Macro Morning

Cross-posted from ANZ

Equities rallied on news that a bipartisan agreement to suspend/raise the debt ceiling until February 7 will likely be reached by the end of the day, thereby ending the shutdown. US equities are up a little over 1% in response, while gains on European markets have been smaller. US Treasuries rallied across the curve, due to a perceived reduction in US credit/default risk. In currency markets, AUD/USD was slightly firmer and is currently trading around 0.9550, while GBP and EUR sold off sharply on news of the deal.

The Senate has reached a bipartisan agreement that would bring an end to the government shutdown (by extending funding to January 15) and suspend/raise the debt ceiling limit until February 7. House Republicans are scheduled to meet at 10AEDT to discuss the deal, with expectations that the House will let the agreement pass without delay, thereby sending the bill back to Senate for final sign-off. Senate Majority leader Harry Reid (Democrat) and Minority leader Mitch McConnell (Republican) unveiled the plan, which is said to contain no major alterations to Obamacare and will require a bipartisan Committee to devise longer-term fiscal plans by 13 December. Assuming a deal will be reached, we still think that Fed tapering will be pushed out to 2014. We will also be monitoring confidence and investment intention measures to determine if the fiscal impasse is likely to cause any longer term damage to the US economy.
In the US, the NAHB Housing Market Index of homebuilders’ sentiment declined marginally in October to +55 (mkt: +57), from +57 in September. The builders’ association noted that part of the softening in the series was due to the political uncertainty in Washington, which has likely weighed on confidence. The Fed’s Beige Book was also released early this morning with the Fed noting that growth remained “modest to moderate”. Four districts reported slower economic growth, although the remaining eight districts noted further economic expansion despite political uncertainty.
In the UK, the unemployment rate was unchanged at 7.7% in the three months to August. However, jobless claims in September fell 41.7k (mkt: -25k) which will ignite expectations that the improvement in the labour market is gaining momentum. Indeed, the fall in jobless claims was the largest decline since June 1997.
In Australia today, the Q3 NAB survey will be released at 11:30AEDT and will provide important updates on firms’ capital expenditure intentions. We will also watch the ‘labour as a constraint on output’ measure closely as this is a good measure of spare capacity in the labour market.

OVERNIGHT MARKETS UPDATE

US Treasuries were higher overnight with US lawmakers reportedly reaching tentative agreement to suspend the debt ceiling for a few months and remove the immediate risk of default. The 2-year bond yield fell 2bp to 0.33% and the curve flattened with the 10-year yield down 6bp to 2.67%.
Australian bond futures also gained. The implied 3‑year yield fell 4bp to 3.16% and the implied 10-year yield declined 5bp to at 4.16%.
US equities rebounded overnight in response to the news about a temporary fiscal agreement. The S&P 500 was 1.2% higher at 1,718 at the time of writing, approaching the mid-September highs, the Dow Jones was 1.1% higher at 15,338 and the NASDAQ had gained 1.1% to 3,836.
European equities erased earlier losses in the last few hours of trading on news of an impending fiscal deal in the US. The Euro Stoxx 50 ended 0.4% higher at 3,015, the FTSE 100 gained 0.3% to 6,572 and the German DAX finished 0.5% higher at 8,846.
Australian SPI futures rose 0.2% to 5,265.
In currency markets, the growing prospect that the US debt ceiling will not be breached and the government reopened was the predominant theme overnight, seeing EUR and GBP sell off sharply on news of a ‘deal’. USD/JPY also rallied. The response in the GBP unwound a prior rally on better-than-expected labour market data earlier in the session. In the end the AUD finished marginally firmer, trading as high as 0.9557, and suggesting that indeed the risk sensitivity of the currency and not its quasi-reserve currency status has been the dominant factor in price determination. Today in Asia the market will try to assess the fiscal and economic implications of the past few weeks and adjust portfolios accordingly. The absence of notable data will not complicate this task. The AUD is expected to remain buoyed in the short term; however, we retain our medium term view that commodity prices and the narrowing interest rate differential will eventually weigh.
Indicative trading levels: AUD 0.9548, AUD/EUR 0.7059, AUD/GBP 0.59882, AUD/NZD 1.1333, AUD/JPY 94.319
EUR/USD 1.3526, GBP/USD 1.5944, USD/JPY 98.79
Oil prices were higher overnight as Congress appeared close to an 11^th-hour deal to raise the government’s debt ceiling and prevent default. WTI futures were 1.1% higher at USD102.27 per barrel and Brent futures were also 1.1% higher at USD110.56 per barrel.
The spot gold price declined 0.2% to USD1,279.9 per ounce on expectations that a resolution to the US budget crisis is on its way.
Base metals prices were mostly higher overnight. Copper was broadly unchanged as gains from expectations of a US debt ceiling deal were offset by a stronger US dollar. Zinc was also broadly unchanged, while lead (+1.0%), nickel (+0.5%) and aluminium (+0.1%) all increased. Meanwhile, thermal coal futures rose 0.5% to USD84.5 per tonne and the spot iron ore price edged 0.1% higher to USD133.7 per tonne.
Agricultural commodities prices were also mixed. Corn (-0.4%) due to changes to the weather outlook although the fall was limited by strong export demand at current low prices. Soybeans (+0.7%) rose, boosted by extended gains from the rising soy-oil market. Sugar (+1.7%), palm oil (+1.7%) and canola (+1.2%) were all higher, while wheat (-0.4%), cotton (‑0.7%) and cocoa (-0.5%) all closed lower.