget ‘out of whack’. Someone should perhaps have reminded him that Puerto Ricans ostensibly have the right to emigrate to the United States; probably not a refugee problem Trump would welcome at this point. Estimates of the repair bill for the Caribbean island currently look to run into the tens of billions of dollars, on a par with the clean-up and reconstruction costs in Texas and Florida.

On the subject of US budgets, Senator Bob Corker (who sits on the banking and  budget committee) has been out lamenting suggestions that the elimination for deductions designed to at least partially fund income tax cuts could be scaled back to appease Congressional officials in certain states. The battle between those in Congress opposed to any tax reform that lifts deficits, and the US administration claims that so called ‘dynamic scoring’ (or the growth dividend) will pay for them in perpetuity, will run for a good while yet.

For now, we can be sure Trump will be telling Congress ‘I won’t back down’ on his tax ambitions (sentiments that equally apply to Catalonians intent on independence from Spain and to both Trump and N. Korean President Kim Jong-Un, albeit there are reports of back-channel communication between the two nations).  For markets, N. Korea fatigue set in a while back, evident in the VIX now comfortably back on a ‘9’ handle.

Pricing for a December Fed rate hike hasn’t moved much since the end of last week from the +/-70% area. The American Girl – Janet Yellen – speaks tonight and is unlikely to move the dial. More importantly, within a few weeks she might be getting a memo from the Oval Office that reads ‘Don’t come around here no more’ (see Coming Up).

The New Zeeland dollar is the weakest G10 currency in the last 24 hours, an unexpectedly weak Global Dairy Trade auction (prices down 2.4%) compounding Tuesday’s locals session weakness. Hardly a breakdown, but even so.

Sterling is second weakest currency, after a poor Construction PMI (48.1 down from an unchanged 51.1 that was expected).

The ongoing Conservative party Conference also doesn’t seem to be helping, UK foreign secretary Boris Johnson’s claim to agree with ‘every syllable’ of PM May’s Florence speech last week ringing hollow and May, in a Sky news interview, saying nothing to repaid the apparent fault lines between her government and the rest of the EU.

As for yesterday’s RBA statement, the Board appeared to be more optimistic about growth in yesterday’s post Board Statement where they predictably left the cash rate unchanged at 1.5%.  A few weeks ago Governor Lower gave the clearest sign yet that the next move in rates is likely to be higher yet yesterday’s Statement gave no hint of any imminent move.  We expect the RBA are waiting for evidence of a tighter labour market through a lower unemployment rate and clearer evidence of upside wage pressure.

Coming Up

Normally we’d be getting excited about a scheduled Janet Yellen speech, but tonight (or rather 06:15 AEST tomorrow morning) it’s just welcoming remarks at a community banking event. Move on. More interesting tomorrow might be further comments from Fed Governor Jerome Powell in so far as he is reportedly one of the candidates to have been interviewed by Donald Trump to potentially be the next Fed chair (a question he neatly side-stepped overnight). The predictit.org betting site currently has Powell as second favourite after Kevin Warsh, with Janet Yellen running a distant third.

Data wise, the main interest tonight is the US non-manufacturing ISM, after Monday’s manufacturing version failed to show any ill effects from last month’s hurricanes.  Consensus is for a small rise to 55.5 from 55.5, but after the manufacturing release, the whisper number is probably a bit stronger. The ADP employment report before that will give a hint of the effect of the hurricanes on Friday’s official payroll data and where the current consensus is for a as rise of just 80,000.

Final EZ PMI’s are also due today, while the main Australian data interest this week doesn’t come until tomorrow with retail sales (that NAB sees weak) and trade figures.


On global stock markets, the S&P 500 was +0.19%. Bond markets saw US 10-years -1.61bp to 2.32%. In commodities, Brent crude oil -0.36% to $55.92, gold-0.1% to $1,272, iron ore +0.0% to $62.05, steam coal +1.1% to $97.00, met. coal +0.0% to $179.00. AUD is at 0.7837 and the range since yesterday 5pm Sydney time is 0.7786 to 0.7839.

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