Originally published by Rivkin
US equity markets were flat on Monday as the upcoming presidential election continues to weigh on sentiment despite data that showed consumer spending rose more than forecast in September. Month-on-month for September consumer spending which accounts for around 70% of GDP increased +0.5% with forecasts for only +0.4% after declining -0.1% back in August. At the same time personal income (MoM Sep) increased to +0.3% from +0.2% previously missing estimates of +0.4%.
The Federal Reserve’s preferred measure of inflation, the PCE index showed that prices rose +0.2% month-on-month to September from +0.1% previously in line with market forecasts. Year-on-year headline prices increased +1.2% from 1.0% previously also in line with expectations. The core measure excluding volatile items such as food and energy increased +0.1% month-on-month slightly down from +0.2% in August as expected and year-on-year at +1.7% as anticipated. This should continue to give further comfort to the FOMC in raising rates in December with the current implied probability of a hike calculated by CME Group’s FedWatch at 73%.
Despite this positive data the U.S. dollar index was unchanged and treasuries rallied as investors piled into safe haven assets prior to the November 8th election. The yield on two-year debt declined -1 basis point to +0.8488 and the ten-year yield also fell -2 basis point to +1.8273%. Both the S&P 500 & Nasdaq 100 were modestly lower, down -0.01% & -0.09% as weakness in energy (-1.15%) offset gains in utilities (+1.69%). 61% of S&P500 companies have now reported, of those 73% have surpassed earnings estimates while 55% have beaten revenue forecasts.
In the UK the pound rose +0.46% against the U.S. dollar following an announcement from the Bank of England Governor Mark Carney that ended speculation around when he would leave his post at the BOE. In a statement on Monday Carney said that he would stay through until the end of June 2019 to ensure a smooth departure from the EU. Previously concerns had been whether Carney would resign in June 2018 as originally intended when he took the job back in 2013 or stay for a full term through to 2021.
Carney’s actions have been key following the Brexit, acting immediately to reassure investors, providing liquidity to banks and boosting stimulus to protect the economy. By remaining on past the end of the two year negotiation period this is certainly a positive for sentiment as Carney is seen as a figure of stability. The Bank of England will meet on Thursday at 11pm AEDT to set monetary policy, calls for further stimulus have been withdrawn following better than expected inflation & GDP data. The bank will also publish its quarterly inflation report and this will be a key focus in determining the likelihood of further stimulus in 2017.
The recent data is certainly enough to suggest there is no need for further stimulus at the moment, however forecasts for when negotiations begin around March 2017 may paint a completely different picture. It may also give us further insight into exactly how much higher inflation the BOE is “willing to look through”.
The announcement halted recent declines in U.K. government bonds, with the yield on two-year securities falling -2.5 basis points to +0.267% and the ten-year yield was -1.5 basis points lower at +1.246%. Despite this U.K. equities market still closed weaker, both the FTSE100 & 250 down -0.60% & -0.57% respectively.
Data from mainland Europe continued to support a slow and modest recovery, year-on-year to October consumer prices rose +0.5% from +0.4% previously in line with expectations and the core measure for the same period remained at +0.8% as predicted. GDP for the third quarter expanded at +0.3% from +0.2% previously although modestly below the +0.4% estimated. Year-on-year the economy grew at +1.6% as anticipated.
The Euro was unchanged against the US dollar around 1.0980 while equity markets declined and bonds were unchanged. Both the Euro Stoxx 600 & DAX finished trading -0.54% & -0.29% lower while German bonds remained flat, the two-year yield around -0.619% and the ten-year yield at +0.166%.
The yen is -0.12% weaker against the U.S. dollar early this morning around 104.82 having continued to weaker over the past month shown on the first chart below. The BOJ will conclude a two day meeting for monetary policy today around 2pm AEDT followed by a press conference by Governor Kuroda. There are no changes expected to the current policy however traders will be focusing in for details on how the BOJ will implement the new “yield control” measures announced in September. The new measures aim to target a ten-year yield around 0% while maintaining a negative interest rate of -0.1% charged to financial institutions to hold money at the bank.
The yield on ten-year government bonds surged +5.3 basis points on Monday to yield around +0.004% from -0.050% previously ahead of today’s announcement. Equity markets pared initial declines to close flat on Monday, the Nikkei index was -0.12% lower and the Topix was +0.04% higher.
In commodities oil prices tumbled on Monday, both Crude Oil & Brent crude shown on the second chart below declined -4.02% & -2.80% respectively. The declines follow after talks on the weekend between non-OPEC and OPEC producers in Vienna provided no concrete details around an agreement to cut output which is due to be finalised on November 30th at a summit in Vienna. Elsewhere natural gas prices were -3.16% weaker on forecasts for warmer weather that is weighing on heating demand, copper rose +0.57% and a measure of a basket of commodities by the Thomson Reuters CRB index fell -1.55%. Precious metals spot gold and Silver posted gains of +0.16% & +0.85% respectively helped by a flat US dollar.
Locally Australia bonds rallied with the yield on two-year securities falling -4.5 basis points to +1.654% as did the ten-year yield down -3 basis points to +2.355%. The S&P/ASX 200 closed +0.64% higher having been oversold the past three weeks and the Australian dollar is +0.14% higher around 0.7605. Meanwhile ASX SPI200 futures are down -12 points in overnight trading ahead of today’s monetary policy decision by the RBA at 2:30pm Sydney time where there is expected to be no change to the current rate of 1.5%.
Data releases:
- Japan Nikkei Manufacturing PMI – Final (MoM Oct) 11:30am AEDT
- Chinese Manufacturing & Non-manufacturing PMI (MoM Oct) 12:00pm AEDT
- Bank of Japan Monetary Policy Decision (Nov 1) 2:00pm AEDT
- Reserve Bank of Australia Monetary Policy Decision (Nov 1) 2:30pm AEDT
- Bank of Japan Governor Kuroda Press Conference (Nov 1) Approx. 5:30pm AEDT
- Canadian GDP (MoM & YoY Aug) 11:30pm AEDT
- U.S. Markit Manufacturing PMI (MoM Oct) 12:45am AEDT
- U.S. ISM Manufacturing Survey, Prices Paid & New Orders (Mom Sep) 1:00am AEDT
- U.S. Construction Spending (MoM Sep) 1:00am AEDT
