The first week of a new month is off to a brisk start today with China’s PMI releases, very much a game of two halves. The weekend releases of the official Manufacturing and Services PMIs for October caused some early palpitations as both underperformed, falling to 49.2 and 52.4 respectively. However, the privately complied Caixin PMI, rose unexpectedly to 50.6, providing some relief for regional markets.
Elsewhere, Markit Manufacturing PMIs from across ASEAN, and the Jibun Manufacturing PMI in Japan showed impressive improvements, lifting Asian recovery sentiment. The exception was South Korea, whose Markit PMI fell to 50.2 from 52.4 in September. Part of the answer for the fall lies in their also released Balance of Trade. Exports grew 24% YoY, roughly as expected, but Imports surged by 40.10%, suggesting that price hikes in imported energy and raw materials are biting, although domestic demand is returning as vaccinations increase.
Japanese markets are on fire today with the Nikkei 225 up 2.0% in early trade. The weekend elections are behind the surge, as the ruling LDP retained its outright, if slightly slimmer, majority in the lower house. Pre and post the Aber-era, being the Japanese Prime Minister was as secure a position as being the Turkish Central Bank Governor. The election is an endorsement for the new Prime Minister Kishida, and markets are once again pricing in his promised fiscal stimulus package. At the periphery, the Jibun PMI outperformance will also have lifted spirits that Japan Inc’s recovery remains on track.
Downunder, Australia reopens international borders today, if you are Australian and vaccinated. But it’s the thought that counts, much like Scott Morrison’s climate pledges. That is reason for cheer and to some extent, had offset disappointing Home Loans data for September, which fell by 2.70%. Some are saying that is a sign Australia’s housing market has peaked. I say that over the last three decades, that’s as dumber trade as shorting the Hong Kong dollar anticipating the peg breaking, or shorting Japanese JGB’s anticipating the return of inflation in Japan (sidenote, the author shorted the HKD quite aggressively during the Asia financial crisis in his former trading desk life, and lost). Home Loan’s though, have been offset by a very impressive ANZ Jobs Advertisements MoM for October, which rose by a mighty 6.20%. Even stripping out lockdown effects in Victoria and New South Wales, the data is undeniably positive.
Will RBA blink on bonds?
This will give the Lucky Country’s Reserve Bank of Australia food for thought at tomorrow’s policy meeting. It will add further torment to participants in Australia’s financial markets. Tomorrow is Melbourne Cup Day, and for decades the RBA has refused to move its meeting, from just before the race to another day. It believes its policy meeting is more important than a horse race, the rest of the country disagrees. Tomorrow though, everyone will need to be at their desk as the RBA today, appears to have capitulated on its 0.10% 2024 bond yield target. Those yields exploded to 0.50% on Friday and today, the RBA has instead bought bonds in the 5 to 7-year tenors. A day of high drama beckons as markets wait to see if the RBA’s no rate-hike before 2024 ultra-dovish guidance is officially changed. Being short the Australian dollar in the first half of this week could be a perilous trade.
This week really is the show with everything but Yul Brunner. Much of Europe is on holiday today, and Russia for the whole week, but Germany releases Retail Sales today and in the US, ISM Manufacturing PMIs. Tomorrow, we have the RBA policy decisions outlined above and pan-Europe Manufacturing PMIs. Wednesday is a Japanese holiday while Thursdays sees much of Asia, including India and Singapore, on holiday for Diwali.
That is unfortunate timing, as the latest US FOMC policy decision will have been released a few hours earlier. On Friday, the US Employment Cost Index shot higher, making the transitory inflation argument a bit harder to justify. I expect the FOMC to formally announce the start of it taper of its quantitative easing, with the real question being, how much per month will it reduce, and will it show some spine and stay the course, even if markets correct lower. I do not believe the Fed taper has been priced into markets and as US earnings season winds down, the US dollar and US yields may rise, and equities may struggle to maintain their rarefied valuations, at least for the rest of Q4.
The Bank of England announces its latest policy decision on Thursday, with markets locked and loaded for a 15 basis point hike and hawkish forward guidance. That may still occur, but I would suggest the risks are that the BOE disappoints on this front and tempers the expectations of the inflationistas. Long sterling has become another crowded trade in anticipation, and despite last Friday’s month-end US dollar rally, probably still is.
Post-FOMC, another monthly US Non-Farm Payrolls has rolled around. So anyone thinking of putting their feet up post-the-see-Japanese-the-FOMC should probably think again. We’ll deal with that later in the week, but needless to say, the crown noise will continue right until the stadium lights are finally turned of on Wall Street at 5 PM Friday. The Democrat spending bill continues to be negotiated and could yet impact markets, depending on its size or how watered down it will be. I shall avoid comment until I see a piece of paper with its final contents.
Finally, the travails of China’s property sector may have gone quiet, but haven’s gone away. Evergrande made some very last moment offshore coupon payments last week, but that’s hardly the sign of a company that is in recovery, is it? Units of Evergrande have more payments due this week on November 6th, but the sector in general has around USD 2 billion in offshore payments due this month. I would direct readers to an excellent piece from Bloomberg on the subject here, Bloomberg China Property, which features a comprehensive breakdown of who has to pay what and when. The executive summary there are a lot of payments due this morning to offshore instrument holders from a number of Chinese developers.
