Markets have been uneventful overnight with little newsflow. US equities are on track for a fourth consecutive daily fall, after their recent strong recovery. US Treasury yields are flat to slightly lower after yesterday’s notable increase. The NZD has been flat overnight and little changed from this time yesterday, consolidating in the low 0.63s. Yesterday the RBA hiked 25bps as expected, with little change in its policy outlook for higher rates.
Yesterday we saw that good news is bad, with the S&P500 ending the day 1.8% lower after the surprisingly strong ISM services report, a decisive break lower soon after breaking above its 200-day moving average. Today, no news is also bad news, with the index tracking lower still, currently down over 1%.
On a slow news day, the headlines are on the weak side. Goldman Sachs CEO Solomon offered a downbeat view of the economy, saying a soft landing “was far from assured” and the company would be focused on costs and a slowdown in hiring. JP Morgan’s Dimon, who has previously warned of a pending economic hurricane, talked of a “mild to hard” recession likely next year. Meanwhile, outside the tech and media sector where job layoffs have been significantly recently and well reported, Pepsico is looking to cull hundreds of jobs across the US to weather worsening economic conditions.
On a more positive note, Beijing followed Shanghai and other cities in scrapping the need for a negative PCR test before being allowed to enter most public venues. Bloomberg reports that state media have been downplaying the danger faced by COVID, noting the typically mild symptoms and noting the country’s ability to cope with the outbreak is increasing. This all plays to the view that China is looking to live with the virus and a full re-opening is now widely anticipated after winter, supporting the economic outlook after some further near-term headwinds as the outbreak spreads.
In economic news, Germany’s factory orders rose 0.8% m/m, ahead of expectations for a flat result, another indicator suggesting the economy might face a shallower recession than previously thought. The US trade deficit widened for a second month in October to $78.2b, with imports up 0.6% and exports down 0.7%.
US Treasuries have tracked sideways, showing flat to small declines across the curve. The 10-year rate is currently down 1bp on the day, following the 9bps lift yesterday.
In currency markets, moves have been modest over the past 24 hours. Commodity currencies have softened a little overnight, CAD underperforming on lower oil prices (see below). The NZD has consolidated in the low 0.63s. The AUD has slipped below 0.67.
The AUD was fairly unresponsive as the RBA raised the cash rate for the eighth consecutive month, with a well-anticipated 25bps hike to 3.1%. There was little change in the narrative and “the Board expects to increase interest rates further over the period ahead”. After a late start to the tightening cycle, the RBA’s policy rate lags others in the dollar-bloc and the real policy rate is still negative, hardly at a level to rein in the intense inflationary pressures facing the economy, so further tightening can be expected next year.
Australian rates were slightly higher post-RBA, with the market having not fully priced in the move and some expecting a more dovish tilt, but this move has faded overnight. The NZ rates market was closed at the time of the policy announcement, and NZGB yields were 3-4bps higher across the curve, in response to the US Treasuries sell-off. There was a flattening bias in the swaps curve, with the 2-year rate up 7bps to 5.08%and the 10-year rate up 2bps to 4.24%. The Australian 10-year bond future is little changed from the NZ close.
The overnight GDT dairy auction showed a second consecutive lift in pricing, with the price index up a modest 0.6%, with wholemilk powder up 0.1% and skim milk up 1.7%. The recent lift in pricing is more a reflection of the weaker USD than any sign of a stronger market.
Oil prices continue to trend lower, with Brent crude falling over 3% to below USD80 per barrel for the first time since January. There was no particular news driving the fall, just sentiment around the near-term demand-supply outlook and a lack of liquidity as speculators remain on the sidelines. The recent combination of lower oil prices and a stronger NZD should help pull local petrol prices down, making the RBNZ’s surprisingly high near-term CPI forecasts look increasingly unlikely to be met.
In the calendar ahead, Australian Q3 GDP is expected to show a lift of 0.7% q/q. Chinese trade data and German industrial production data are expected to be weaker, while the Bank of Canada’s policy rate decision is expected to be a close call between 25bps or 50bps, market pricing favouring the former and the Bloomberg survey of economists slightly tipping 50bps in a 17-16 split.
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