Yesterday's Highlights

As expected, the Reserve Bank Board decided to retain the current policy settings at its December Board meeting. The overnight cash rate was held at 0.1%; the Exchange Settlement rate stayed at zero while the Bank will continue to purchase securities at the rate of $4 billion a week until at least mid-February 2022. The RBA said that “The economy is expected to return to its pre-Delta path in the first half of 2022,” versus a previous estimate of H2 2022. AUD/USD was 0.7058 pre-RBA, gyrated for a while, then ground steadily higher, to 0.7085. Australia government bonds made more notable moves, the 3yr up 8.5bp on the day at 0.95%, the 10yr +7bp at 1.64%. Regional equities were a sea of green, with Japan and Hong Kong particularly strong, up 2%. The ASX 200 rallied 1.0%.

Currency Markets

EUR/USD fell from 1.1290 to 1.1228 then trimmed losses to 1.1265. GBP/USD is down a net 30 pips at 1.3235. USD/JPY traded a fairly muted 113.40 to 113.78 range, despite the rise in US yields and equities. Outperformer AUD extended its local session gains to 0.7110. NZD rose 30 pips to 0.6780. AUD/NZD rose from 1.0460 to 1.0502.
US final 3Q non-farm productivity was revised to -5.2%q/q (from preliminary -5.0%q/q) and labour costs rose 9.6% (prelim. 8.3%), with covid and government payments still distorting the data. IBD/TIPP small business sentiment survey bounced 4.5 points to 48.4 in December, breaking a string of five consecutive monthly declines, although the index remains in marginally pessimistic territory amid ongoing covid and inflation concerns.
Canada’s Ivey PMI bounced to 61.2 in November from 59.3, continuing to gyrate near post-pandemic highs.
Eurozone final 3Q GDP was little changed at +2.2%q/q, but edged up to +3.9%y/y from the preliminary 3.7%y/y. The components showed declines in capex (-0.9%q/q against expected +0.6%q/q) and government spending (+0.2%q/q against est. +0.7%q/q), offset by firmer household consumption (+4.1%q/q, est. +3.7%q/q).
German industrial production in October surprised with a rise of +2.8%m/m and -0.6%y/y (est. +1.0%m/m and -2.9%y/y). In Eurozone ZEW economic confidence surveys, Germany’s current situation fell to -7.4 (est. +5.7, prior +12.5) and expectations fell to +29.9 (est. +25.4, prior +31.7). Eurozone’s current situation fell to -2.3 (prior +11.6), while expectations rose to +26.8 from prior +25.9.

Interest Rates

US bond yields rose for the second day this week, as the easing of virus fears saw markets grow in positive risk sentiment. 2yr government bond yields rose from 0.64% to 0.68%, and 10yr government bond yields rose from 1.44% to 1.47%.
Australian bond yields rose, following global price action, and bonds underperformed their US counterparts. Yesterday’s RBA did not shift market sentiment by much, although the RBA’s rhetoric does have markets thinking about the possibility of a hard taper to zero on their bond purchase program in the February meeting. 3yr government bond yields (futures) rose from 1.12% to 1.20%, and 10yr government bond yields (futures) rose from 1.65% to 1.70%.
Credit markets followed the risk-on tone, with credit indices and cash spreads moving tighter. US IG closed the day at 54 (-2) and HY at 306 (-11), and cash was also supported with Europe similar as Main closed at 54 (-4) and XO at 264 (-17). Euro primary markets saw CIBC price a GBP1bn 4yr and WNZL completed its EUR750M 5yr at MS+55 (BBSW+97, BKBM+91). In the US we saw benchmark acquisition deals from Merck, which completed a USD8bn 5 part deal to fund its Acceleron buy and Emerson Electric priced USD3bn across 3 tranches for its AspenTech deal, while JPM priced USD2.75bn of 4nc3yr (fixed and FRN).

Commodity markets

Crude markets continued the aggressive recovery as fears over the Omicron variant appeared to wane and global risk sentiment rose. The Jan WTI contract is up another $2.04 at $71.52 while the Feb Brent contract is up $1.90 at $74.97. Brent is now up 14% from the lows last week, as traders positioned for the view that last week’s sell off was an overreaction to the new variants’ announcement. A keen sense that Iran nuclear talks would not head anywhere added some weight to the recovery, plus the weekend news that Saudi Aramco was raising prices for January and strong Chinese thermal energy imports in November added to positive sentiment. News that the US requested Germany agree to halt the Nord Stream 2 pipeline if Russia invades the Ukraine added to the list of geopolitical risks the market may have to face into over the winter.
Metals joined in on the burst of positive risk sentiment with copper up 0.48% at $9,550 and aluminium up 1.4% at $2,624. Nickel jumped by a larger 1.8% to $20,180 while zinc rose 2.2% to $3,232. The strength in Chinese commodity imports helped lift sentiment, with copper concentrate imports at a record high and unwrought copper at an 8-month high.
Finally note that iron ore surged again, helped by 13-month highs for Chinese imports of iron ore, with the November total at 104.96mt up 6.9%yy. Optimism that China will relax production caps/ boost commercial housing as we move through the Beijing Olympics added to the sense of optimism, with the surge in imports coming even as port inventory hit 40-month highs. Xinhua News reported that the government will “support the commercial housing market to better meet buyers’ reasonable housing needs”. The Jan SGX contract is last at $114.70, up $7.65 while the May Dalian contract rose 3% on the night session.

Event Risk

Japan: In October, the current account surplus is expected to remain narrow versus the level of early 2021 (market f/c: ¥1274.9bn); meanwhile the final release of Q3 GDP should again highlight the weak state of domestic demand.
India: The RBI will keep policy on hold as they assess the uncertainties surrounding demand and inflation (market f/c: 4.0%).
US: Demand for cars is anticipated to buoy consumer credit in October (market f/c: US$25bn). JOLTS job openings for October should continue to reflect the extraordinary demand for workers (market f/c: 10469k).
At its October meeting, the Bank of Canada ended its bond purchase program, while keeping the benchmark interest rate at 0.25%. No change is expected at today’s meeting but strong employment data continues to support expectations for rate hikes in 2022.

{{banner.title | ellipsisHero}}

Highlights

Padlock {{article.title}}

{{article.authorNames}}

{{article.publishDate | friendlyDate}}

Latest News

Padlock {{article.title | ellipsis}}

{{author}} & , {{article.authors[0]}}, {{article.authors[1]}}, {{article.authors[2]}}, ...{{author}} and ,

{{article.publishDate | friendlyDate}}

{{article.title}}

{{article.title | ellipsis}}

{{author}} & ,

{{article.authors[0]}}, {{article.authors[1]}}, {{article.authors[2]}}, ...{{author}} and ,