While commodities foretold the deflation shock to come:
Big miners were thumped:
EM stocks have rolled:
Junk is still OK:
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The Treasury curve was hammered:
That helped Growth but stocks were soft overall:
Westpac has the wrap:
Event Wrap
Bank of Canada surprised markets with a decidedly more hawkish statement. It announced an early and abrupt end to its QE programme (although will reinvest maturities). It also said that rates hikes are more likely in the middle quarters of 2022, rather than the previous guidance of late 2022. It stated that although inflation risks are balanced, they are at the high end of their profiles and so upside risks are of more concern as the output gap is set close earlier than previously thought.
US durable goods orders in September fell 0.4%, less than expected (est. -1.1%m/m), but that was offset by a downward revision to August (to +1.3%m/m from +1.8%m/m). The ex-transport reading was in line with expectations at +0.4%m/m, with the prior level unchanged (+0.3%m/m). The goods trade deficit in September widened to a record -USD96.3bn (est. -USD88,3bn, prior -USD88.2bn), largely due to a fall in exports whilst imports continued to rise. Wholesale inventories in September rose 1.1%m/m (est. +1.0%m/m, prior +1.2%m/m).
Atlanta Fed reduced its GDPNow projection for Q3 to a 0.20% annualised growth rate, from 0.43% previously, and 1.165% around a week ago. The downward revisions come amid lower estimates of real government spending and net exports.
German GfK consumer confidence rose marginally to +0.9 after recent declines (prior +0.4, est. -0.5). French consumer confidence was softer, at 99 (est. 101, prior 101).
UK’s Autumn Budget contained a more positive economic growth outlook and fiscal forecast, indicating a lower debt profile and issuance need. The net profile remains expansionary at the margin and so leaves the calls for next week’s BOE MPC meeting finely balanced.
Event Outlook
Australia: The Q3 import price index could produce the largest rise since 2013 Q3 due to a lower AUD and rising oil prices (Westpac f/c: 4.0%). The export price index should show continued strength with commodity prices seeing a significant improvement since Q2 (Westpac f/c: 6.5%). RBA Dep. Gov. Debelle appears online before the Senate Economics Legislation Committee.
NZ: RBNZ Governor Orr speaks at an INFINZ event on regulation.
Euro/UK: Consumer confidence is expected to remain well above the lows of early-2021 in the final release for Oct. The ECB’sOctoberpolicy meeting communications will reflect confidence in the outlook despite lingering delta risks; the persistence of inflation is likely to be downplayed again despite recent outcomes and market concern. For the UK, October’s Nationwide house prices should exhibit continued strength, with annual price growth remaining near 10%.
US: Q3 GDP will be released. Delta hit consumption hard in Q3, slowing growth abruptly. Vaccinations and declining cases should mean this is a temporary result (Westpac f/c: 2.0% annualised). Initial jobless claims should continue to fall, albeit at a slower pace. Pending home sales will likely show further strength in September. October’s Kansas City Fed manufacturing index will highlight the varied conditions nationally owing to the effects of delta and supply chain disruptions.
Credit Suisse (SIX:CSGN) captures the moment:
We turn neutral on AUD and revise our broad target range higher
Two weeks ago we raised the top end of our AUD range from 0.7400 to 0.7480, and signalled the latter as an attractive entry point for shorts. With spot now above that level,we find that the pro-AUD asymmetry that we expected to see at current levels is simply not extreme enough to make the risk-reward of entering fresh AUD shorts compelling, especially with another short AUD expression already amongst our trade recommendations (AUDCAD 0.91 digital put, from 22 Sep-link). Vol markets seems to be pricing limited potential for change from next week’s RBA decision, which fits in linewith our view. This likely means that AUD might be unfazed by a statement that reiterates the RBA’s well-understood willingness to lag markets, without new firepower being deployed. Also, on the positioning front, the unwind of the short AUDUSD position in IMMfutures that we highlighted two weeks ago has simply been slower than we anticipated.
We still think that in the medium-term, i.e. over the course of the rest of Q4, the amount of rate hikes priced-in will be a hurdle for meaningful AUD strength. From a more tactical standpoint, however, we also note that the repricing in RBA policy expectations appears much less extreme vs the rest of G10 than it did in Q1 2021. At the time, market expectations moved to price in a meaningful pro-AUD gap in policy rate differentials vs theFed, especially out to 2024. This time, the gap is more contained, and the macrobackdrop is considerably more constructive. We think this, for now, reduces the urge forthe RBA to fight back. We suspect this theme be revisited later in Q4, but at current levels the asymmetry is just not extreme enough to make us want to fade it. With the key points that drove our “fade AUD” view undermined, we turn neutral on AUD and revise our target range for Q4 higher from 0.7050-0.7480 to 0.7320-0.7660. The extremes of the range are around the 23.6% and 61.8% of the 2021 top-to-bottom retracement. We continue to think that the steel-heavy composition of Australia’s export basket makes it a less than ideal expression of rising energy prices, compared to otherG10 currencies like CAD and NOK, and we continue to see priced-in RBA tightening expectations as high relative to actual RBA intentions. But in the near-term, we don’t see either as a sufficiently strong catalyst to trigger a near-term reversal in AUDUSD.
The top end of the Australian economic pipeline is filling with deflation not inflation as the term of trade enters a historic crash. I will still use any further AUD strength to buy offshore assets.
Written By:
David Llewellyn-Smith
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