Yesterday's Highlights

The Reserve Bank Board’s October minutes revealed very little evidence of any potential change in policy. The key conclusion that has been used in recent minutes was repeated, “It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent range” which the RBA judges will not be before 2024 due to sluggish wages growth. AUD/USD was barely troubled on a day when the US dollar came under broad-based and substantial selling pressure. The Aussie rose 55 pips or 0.8% to 0.7470, printing highs since early September. Regional equities were almost all in the green, making the ASX 200’s small decline a clear underperformance.

Currency Markets

The US dollar fell against all G10 currencies except JPY on the day. EUR/USD peaked at 1.1669 (a three-week high) in London trade, then edged down to 1.1635, up a net 0.2%. GBP/USD rose a net 0.65c or 0.5% to 1.3790. USD/JPY dipped to 113.88 then recovered to 114.40, up fractionally overall.
AUD/USD extended its local session gains to 0.7486, marginally above the 3 September high and thus the Aussie’s strongest point since 15 July. The kiwi was strongest of all in the G10, up 0.9% to 0.7150, including a high of 0.7172, a high since June. This left AUD/NZD down slightly at 1.0450.
US building permits and starts in September fell more than expected. Starts pulled back to 1.555m annualised pace (est. 1.610m, prior 1.580m revised from 1.615m) and permits fell to 1.589mn (est. 1.68mn, prior revised to 1.721mn from 1.728mn). At play are shortages of construction materials and labour, with a heavy backlog of construction still to start. Despite the misses, core single family homes remained firm, the data still suggesting a very strong construction pipeline.
Fed governor Bowman noted a couple of factors that could be drags on the economy. She worries that lingering effects from the pandemic could have long-lasting implications for women's job opportunities. Childcare availability may prevent women from getting back to work, or those who took reduced hours could be in weaker positions for advancement. Early retirement has also weighed on the labour market, and the loss of workers over 55 will limit productivity capacity. In Q&A she said inflation may be longer lasting than expected. Fellow governor Waller said tapering of bond purchases should start next month but a rate hike is “still some time off.”
Richmond Fed president Barkin said the need for workers has seen wages increase, especially for entry level positions and those at the lower end of the pay scale. He cited several barriers to employment, including skill mismatches, family care, health reasons, and incentives.
The ECB’s Villeroy, Centero, Rehn and Lane collectively spoke of slack in the region’s economy, low core inflation, the need for accommodation, and that market pricing was out of line with ECB guidance and that there is little chance of a rate move in 2022. There were also comments about the potential flexibility of the ongoing asset purchase program once the pandemic emergency program expires around March 2022.

Interest Rates

Long end US treasury yields rose overnight and the curve steepened following a hawkish Fedspeak from Waller, who noted that tapering of bond purchases should start in November. 2yr government bond yields traded at 0.39%, and 10yr government bond yields rose from 1.57% to 1.63%.
The RBA minutes yesterday reaffirmed the RBA’s expectation not to raise rates until 2024, which saw some of the recent front end price action pared back. 3yr government bond yields (futures) fell to 0.93%, and 10yr yields (futures) traded at 1.78%.
Credit indices were better last night with both Main (50) and CDX (51.5) a bp lower, however cash spreads pushed wider. Primary activity remains solid with Europe seeing 6 IG issuers price EUR3.65bn and we also saw CBA mandate banks for a GBP 7yr covered deal (CBA has AUD, EUR and NOK covered maturities in the next 6 months). In the US, 3 issuers priced close to USD10bn led by Thermo Fisher’s short dated 5 part deal (USD5.85bn) that will partly fund its PPD acquisition.

Commodity markets

Brent closed above $85 for the first time since 2018 as positive risk sentiment and concerns about energy shortages added to the momentum. The November WTI contract is up 44c at $82.88 while the December Brent contract is last at $85, up 67c on the day. After the recent rises in crude inventory, traders will watch the API data later today and then the EIA data tomorrow. A small inventory build is expected after sizeable builds over the last 3 weeks. European gas prices fell again on expectations for mild windy weather, despite signals from Russia that approval from Germany and Europe for the Nord Stream 2 pipeline to be commissioned is a precondition for increased supplies.
Metals saw some pretty hefty losses with copper down 0.76% at $10,119, aluminium down 2% at $3,103 and zinc down 4% at $3,550. The correction appeared to be driven by LME rule changes which imposed a limit on the tom/ next backwardation and moved to avoid deterring market participants from lending inventory to buyers. The temporary moves took place after the spread between prompt delivery and the 3-month copper contract traded above $1,000 for the first time ever, which in turn appeared to be driven by inventory of freely available copper at LME warehouses hitting 47yr lows. Press reported that Trafigura had played a “significant role” in the total requests to withdraw more than 150,000 tons of copper from LME warehouses in the past two months. The spread between prompt zinc and the 3m contract also declined from a 2yr high above $50.
Finally note that iron ore markets marked time after BHP met expectations for iron ore production in its Q1 report and left guidance unchanged. Vale will report its Q3 production after the market close later today. BHP production was down almost 4% on the quarter, though this had been flagged in the last update driven by delayed maintenance and labor shortages caused by border restrictions. The Jan Dalian contract is up 0.5% while the November SGX contract is last at $123.40, up just over $1 from levels this time yesterday. The 62% Mysteel index fell 45c to $123.85.

Event Risk

Australia: The Westpac-MI leading index fell from 1.4% in July to 0.5% in August. Delta restrictions and global uncertainty are expected to again be significant negatives in September.
There will be plenty of interest in UK September CPI, given rumblings from Bank of England members about a possible rate hike before year end. Consensus is 0.4%mth, 3.2%yr and 3.0%yr on the core rate. The BoE target is 2.0%yr but of course the debate over how much inflation is transitory is ongoing.
The final reading on Eurozone September CPI is due, expected to be 3.4%yr overall, 1.9%yr core rate.
US: The latest Fed Beige book will provide a qualitative view of conditions across the 12 Fed districts. The FOMC’s Quarles will speak on the outlook. Bostic, Kashkari, Evans and Bullard appear too.

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