Originally published by Rivkin
The main data focus on Thursday was the advanced third quarter GDP figures for the U.K. which is the first reading covering the period following the June 23rd referendum to leave the EU. Continuing with the recent theme of data releases the report surpassed expectations, rising +0.5% quarter-on-quarter against estimates of +0.3%, although slightly down from the +0.7% prior. On a year-on-year basis the economy expanded at +2.3% beating estimates of +2.1%.
The better data along with higher than expected inflation last week and comments by Mark Carney that there “is a limit” to how much they are willing to look through higher inflation has reduced the chances of a further interest rate cut. The next Bank of England next meets on the 3rd of November where they will also provide their updated economic projections.The recent data does suggest that the BOE should be in no hurry to cut rates further, however should be on standby should the situation begin to deteriorate.
While I am surprised by the U.K. economy’s resilience in the wake of the decision to leave the EU I remain cautious for the outlook, all that has happened so far is the vote to leave – the real challenge lies ahead once negotiations begin. That being said, if the economy does continue along this path then things would certainly be looking very bright.
In reaction U.K. government bond yields surged to the highest levels since the Brexit vote, the yield on two-year debt gained +2 basis points to +0.294% while the yield on ten-year debt which is more sensitive to interest rate expectations jumped +10 basis point to +1.254%. The first chart below shows the pound which reversed initial gains to finish trading -0.35% lower. Equities were mixed with the FTSE100 gaining +0.41% while the FTSE250 fell -0.50%.
The bond sell-off continued in mainland Europe also, German sovereign debt which is the benchmark for the region declined. Two-year yields gained +1.6% basis points to -0.622% while the ten-year yield which was negative earlier this month jumped +8.4 basis points to +0.173%. The Euro also reversed initial gains against the U.S. dollar to finished relatively unchanged at 1.0897 and equity markets were also flat with the Euro Stoxx 600 & DAX -0.01% lower & +0.07% higher respectively.
A preliminary reading of U.S. durable goods orders (MoM Sep) missed expectations, declining by -0.1% from +0.3% previously as estimates of +0.1%. However the headline figure does include transportation such as civilian vehicles and aircraft which are expensive and often fluctuate. Therefore the measure without transportation provided a more positive picture gaining +0.2% in line with forecasts and up from the +0.1% previously.
Continuing & initial jobless claims continued to suggest the labour market is healthy, continuing claims for October 15th declined more than forecast to 2.039 million from 2.054 million previously. Initial claims for October 22nd also decreased to 258,000 from 261,000 previously, although modestly higher than the 256,000 expected.
The U.S. dollar index strengthened +0.30% along with bond yields taking the lead from European trading. The yield on two-year treasuries was +1.2 basis points higher at +0.8843% while ten-year bond yields rose +5.5 basis points to +1.8465%. Equity markets were lower with both the S&P 500 & Nasdaq 100 down -0.30% & -0.50% respectively. Declines in the S&P500 were led by consumer cyclicals (-0.83%) and industrials (-0.54%) while telecommunications (+1.23%) and healthcare (+0.55%) outperformed.
Despite the stronger U.S. dollar commodity prices were higher, both Crude Oil & Brent crude oil gained +0.94% & +0.78% after reports that Gulf OPEC nations were considering cutting production by 4%. A broad measure of a basket of commodities, the Thomson Reuters CRB index gained +0.70%, natural gas was +1.21% higher after U.S. storage decreased as expected and copper was +0.79% higher. Precious metals spot gold & Silver were also modestly higher, up +0.20% & +0.16%.
The Yen weakened -0.78% against the dollar overnight which should help boost Japanese equities today which were weaker on Thursday with the Nikkei 225 finishing -0.32% lower while the Topix was unchanged. The second chart below highlights the strong correlation between a weaker JPY and stronger Nikkei 225. The focus today will also be the release of CPI data at 10:30am Sydney time, expectations are for headline prices to decline by -0.5% while a measure excluding volatile items such as food and energy is forecast to grow at +0.1%. At the same time both the jobless rate and household spending data will also be released.
Locally Australian government debt were also sold off on Thursday, the two-year yield increased +1 basis point to +1.71% while the ten-year yield jumped +6.5% basis points to +2.343%. The S&P/ASX 200 was -1.20% weaker closing at 5,295.55 just below the key technical level of 5,300. Meanwhile we can expect a stronger start to trading this morning with ASX SPI200 futures up 28 points in overnight trading.
Data releases:
- Japanese Jobless Rate (MoM Sep) 10:30am AEDT
- Japanese Household Spending (YoY Sep) 10:30am AEDT
- Japanese CPI (YoY & MoM Sep) 10;30am AEDT
- Australian New Home Sales (MoM Sep) 11:00am AEDT
- Australian Producer Prices (YoY & QoQ Q3) 11:30am AEDT
- German CPI (MoM & YoY Oct) 11:00pm AEDT
- U.S. GDP (Q3) 11:30pm AEDT
- U.S. Person Consumption Expenditure (QoQ Q3) 11:30pm AEDT
- U.S. Univeristy of Michigan Consumer Confidence – Final (MoM Oct) 1:00am AEDT
- U.S. Baker Hughes Rig Count (Oct 28th) 4:00am AEDT
This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd.
