DXY was soft last night as EUR firmed:
AUD was up against DMs:
EMs were even stronger:
Metals were happier:
EM stocks are breaking out:
US junk is threatening to:
All bonds eased:
As the S&P500 flew to record highs:
The news flow was dominated by more trade non-deal positivity and three month delay to Brexit. Another expected Fed rate cut tomorrow is helping. Earnings season has been flat but, for now, 2020 froth and bubbles outlooks are holding. Enough to keep the stock pump running.
The key to the durability of the rally beyond the whim of politics is will bonds well off as stocks rise? I don’t think so. At least, not very far. The US housing recovery hangs on low bond yields and while the oil patch retrenches along with wider export sectors it is essential to growth. The US bond market has priced one more cut and futures are pricing lower not higher yields.
At some point if we can bumble through the new year without another political accident then oil might get bid into Q1 and shock yields but not yet.
Will Powell & the FOMC shift sentiment?
Unlikely given markets have taken a much more positive view on the geo-political outlook.
The market – which has been a historically good predictor of FOMC meeting outcomes – is fully priced for the FOMC to lower the Federal Funds target range to 1.50-1.75% when they meet on Wednesday. So what does that for the broader term structure? The chart at middle would suggest that a material rally in USTs would need to be driven by a fall in cash expectations. We could expect to see a slide in forward cash expectations (and US yields) as we did following the Jul and Sep rate cuts, though for this meeting, we do not see that rally sustained for two main reasons. Firstly, given the lack of consensus in the Sep dot plots, as well as the Fed’s optimistic forecasts and strong risk sentiment in markets currently, we do not anticipate any more dovish language around the cut, which in turn should not prompt the market to price in more aggressive easing. Secondly, the positivity around US-China trade is likely to continue as officials eke out the details of a “phase one” trade deal. That, as well as a better than expected earnings season, should keep yields higher and risk assets supported over the near term (chart at right). In our view, that fall in cash expectations is likely to come from a concern that there will be little positive development on US-China trade, causing weaker business investment to filter through to employment and eventually the currently robust US consumer. However that is a story that is set to develop over coming months, once the discussion turns away from resolving a bi-literal trade deficit to more complex issues including forced technology transfers, enforcement and monitoring.
And for Australia:
Downside surprise to see core inflation move even further away from the RBA target band.
AU Q3 2019 CPI figures will be released on Wednesday. Westpac Economics is forecasting headline CPI at 0.6% for the quarter, which would see the annual pace lift to 1.8% from 1.6%. This is higher than market expectations for 0.5%qtr, 1.7%yr and is driven in large by our observations around holiday travel & accommodation, as well as seasonal strength in alcohol & tobacco (mostly the annual re-indexing of the tobacco excise) and food (drought offsetting normal seasonal softness). Westpac Economics’ forecast for average of core inflation measures, however, is more modest than the markets at 0.3%qtr, 1.3%yr (mkt 0.4%qtr, 1.5%yr). Such a downside surprise will see core inflation move even further away from the RBA target, so with 3yr yields nearing the upper end of recent ranges, our bias is to be long approaching Wednesday’s data print. That’s not to suggest that we expect a major shift in the term structure. Given that the market is expecting a benign inflation print and the RBA’s has shifted to a more ambitious “full employment” target, the importance of the CPI to the broader valuation complex has been somewhat been reduced. For that reason, we’d expect AU rates to respect recent ranges with a bias toward lower yields.
There’s still not much reason to see any kind of enduring rally in the Australian dollar.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
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