The US dollar extended its October slide amid little fresh news of note. AUD rose to a 3-month high at 0.6565. The S&P 500 also closed at a high since August. Today’s calendar includes the RBA November minutes, comments from RBA Governor Bullock and the FOMC November minutes.
Yesterday
AUD/USD spent the morning around 0.6510, then began to rally when the daily Chinese yuan fixing was on the strong side (i.e. lower USD/CNY), encouraging further yuan gains. The Aussie joined the Asian FX rally, reaching a high of 0.6563, its strongest point since 10 August. Equities in Hong Kong, China and Korea rallied sharply but Japan’s Topix closed -0.5% and the ASX 200 was little changed, +0.1%. Australia’s data calendar is virtually empty this week.
Currencies/Macro
The US dollar fell against all G10 currencies on the day except CAD (about flat). EUR/USD rose from 1.0910 to 1.0952 – a high since August. GBP/USD rose from 1.2460 to 1.2510. USD/JPY fell from 149.70 to 148.35. AUD/USD rose from 0.6515 to 0.6565, fractionally above the local session high and thus a fresh high since August. NZD/USD rose from 0.5995 to 0.6035. AUD/NZD was little changed overall, at 1.0870.
ECB’s de Cos and Wunsch affirmed that ECB may be on hold but that it is inappropriate for markets to price in rate reductions. Wunsch went further to suggest that the pricing of cuts could lead to ECB raising rates again in order to counter such an easing of financial conditions.
Bank of England Governor Bailey warned that rates may need to rise again, with food price inflation potentially contributing to ongoing high wage demands. He said “it is far too early to be thinking about rate cuts.”
In the US, the Conference Board’s Leading Index for October fell -0.8% to 104.7 (est. -0.7%, prior -0.7%) – the lowest level since May 2020. It was the 19th consecutive monthly decline, with 6 of the 10 indicators making negative contributions, led by consumer expectations (-0.22%) and new orders (-0.22%).
Interest rates
US 2yr treasury yields ticked up from 4.88% to 4.91%, while the 10yr yield dropped from 4.46% to 4.42% after the results of the 20yr auction. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be unchanged at the next two meetings, with easing expected from May 2024.
Australian 3yr government bond yields (futures) round-tripped from 4.15% to 4.18% and back, while the 10yr yield round-tripped from 4.51% to 4.42% and back. Markets are pricing no hike at the next meeting on 5 December, but a 50% chance of one by May 2024. New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged on 29 November and in February, with easing expected from May 2024.
Credit continues to outperform with Main 1.5bp tighter to 68.5, CDX also 1.5bp better at 63 and US IG cash was another 1-2bp better with November month to date performance now a standout. Expectations for primary activity are fairly subdued in a short week. Europe opened with 6 issuers pricing ~EUR4.9bn while in the US, 4 issuers priced USD7.25bn.
Commodities
Crude markets extended the weekend bounce on FT reports that the group is willing to extend and deepen cuts, “galvanised” by the Israel-Hamas conflict. The plunge in the dollar helped too with the December WTI contract up $1.71 to $77.60 and the January Brent contract up $1.54 to $82.15. A number of research reports suggested the recent drop had been excessive with Deutsche noting that Brent below $80 is “cheap relative to Q4 fundamentals”. However, Vitol noted that there are “reasons to be concerned” about weakness in Chinese energy demand. Bloomberg noted that the rise in rig count in the US last week by 6, the biggest in 6 months, was led by the Permian, citing an EIA report which expects production in the region to expand in both November and December. Meanwhile US natural gas prices slumped 2.5% to 7-week lows as concerns about high storage numbers weighed on sentiment.
Metals surged on the slump in the US$ to 2 ½ month lows. Indeed, copper had its best day since July, up 2.2% to $8,447, all but testing the 200dma. Warnings of a shutdown at First Quantum’s massive Cobre Panama mine which accounts for about 1.5% of global copper production helped lift sentiment too. However, other metals were less impressed with aluminium up just 1.7% to $2,244 and nickel unchanged at 2 1/2-year lows. The IAI reported that global aluminium output fell 0.1% in October, with estimated Chinese production down 0.5% but still up 5.5%yy.
Iron ore markets pushed to fresh highs with the December SGX contract up $3.20 from the same time yesterday to $132.35 and the 62% Mysteel index up $2.50 to $132.75. The AFR reported that “hundreds of train drivers at BHP’s lucrative iron ore operations in WA will kick off the sector’s first industrial action in decades as workers revolt against unpredictable treatment of working conditions”. The industrial action is set to commence Friday. Indian steel consumption rose 14%yy, pointing to rising infrastructure investment.
Day ahead
From 10am AEDT, RBA Governor Bullock will participate in a panel at the ASIC Annual Forum in Melbourne.
At 11:30am AEDT, the RBA will release its minutes for the November meeting. These will draw considerable interest despite the detail of the quarterly statement released since the meeting, especially the discussion around the arguments behind the decision to raise rates.
The FOMC will release minutes for its November meeting, always a potential market mover. October’s Chicago Fed activity index should reflect the economy operating at close to capacity (market f/c: 0pt). Existing home sales in October look set to decline as supply tightens and rates threaten affordability (market f/c: -1.5%mth).
