Stocks and Bonds Extend Rally

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Marc Chandler
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Overview: The big bond and stock market seen yesterday has continued today. The Reserve Bank of Australia’s reversion to a quarter-point hike stokes hope that the aggressive tightening cycle more broadly is set to slow. The UN’s Conference on Trade and Development became the latest to warn that the synchronized tightening risks a global recession and a prolonged period of stagnation. The large equity markets in the Asia Pacific region rose 2.0%-3.75%.  Europe’s Stoxx 600 gapped higher and its is up around 2.2% in late morning turnover, while US futures point to a gap higher opening. Benchmark 10-year yields are off 14-18 bp in the eurozone while 10-year Gilts are off more than 20 bp. The US 10-year Treasury yield is near 3.56%, having peaked on September 28 a little above 4%. The greenback is mixed. The dollar bloc and the Japanese are softer, with the Aussie off around 0.4%. Emerging market currencies are firmer, with the notable exception of the Turkish lira. There is nothing like lower yields to help gold. A week ago, the yellow metal hit $1615 and today it is pushing above $1700 to reach almost $1711. The next target may be near $1730. Oil is firm ahead of OPEC+ decision tomorrow, where a sharp output cut is expected. December WTI is near yesterday’s highs around $83.50. US natgas is stabilizing after falling nearly 6% of the past two sessions on strong US production. Europe’s natgas benchmark is off 1.6% after rallying 2.4% yesterday. Iron ore also firmed. It gained nearly 1.5%, its biggest advance in a week. December copper recover to trade near $350 before stalling. December wheat is consolidating after rising almost 4.7% last week.

Asia Pacific

The Reserve Bank of Australia warned that after four half-point hikes, it would consider reducing the pace to quarter-point. However, the market still leaned (60%) in favor of a 50 bp move.  The RBA hiked by 25 bp to 2.60%.  The smaller move spurred the largest intraday drop in three-year yields since October 2008 and a 3.75% rally in the equity market, the largest June 2020. The Australian dollar was sold to about $0.6450 after settling in North America around $0.6515. It recovered and set new session highs a little shy of $0.6550 before meeting new sellers. The RBA has two more meetings this year.  Governor Lowe indicated that rates and not peaked. Still, yesterday, the market saw a peak in Q2 23 between 4.00-4.25%. Now it sees the peak closer to 3.50%. The next meeting in November 1 and the market has about a 70% chance of a quarter-point move.

Tokyo’s September CPI stood at 2.8%, down a notch from 2.9% in August. However, the underlying measures firmed. The core rate, which excludes fresh food rose to 2.8% from 2.6%. While that was in line with expectation, the measure, excluding fresh food and energy, was a little firmer than expected at 1.7%, up from 1.4%. The government’s is using fiscal policy to help blunt the impact of higher energy and some food prices through subsidies for energy and wheat. Also, the new travel subsidy begins next week. The net impact is that there may still be some upside pressure on prices (especially processed food), but price pressures may ease starting next year.

The dollar poked above JPY145 yesterday for the first time since the BOJ intervention on September 22, but today has held in a narrow range below it.  The low was recorded in early Asian turnover near JPY144.40. On the back of the sharp drop in US yields, the dollar had slipped through JPY114.20 yesterday. Yields are still falling and that may help cap the greenback. The Australian dollar rose to a five-day high near $0.6550 but has faltered in the European morning. Support is seen in the $0.6450-60 area. On the daily charts, the momentum indicators are turning from oversold territory. A base appears to be being forged. Mainland Chinese markets are closed for the rest of the week and Hong Kong is also on holiday today. The broad dollar pullback is giving the offshore yuan a lift. It is up slightly more than 0.5% for the second consecutive day. The greenback approached the 20-day moving average near CNH7.05. It has not closed below this average since mid-August.

Europe

The UK continues to recover from last week’s dramatic moves. Sterling has recovered to September 20 levels, having trading to almost $1.1430 today (the historic low was set seven sessions ago near $1.0350). The 10-year Gilt yield peaked on a closing basis near 4.50% a week ago and is falling for the third session to around 3.84%. On the eve of the mini budget, the yield was closer 3.50%. The Bank of England has bought a fraction amount of bonds it was prepared to and has now requested that banks identify who is selling the bonds to it amid ideas that it could be other parties and not the pension funds and insurance companies that the program meant to help. Since last Wednesday through yesterday, the BOE bought about GBP3.6 bln of long-dated bond compared with the capacity to have bought GBP20 bln. The BOE’s operation is scheduled to run until October 14.

For its part, the government dropped its plan to cut the top income tax rate, which among the most controversial components though it accounted for about 5% of the GBP45 bln effort. Kwarteng also will bring forward the full budget announcement from November 23, and there are some reports suggesting it could come as early as this month.  Meanwhile, the Tory Party Conference is underway and Prime Minister Truss will speak at it tomorrow. The next focal point may be whether the government proposes an increase in transfer payments outside of pension that keep up with inflation. Lastly, note that following its downgrade of the UK credit outlook to negative, S&P followed up with a cut next year’s growth forecast to -0.5% from 1.0%. The market (median, Bloomberg survey) had it at -0.2%, while the IMF projects 0.5%, the OECD looked for a flat performance.

Eurozone producer prices continue to soar. They rose 5% in August alone and are up 43.3% year-over-year after a 38% pace in July. Tomorrow the final September services and composite PMI will be reported. The preliminary estimate saw the services PMI fall to 48.9 from 49.8, which is the lowest since February 2021. The composite estimate was 48.2. It was the third consecutive reading below the 50 boom/bust level. The composite has not ticked up since April. The swaps market continues to favor a 75 bp hike later this month but the odds has lessened. Last Monday, it was nearly completely discounted and today, only about 70% chance is priced. The year-end rate was seen around 2.05% last Monday and is now closer to 1.88%.

The euro approached $0.9900, its highest level since September 22. The next target is near $0.9950. However, this may remain out of reach. The momentum has waned a test on the $0.9800-20 area may be seen in North America. Sterling closed above its 20-day moving average (~$1.1295) yesterday for the first time since mid-August. Follow-through buying lifted it to almost $1.1430 today, where it has stalled. Initial support is seen in the $1.1280-$1.1300 area. The euro had spiked to GBP0.9265 at the start of last week, its best level since September 2020. It has been coming off sharply and today tested the GBP08650 area, its lowest since September 15. Although the next area of chart support is around GBP0.8600-10, the move seems nearly complete.

America

The upward revision of the US manufacturing PMI to 52.0 from 51.8 preliminary estimate and 51.5 in August was quickly cast aside, even though it confirms the first increase since April. The ISM represents fresh news and here the news was less favorable. It is not so much the headline fell to 50.9 from 52.8, but the details were poor. New orders slumped to 47.1 from 51.3, the weakest since May 2020. Export orders stayed below the 50 boom/bust level for the second consecutive month, and China and Europe were cited as constraints. The backlog of orders continued to soften. Employment fell to 48.7 from 54.2. It is the fourth time in five months that it was below the 50 boom/bust level. Lastly, we note that the ISM prices paid sub-index has been falling since the 87.1 peak in March. It stood at 51.7 in September, the lowest since July 2020.

On tap today are the durable goods orders/factory orders. Factory, excluding transportation, were holding up well this year. They posted a monthly average of 1.3% in H1 22 after averaging 1.1% a month in H1 21. However, it was like a wall was hit, as some other time series suggest and factory orders, excluding transportation collapsed by 1.1% in July. The median estimate in Bloomberg’s survey for a 0.2% gain suffers from the lack of participation. There were three survey responses. Action Economics survey had 14 respondents and a median of zero. At the same time, the US releases the JOLTS report on job openings, and this will garner the market’s attention. In the first seven months of the year, job openings have risen three times and fallen four. The July reading of 11.24 mln was about 200k lower from December 2021. No fewer than five Fed officials speak. The views of most officials are known, but the market is just getting know Logan in her new capacity as Dallas Fed President and Governor Jefferson how joined the Board in late May.

Canada reports August building permits, which likely fell for the third straight month. It also reports August merchandise trade figures. Through July, it recorded a C$23.6 bln trade surplus. For the year ago period, it registered a trade surplus of C$525 mln. The combination of slowing world growth and softer commodity prices warns the best news has likely passed. The trade surplus is expected to fall for the second consecutive month.

Mexico reported stronger worker remittances ($5.12 bln) and a move above 50 in the manufacturing PMI and IMEF survey. The non-manufacturing IMEF survey softened to 50.9 from 51.5 (revised from 51.9). Mexico’s data highlight is the CPI figures at the end of the week.  Both the headline and core are expected to have risen further and this will underscore that Banxico has more work to do. It can be expected to match the Fed’s 75 bp hike when it meets next on November 10. The risk-on mood helped the peso about 0.60%.  Brazil though was the belle of the dance. It soared nearly 5%, the biggest move in four years ago. The risk appetites helped but this seemed to be a reaction to the election. The economic data disappointed. The manufacturing PMI weakened (51.1 vs 51.9) and the trade surplus was smaller ($4.0 bln vs. $4.1 bln and a median forecast in Bloomberg’s survey for $4.5 bln). Hopes for privatizations helped lift the Bovespa by 5.5% yesterday, nearly doubling the year-to-date gain.

The US dollar was turned back from CAD1.38 yesterday and plunged to about CAD1.3620. Follow-through selling took it slightly through CAD1.3570. It recovered in the European morning to almost CAD1.3650. There is scope for additional, albeit limited gains (maybe CAD1.3670-80), but the intraday momentum indicators are getting stretched. After the RBA’s move, there is some speculation that the Bank of Canada is next. The swaps market has downgraded the chances of a 50 bp hike on October 26 to about 55% from almost 90% a week ago. The greenback fell 0.5% against the Mexico peso yesterday to reach almost MXN19.95. Recall, last week it jumped to around MXN20.58. There has been no follow-through dollar selling today. There is scope to retest the MXN20.05 area but that might be sufficient to hold back stronger gains today. The US dollar tested the 200-day moving average against the Brazilian real yesterday (~BRL5.16). Follow-through buying today may be limited and after yesterday’s big move, consolidation may be in order today.