MT: Markets buoyed by bad news and caving in

A surprise U-turn by the UK government on the fiscal package and a weaker-than-expected US ISM in manufacturing (50.9 vs. 52.0 exp) have caused global yields to fall sharply.


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  • Continue to risk the S&P500 +2.6% as yields fall (US 10-year Treasuries -17.7bps)
  • Fiscal reversal in UK and weak ISM manufacturing process (bad news is good news).
  • Oil prices up with Brent +4.5% ahead of OPEC+ tonight; Talk about 1m plus cut
  • Commodity currencies rebound strongly, AUD up 1.9% to 0.6519
  • The Fed’s Williams Post Close still sounds hawkish despite market moves
  • Coming up: RBA (up 50bp); CPI Tokyo; EZ PPI; US BACK; OPEC

A surprise U-turn by the UK government on the fiscal package and a weaker-than-expected US ISM in manufacturing (50.9 vs. 52.0 exp) have caused global yields to fall sharply. The US 10-year Treasury bond fell -18.6 basis points to 3.64%, while hitting a low of 3.57%. The US 2-year yield also fell about 16 basis points to 4.12%, meaning the 2/10 curve has flattened to -47.9 basis points. The moves are reflected in real yields, with the 10-year TIP yield falling -24.4 basis points to 1.43%, while the implied breakeven point rose 5 basis points to 2.20%. The rise in break-even comes alongside a rise in oil prices, with Brent oil up 4.7% tonight ahead of OPEC+. Although yields have moved sharply, Fed fund pricing still implies a 72% chance of a 75 basis point hike in November and a 4.45% peak by March 2023. For equities, the ISM was weaker than expected linked to “bad news is good news” The S&P500 rose 2.6% after falling to its lowest level since November 2020 on Friday. The strong moves in bonds and stocks also reflect last week’s bearish positioning – CFTC bond futures were net short last Tuesday by the largest amount this cycle. There is also renewed talk within equity markets that the Fed is being forced to turn around, bolstered by the recent UNCTAD report warning of a policy-driven global recession and urging central banks to back off aggressive rate hikes (“there is still time , off the brink of recession”). However, the Fed’s Williams and Barkin both pushed back on any notion of a Fed pivot.

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First to British politics. The UK government has reversed a plan to scrap a cut in the top tax rate and leave it at 45%. Although going back this year will cost around £2-3bn out of an estimated £72.4bn in potential debt issuance, it is is a sign that the government is responding to market concerns as well as polls, which could mean the new administration is not as cavalier as some had feared. With the adage ‘a week is a long time in politics’ and the opposition Labor Party remaining 33 points ahead of the Tory government in opinion polls, more changes could follow. The FT also noted that Chancellor Kwarteng is expected to bring forward his plans to release a mid-term financial report by a month. The plan was originally scheduled to be unveiled on November 23, but will be announced later this month. Most importantly, this means that it will also be available ahead of the BoE MPC meeting on November 3rd. The FT notes that the statement will set out a five-year plan to show Britain’s debt falling over time. BoE MPC member Mann was out just 30 minutes ago, noting that a weaker pound and the UK government’s support for household energy bills were behind its bid for the highest interest rate in more than three decades last month. It suggests that markets should still expect an outsized rate hike – the market price is around 121 basis points for November and a peak of 5.6% by mid-2023.

As for the data, it was a tale of bad news is good news. The US ISM Manufacturing traded at 50.9, below 52.0 expected and the lowest since May 2020. The details in the report were worse. New orders fell sharply to 47.1 from 51.3, also a 28-month low, and inventories rose to 55.5 from 53.1. An ISM recession indicator that measures the difference between new orders and inventories is now at -8.4, the lowest level since the peak of the pandemic. Adding to recession expectations, ISM Chair Fiore said manufacturing could be on track for a contraction in the first half of 2023. More positive news is on the inflation front, with the price paid index falling to 51.7, its lowest since June 2020, and supplier shipments falling to 52.4. An indicator of inflationary pressures adds up paid prices and supplier deliveries, and that calculation is now at its lowest level since March 2020. Clear price pressures then spilled over into goods/manufacturing, which then posted a premium to the ISM services index and wages on Wednesday – and payroll brings on Friday to see if price pressures on the services side are easing and if the slowdown in activity extends beyond manufacturing (see US ISM Manufacturing for details).

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The last news flow of note was UNCTAD’s warning that advanced-economy central banks risk pushing the global economy into recession followed by prolonged stagnation if they continue to raise interest rates. UNCTAD Secretary-General Rebeca Grynspan urged central banks to scale back aggressiveness, noting “there is still time to break away from the recession brink”. UNCTAD estimated that a one percentage point hike in the Fed’s interest rate would reduce output in other rich countries by 0.5% and output in poor countries by 0.8% over the next three years (see UNCTAD report for details). The Fed’s pivoting narrative has been behind at least one bear market rally this year, and Fed officials were quick to quash any notion. The Fed’s Barkin noted the Fed is focused on US developments and would only worry about weakness in the global economy if it spilled over to the US – “What you’re worried about is the collateral damage to it the international economies could emerge and in particular their financial systems”. The Fed’s Williams also confirmed the Fed’s dovish stance as outlined in the September FOMC forecasts. As the Fed wanders until something breaks, Credit Suisse E shares fell as much as 12% overnight at one point before rebounding and closing largely unchanged. The sharp drop in the share price this year, down around -55%, is partly due to concerns that the scandal-hit bank will have to raise new equity as part of a much-needed restructuring, diluting existing shareholders.

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Finally, in terms of FX moves, it was the commodity currencies that outperformed with AUD +1.8% and NZD +2.1%. Overall risk in tone and oil price surge ahead of tonight’s OPEC+ driving. The GBP, meanwhile, held on to early gains and extended it in response to the UK government’s fiscal turnaround. GBP rose 1.3%.

Arrives today:

  • AU: RBA meeting & other dates: We expect the RBA to hike rates 50 basis points to 2.85% at its October meeting on Tuesday. Governor Lowe recently stated that the RBA will discuss the merits of a 25 basis point hike versus a 50 basis point hike at the October meeting. The NAB believes that the current level of 2.35% for interest rates is still below the RBA’s nominal neutral view of at least 2.5% and the resilience evident in the data supports a further 50 basis point hike , before a downgrade to 25 basis points November raise. The overwhelming consensus is for a 50 basis point hike with 21 out of 28 economists. Expect discussion of financial stability concerns in the post-meeting statement, particularly around budgets as the RBA’s Financial Stability Review is released on Friday. There’s also plenty of data today including ANZ job listings, housing finance approvals and building permits – all set to take a backseat in the face of the RBA.
  • JN: Tokyo CPI: Consensus expects core CPI (excluding food and energy) to rise 1.6% yoy from 1.4%.
  • EZ: PPI & ECB speak: Consensus for producer prices is at a staggering 43.2% yoy from 37.9%. There are also some ECB speeches, albeit at non-monetary events with ECB President Lagarde speaking to students from the Central Bank of Cyprus and Centeno
  • USA: JOLTS & Fed Speak: Job vacancies are expected to fall but remain very high at 11.1m from 11.239m which would still mean the labor market remains very tight as there are only 6.014m unemployed – or put another way there is 1 .8 vacancies per unemployed person

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