Yesterday's Highlights

Australia retail sales fell -1.7% in August, moderately above consensus forecasts of a -2.5% decline. Across the states, NSW reported a fall of -3.5%, while Victoria performed marginally better with a decline of -3.0%. The two week lockdown in Qld at the beginning of the month saw retail sales for the state decline -0.9%. ACT suffered the greatest hit to retail sales with a sharp drop of -19.9%. AUD/USD traded a fairly wide 0.7263-0.7311 range, finishing around 0.7270 as equity sentiment soured. The ASX closed -1.5%, with most other regional bourses in the red, along with S&P 500 futures, -0.6%.

Currency Markets

The US dollar outperformed all G10 currencies on the day. The euro held up better than most, -0.1% at 1.1680, but did touch a one-month low of 1.1668. Sterling was weakest in the G10, with sentiment on the UK economy souring on fuel and other shortages and as the jobs furlough support scheme expires. GBP/USD slumped from 1.3700 to 1.3535, printing lows since January.
The Japanese yen did not benefit from risk aversion, instead weakening as US Treasury yields became more tempting to Japanese investors. USD/JPY rose from 111.20 to 111.64 – a three-month high. AUD/USD is down about half a cent on the day at 0.7240, a relatively muted response to the equity rout. NZD/USD fell 60 pips to 0.6955, with a one-month low of 0.6943. AUD/NZD rose from 1.0390 to 1.0405.
In the US, attempts to break the deadlock on the debt ceiling continued with both Treasury Secretary Yellen and Fed Chair Powell warning of the negative effects on the economy from failure to find agreement. Yellen suggested that the debt ceiling would be hit by 18 October. They both also referred to supply chain bottlenecks leading to more protracted, if still transitory, inflation pressures into 2022. Senator Warren said she would vote against Powell if he is nominated for another term as Fed chair. There is also concern over the bipartisan infrastructure deal, with progressive Democrats threatening to vote against it unless the much larger budget proposal is passed.
US September Conference Board consumer confidence fell to 109.3 (est. 115.0, prior 115.2). The CoreLogic house price index in July rose 19.95%y/y (est. +20.0%y/y). The Richmond Fed September manufacturing survey slumped to -3 (est. 10, prior 9 and July peak of 27), with a notably large decline in new orders to -19 from prior 5 (its first below sub- zero reading since May 2020). Despite the slide in activity and further increases in prices paid, firms remained relatively optimistic.
GfK’s consumer confidence survey for Germany was firmer at +0.3 (est. -1.4, prior-1.1), as was French consumer confidence at 102 (est. 100, prior 99).

Interest Rates

US bond yields continue to rise despite sell off in equities as hawkish comments from the Fed remains the centre of focus for markets. 2yr government bond yields traded at 0.30%, and 10yr government bond yields rose from 1.50% to 1.57%, the highest level in 3 months, before settling at 1.54%.
Australian bond yields have followed price action from its US counterparts as domestic price movers should remain on hold until early next month when lockdown restrictions are eased. 3yr government bond yields (futures) traded at 0.47%, and 10yr government bond yields rose from 1.48% to 1.53% before settling at 1.50%.
Credit was not immune to the risk off move last night, however the price action was orderly with IG indices out a bp (Main to 50, CDX to 52) and cash spreads 1-2bp wider with financials outperforming. Primary activity continued uninhibited in both EUR and USD and we saw an Aussie flavour to the activity. CBA priced a USD1.5bn 3.75yr FRN at SOFR+40 (BBSW+36) with the July 25 deal hitting the 2025/26 refi window for major banks, NBN completed its USD2bn, 3 tranche deal that included a 3yr at T+43 (BBSW+40), 5.25 year at T+70 (BBSW+75) and a 10.5yr at T+100 (BBSW+125) and Computershare priced a EUR500M 10yr at MS+105.

Commodity markets

Crude markets slipped from 3yr highs as a stronger US$ and higher rates hit sentiment. The November WTI contract is down $1.11 at $74.34 while the November Brent contract is down $1.36 at $78.17. Adding to the correction, OPEC Secretary General Barkindo said in an interview with Bloomberg that OPEC+ will “continue to do what it knows best” which is “how to keep the market in balance”. OPEC+ meets Monday next week. API data showed a very surprising 4.1mb rise in crude inventory plus a 3.6mb rise in gasoline and 2.5mb rise in distillate.
Metals fell with copper down 1.13% at $9,256 and nickel down 2.38% at $18,495. That was despite MMG stating that it may have to halt production at the Las Bamba mine in Peru due to protests, Rio declaring force majeure on shipments from its Kennecott operation in Utah due to the release of molten copper and Vale confirming it has been able to free only 35 of 39 trapped workers at its Sudbury nickel mine in Canada. Nickel is approaching two-month lows despite nickel inventory on the LME dropping to 20-month lows. The driver here is concerns that power cuts in China being implemented to conserve electricity may impact steel and stainless-steel production and hence nickel demand. At the other extreme, aluminium rose 1.68% to $2,932, as the prospect of power cuts in China hitting production lifted prices back towards 13yr highs.
Finally note that iron ore markets weakened as power shortages accelerated steel production curbs. MySteel reported that over 80 steel mills have suspended operations for maintenance while some northern provinces have implemented power curbs at steel mills. The October SGX contract fell over 7% during the day session yesterday, closing at $112.65 on the night session. The 62% Mysteel index fell $5.45 to $112.55.

Event Risk

The global calendar is very low key. In the Eurozone, supply constraints and shipping capacity may be headwinds for economic confidence in September (market f/c: 116.9). In the US, pending home sales in August are due for a slight uptick, with supply still a constraint (market f/c: 1.0%). Further, hawkish Fed presidents Bullard (St. Louis) and Bostic (Atlanta) will provide their respective views on the economy.

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