Markets: Aim High
Noise beat signal overnight, but the FOMC minutes continue to echo in investor ears and risks going forward. The Fed has a number of members that are aiming high like archers seeking the perfect trajectory. The odds of 3 hikes in 2019 to 3% rose after the release to 30%. This has supported the USD, hit risk moods and led to a renewed thinking about bond yields. Of course, the actual arrows being shot by others are still painful and add to the mixed view for today – as UK Brexit headlines show a deadlock but PM May aims high for a deal with perhaps a delay. The Italy and EU budget row didn’t find much comfort despite a Merkel meeting. The Saudi issue with journalist Khashoggi gets worse with the Turkish tapes and the US trade spats with China and the EU are ongoing. The price action in China shares dominated Asia with the near 3% drop adding to tomorrow’s GDP doubts and the drift lower in CNY after the US Treasury didn’t label China a currency manipulator doesn’t look like a coincidence.
On the economic front overnight the data missed the target – the Japan trade data are troubling for the notable drop in exports – worst in 2 years – while the Australian jobs were strong enough to keep unemployment at 6-year lows but with no real inflation and with lower participation. The UK retail sales missed the mark and highlight the role of discounting at brick and mortar stores over the internet. Everyone loves a bargain. Investors do as well and so the buying of the dip mentality won’t go away even with some of the Fed aiming high on rates. The risk barometer for today rest with the USD as it’s the stuff holding back 3Q earnings from even better profits if you listen to the calls. USD 95-96 trading is a dangerous flag with risk of 96 breakouts for 97 should US rates go even higher.
Question for the Day:Where is US rate policy restrictive? If we can’t know what neutral is, then surely we won’t know what is restrictive until we get a recession. The common wisdom from the Fed Dot Plots is 3% but the risk of overshoot has returned thanks to the FOMC minutes – with this being the hawkish tilt – “A few participants expected that policy would need to become modestly restrictive for a time and a number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level in order to reduce the risk of a sustained overshooting of the Committee's 2 percent inflation objective or the risk posed by significant financial imbalances. A couple of participants indicated that they would not favor adopting a restrictive policy stance in the absence of clear signs of an overheating economy and rising inflation.”
What Happened?
- Japan September trade surplus Y139.6bn after Y438.4bn deficit – better than Y50bn deficit expected. Exports fell 1.2% y/y - worse than +2% y/y expected and first y/y drop since Dec 2016, but imports rose 7% y/y – less than 13.5% y/y expected and again dominated by higher energy prices. By nation, exports to China fell 1.7% y/y and Korea fell 4.6% y/y but India up 26.9%, Thailand up 11% and Indonesia up 13.9%. Exports to the US were -0.2% y/y while Canada fell 19.2%. Trade with Europe fell 9.4% y/y.
- BOJ Kuroda: Still upbeat on economy and price outlook. Japan's economy is expanding moderately, with a virtuous cycle in operation from income to spending. Japan's economy is likely to continue its "moderate" expansion. CPI is is likely to continue on an uptrend and increase toward 2%, due mainly to an improvement in the output gap and a rise in medium-to-long term inflation expectations.
- BOJ 3Q Regional Economic Report: All nine regions either expanding or recovering.7 out of 9 keep economic view from July but 2 out of 9 cut it. Effects of Hokkaido Earthquake and heavy rain hit some growth as did the effects of Typhoon Jebi.
- Australia 3Q NAB business confidence fell 4 to +3, conditions -2 to +13 – both still above long-term averages. According to Alan Oster, NAB Group Chief Economist “Business conditions have pulled back through the middle of 2018 after reaching very high levels earlier in the year. However, the latest monthly survey suggests that conditions have stabilised at a still high level. This suggests that momentum in the business sector has not weakened further. Overall, trading conditions, profitability and employment conditions remain quite favorable.” “Conditions have eased across most industries, though generally most industries continue to report above average conditions. Retail however, remains weak, as it has been for some time” said Mr Oster.
- Australia September jobs rise 26,000 after 44,000 – more than 15,000 expected - while unemployment holds 5.2% - better than 5.3% expected and a 6-year low. August was revised from 5.3% to 5.2%. The participation rate fell to 65.4% from 65.7% - more than 65.6% expected on a seasonally adjusted basis. The under employment rate was flat at 8.3% while the underutilization rate fell to 13.3% from 13.5%. The number of jobs created full-time rose 20,300 after 33,700 while part-time fell 14,700 after +10,200. The number of employed rose a seasonally-adjusted 5,600 in September. The number of unemployed fell 37,200, back on a declining track after an upward blip in August.
- German September wholesale prices up 0.4% m/m, 3.5% y/y after 3.8% y/y – as expected. Fuel/oil products up 4% m/m, grains/seeds -0.7% m/m, Ore/Steel up 0.1% m/m, fruits/vegetable -1.6% m/m, data processing -0.2% m/m and food/beverages -0.2% m/m
- UK September retail sales -0.8% m/m, +3% y/y after revised 0.4% m/m, 3.4% y/y – weaker than -0.4% m/m, 3.7% y/y expected. Overall, 3Q sales rose 1.2% q/q and should add 0.06pp to 3Q GDP. The ex fuel slaes were -0.8% m/m, 3.2% y/y after 3.6% y/y – also weaker than 3.7% y/y expected. The deflator was 1.8% y/y and ex-fuel 0.9% - highest since 1Q2017. Food sales reversed gains from the summer -1.5% m/m – worst since Oct 2015. Household goods sales rose 10.6% y/y best since July 2015, helped by discounting. Internet sales slowed off 2.1% m/m, 17.8% of total sales down from 18% - the biggest drop since Dec 2016.
Market Recap:
Equities: The S&P500 futures are off 0.3% after losing 0.03% yesterday. The Stoxx Europe 600 is up 0.2%. The MSCI Asia Pacific Index fell 0.6%.
- Japan Nikkei off 0.8% to 22,658.16
- Korea Kospi off 0.89% to 2,148.31
- Hong Kong Hang Seng off 0.03% to 25,454.55
- China Shanghai Composite off 2.94% to 2,486.42
- Australia ASX up 0.05% to 6,050.10
- India NSE50 closed for holiday
- UK FTSE so far flat at 7,053
- German DAX so far up 0.2% to 11,741
- French CAC40 so far up 0.35% to 5,163
- Italian FTSE so far off 0.25% to 19,409
Fixed Income: Supply and FOMC minutes driving bonds and flip up in equities add to selling – but mixed for core with periphery still soggy thanks to Italy fears and Spanish supply. UK Gilts ignored Brexit bad news – 10-year yields up 1.5bps to 1.585%, German Bunds up 1bps to 0.47%, France up 2.2bps to 0.832% after mixed auctions. Italy up 4bps to 3.58%, Spain up 4bp to 1.685%, Portugal up 2bps to 1.96% and Greec up 9.5bps to 4.375%.
- Spain sold E4.49bn of bonds with higher rates and steady demand– E1.53bn of 5Y 0.35% Jul 2023 Bono at 0.63% with 1.78 cover – previously 0.41% with 1.69 cover – E1.31bn of 10Y 1.4% Jul 2028 Oblig at 1.65%with 2.03 cover – previously 1.54% with 2.38 cover – E0.63bn of 15Y 5.75% Jul 2032 Oblig at 1.98% with 1.46 cover – previously 1.93% with 1.54 cover – and E1.03bn of 30Y 2.9% Oct 2046 Oblig at 2.7% with 1.43 cover – previously 2.69% with 3.4 cover.
- France sold E8bn of OATs with mixed yields and lower demand– E2.95bn of 3Y 0% Feb 2021 OATs at -0.42% with 2.4 cover – previously -0.37% with 3.2 cover – E3.29bn of 6Y 0% Mar 2024 OAT at 0.16% with 1.8 cover – previously 0.14% with 2.2 cover – and E1.76bn of 7Y 1% Nov 2025 OAT at 0.39% with 1.8 cover.
- France sold E1.746bn in OATei – upper end of target but weaker demand– E0.65bn of 3Y 0% Mar 2021 OATei at -1.83% with 2.5 cover – previously -1.89% real yields with 3.77 cover – E0.956bn of 9Y 1.85% Jul 2027 OATei at -0.85% with 1.86 cover – previously -1% with 2 cover – and E0.14bn of 30Y 0.1% Jul 2047 OATei at -0.09% with 3.57 cover – previously -0.24% with 2.18 cover.
- US Bonds lower with bear flattening play into Philly Fed– 2Y up 1.5bps to 2.903%, 5Y up 1bps to 3.068% 10Y up 0.6bps to 3.211% and 30Y up 0.7bps to 3.38%.
- Japan JGBs focused on average 20Y sale, weaker equities– 2Y flat at -0.125%, 5Y up 0.5bps to -0.061%, 10Y up 0.6bps to 0.142%, 30y up 0.7bps to 0.906%. MOF sold Y800.3bn of 20Y JGBs at 0.683% with 4.23 cover – previously 0.618% with 4.032 cover.
- Australian bonds sold on jobs report, watching China data next– 3Y up 3.1bps to 2.062%, 10Y up 2.4bps to 2.721%.
- China PBOC skips open market operations, leaves liquidity unchanged. Money market rates were mixed as O/N rose 8bps to 2.409% but 7-day was flat at 2.586%. 10Y bond yields off 1bps to 3.56%.
Foreign Exchange: The US dollar index is off 0.05% to 95.53 with 95.48-95.77 range – with 95-96 big flag formation. The USD is mixed in EM– EMEA: ZAR up 0.15% to 14.223, TRY up 0.9% to 5.535, RUB flat at 65.54; ASIA: TWD off 0.3% to 30.943, KRW off 0.75% to 1135 and INR off 0.2% to 73.605 – on holiday.
- EUR: 1.1520 up 0.15%.Range 1.1482-1.1527 with Italy and rates still the drag but 1.1450-80 support holding.
- JPY: 112.50 off 0.1%.Range 112.44-112.73 with EUR/JPY 129.60 flat – focus is on 112 pivot still and equities
- GBP: 1.3125 up 0.1%.Range 1.3076-1.3131 with EUR/GBP .8775 up 0.1% - Brexit boredom – lower retail sales leave 1.30 retest risk
- AUD: .7145 up 0.5%.Range .7105-.7151 with focus on jobs not China – NZD up 0.35% to .6575 with .66 still important.
- CAD: 1.3030 up 0.1%.Range 1.3019-1.3056 with oil and rates driving 1.3075 opens 1.32 tests
- CHF: .9925 off 0.3%.Range .9920-.9959 with EUR/CHF 1.1435 off 0.1% - back in play with .9850 target if Italy gets worse.
- CNY: 6.9275 fixed 0.24% weaker from 6.9103, now off 0.15% to 6.9375 with Range 6.9303-6.9452
Commodities: Oil lower, Gold up, Copper off 1.1% to $2.7930.
- Oil: $68.97 off 1.1%. Range $68.92-$70.03 Watching 55-day at $69.54 then 100-day at $68.17 with $70 the cap for now, bears target $66. Brent $79.03 off 1.3% with 55-day at $78.06 and 200-day $72.14 bear test zone with $80 pivot. The EIA build and the US/Saudi tension reduction key drivers along with stale positions.
- Gold: $1223.80 up 0.1%.Range $1220-$1224 with focus on momentum rather than US rates. Watching $1201 to $1236. Silver off 0.55% to $14.53 barely holding the $14.50 pivot and now below the $14.587 55-day support with risk of $14.24 again Oct 10 lows.
Conclusions: Does the Philly Fed matter? If you think that the real risk of trading today is about rates and 10-year yields >3.25% then you have to pay attention to the forward looking data on growth which the Philadelphia Fed Manufacturing Survey has done well for years. This Survey leads orders and industrial production well. Growth is the key to seeing if the FOMC can be pushed into 4 more hikes in the next year. The 3Q growth outlooks have normalized to 3.25%-3.75%, what we see in the Philly Fed is the 4Q, which many have penciled in 2.5%.
Economic Calendar:
- 0830 am US weekly jobless claims 214k p 208ke
- 0830 am US Oct Philly Fed Manufacturing index 22.9p 20.0e
- 0830 am US 3Q employment cost index 0.6%p 0.5%e
- 0830 am Canada Sep ADP employment change 13.6k p 37.5k e
- 0900 am St.Louis Fed Bullard speech
- 1000 am US Sep Conference Board LEI 0.4%p 0.5%e
- 1215 pm Fed Vice Chair Quarles Speech
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