Originally published by Rivkin Securities
The US dollar continued to strengthen on Wednesday up +0.18% as it remains modestly above the key psychological level of 100 and trading at the highest levels since 2003. This comes on the back of comments from Federal Reserve of St. Louis president James Bullard that it would take a “surprise at this point” for the Fed not to raise rates in December with big shocks the only reason to delay. At the same time Cleveland Fed president Loretta Mester said in an interview that extreme volatility would force her to reassess policy but recent movements are not troubling or would warrant a change in policy stance.
Importantly Mester also touched on the fact that while there are prospects for fiscal policy to improve the outlook, we don’t know exactly how these policies will look, when or if they will be implemented. The Fed remains data dependent and has signalled that the path of interest rates will continue to rise gradually, a December rate hike is almost guaranteed with CME Group (NASDAQ:CME) calculating the odds just over 90%.
What will be important will be any revisions to future hike projections, in the last set of projections from September the Fed revised it’s 2017 outlook down to just two hikes from three previously. While the prospect of more fiscal stimulus will ultimately steepen these projections should it occur, until these polices are actually implemented and impact the underlying economy, it is unlikely these projections will be revised higher.
Equity markets were mixed, the S&P 500 closed modestly lower, down -0.16% while the Nasdaq100 bounced +0.58% benefiting from gains in technology stocks such as Apple Inc (NASDAQ:AAPL). which has been oversold recently over concerns a trade war between the US & China would impact sales. Yields on treasuries were relatively unchanged, the two-year yield was flat at +1.005% while the ten-year yield fell -1 basis point to +2.2225%.
Data from the US overnight was mixed, manufacturing production (MoM Oct) missed estimates of a +0.3% gain with an actual reading of +0.2% while industrial production (MoM Oct) was flat at 0% missing forecasts for +0.2% growth. These numbers tend to be quite volatile month to month and overall don’t have such a large impact on GDP when compared with retail sales data.
A separate report showed that the headline producer price index (PPI) (YoY Oct) missed expectations of +1.2% with an actual of +0.8% from +0.7% previously. While this is a miss in expectations prices did rise at the fastest pace in nearly two years. A less volatile measure excluding energy & food for the same period was also lower than anticipated at +1.2% vs +1.6%. Producers will often pass on cost increases to the consumer to protect their margins, hence PPI data provides some insights into future inflation.
In the UK unemployment data for the three months through until September was better than forecast at 4.8% down from 4.9% previously. While this is certainly positive, there are some indications that gains in the labour market are slowing with the number of jobs added over the same period only 49,000 with estimates of 91,000 and a previous reading of 106,000. Average weekly earnings remained stable at +2.3% slightly missing forecasts for a gain of +2.4%. Adjusting for inflation real wages only grew at +1.7% and with inflation forecast to rise over the coming years, which could weigh on consumer spending which is a key driver of the economy.
In reaction UK equity markets declined with both the FTSE100 and FTSE 250 down -0.63% & -0.56% respectively while the yield on two-year government securities fell -1.7 basis points to +0.187%. The yield on ten-year government debt was unchanged around +1.380% and the Pound was modestly lower, down just -0.08% against the US dollar.
In mainland Europe there were no key data releases, equity benchmarks were lower across the board led by declines in the Euro Stoxx 600 and DAX down -0.20% & -0.66% respectively. The first chart below highlights the Euro against the US dollar which declined -0.38% overnight taking it to the lowest levels since December 2015. German bond yields were modestly lower, the two-year yield down just -0.5 basis points at -0.628% while the ten-year yield dropped -1 basis point to +0.303%.
Two-year Italian bond yields were little changed at +0.088% ahead of the upcoming constitutional referendum on December 4th.
In Japan the yen was flat against the dollar at 109.16 while equity markets were boosted by the recent weakening in the currency, both the Nikkei & Topix indices up +1.10% & +1.33% respectively. Ten-year bond yields are now at +0.023% testing the Bank of Japan who in the latest stance in monetary policy is targeting the ten-year yield of around 0%.
Oil prices swung between gains and losses before eventually finishing lower as crude oil inventories (Nov 11th) rose more than anticipated. Inventories increased +5.274 million barrels from 2.432 million previously and estimates of only a 1.5 million increase. The focus for oil continues to be the upcoming November 30th meeting where officials need to reach an agreement on allocating production cuts. The market seems to remain fairly sceptical and for good reason, we have previously seen such talks fall through and rhetoric from countries such as Iraq stating they should be excluded has weighed on the price recently. Another reason prices have been low is OPEC pumping record amounts of oil, 33.64 million barrels per day in October, with individual members trying to get their baseline production as high as possible. While it is yet to be determined however cuts will be allocated figures will likely be used and therefore it is in member’s interests to get these numbers as high as possible.
Overall I remain optimistic that a deal will get done at the end of the day, oil producing nations are suffering from the low revenue and critical that they act to stabilise the market. An approximate 750,000 barrel per day production cut may not be enough however it would be a step in the right direction and could easily see the price back towards US$55 per barrel.
Locally the Australian dollar was -1.20% lower on Wednesday, hurt by weaker commodity prices and disappointing wage growth data. Wage growth (QoQ Q3) was +0.4% missing estimates of +0.5% and year-on-year gained +1.9% vs expectations of 2%. This is the lowest level ever on the series and the second chart below highlights the downtrend we have seen in recent years. Wage growth is likely to remain subdued and therefore should keep inflation relatively subdued in the near-term. The reasoning behind this is that there is still slack in the labour market, while the headline unemployment rate has been trending in the right direction it has diverged with the underemployment rate which has increased shown on the third chart below. Underemployment represents those working part-time but would prefer working full-time.
Aside from slack in the labour market other reasons for the low wage growth are attributed to, lower headline inflation mindset which flows through into lower pay rise demands, greater purchasing power through technology advances and disrupters (think Uber vs Taxi’s) and preference for job security in a world where the economic recovery following the GFC has been tepid.
The S&P/ASX 200 was flat on Wednesday, up just +0.03% at 5,327.67. Meanwhile we can expect a weaker start to trading this morning with ASX SPI200 futures down -14 points in overnight trading.