Originally published by Rivkin Securities
The U.S. dollar index strengthened on Thursday, bond yields increased and equity markets were flat following better than expected initial & continuing jobless claims ahead of Friday’s heavily anticipated non-farm payroll data. For September 24th continuing claims were 2.058m with estimates for 2.081m, the lowest level since 2000. Initial claims for October 1st also surpassed forecasts of 256,000 with an actual of 249,000 extending a streak of readings below 300,000 to 83 weeks, readings below 300,000 are consistent with a healthy labour market.
This spurred expectations for a December rate hike which the Fed has recently been preparing the market for through more hawkish commentary, as a result the yields on U.S. government debt rose. Two-year debt yields increased +0.8 basis points to +0.8536% while the ten-year yields which are more sensitive to interest rate changes, increased 2.3 basis points to +1.7389%. Rising bond yields means a stronger dollar and the U.S. dollar index increased +0.59% as a result.
The reaction in both the S&P 500 & Nasdaq 100 were fairly muted as the S&P500 gained just +0.05% as a gain in basic materials (+0.89%) helped offset a decline in healthcare (-0.41%) while the Nasdaq100 declined -0.08%.
In Europe equity markets pared back the majority of initial declines to finish modestly lower following comments from the ECB’s chief economist Peter Praet that helped alleviate concerns the ECB may begin to taper its current QE program in March 2017. Praet stated that they will “remain committed to preserving the very substantial amount of monetary support” and that it “remains necessary to secure a return of inflation”. Vice President Vitor Constancio also said that a report by Bloomberg that the ECB has reached an informal consensus to taper the program was “not correct, period”.
Both the Euro Stoxx 600 & DAX finished trading -0.40% & -0.16% lower respectively, the Euro weakened -0.54% against the dollar and German Bund yields were unchanged. Data from the Euro-zone was mixed, German factory orders (YoY Aug) increased +2.1% beating estimates of +1.6%. German retail PMI (MoM Sep) continued to show expansion with a reading of 53 although lower than the 54.1 reading in August. Overall Euro-zone retail PMI however signalled contraction with a reading of 49.6 vs 51, the 50 level is used to signal contraction or expansion.
In the U.K. the Pound continued recent declines as concerns around a “hard” Brexit weigh on sentiment closing -1.0% lower against the dollar and -0.47% weaker against the Euro shown on the first chart below. The currency has fallen almost 16% since the June 23rd referendum to leave the U.K. and this is stoking inflation expectations seen in the increased yield in ten-year government debt overnight up +5.3 basis points to (+0.873%). At the same time two-year debt which is less sensitive to inflation expectations was unchanged at +0.129%.
This has prompted views that the Bank of England may no longer look to lower interest rates further as a result of these higher inflation expectations. However the BoE has previously stated they are willing to look through higher inflation in the near-term to ensure the economy is protected. The key will be the updated economic projections in November, if the outlook has not improved from the August projections then a cut to 0.1-0.05% is a decent probability.
In the commodity space oil prices continued to outperform, both Crude Oil & Brent crude oil up +1.42% & +1.47% respectively as Algeria’s Energy Minister said that OPEC could ultimately look to reduce output by more than the 700,000 barrels per day when they meet for a formal meeting in Vienna at the end of November. Oil prices are now back above US$50 per barrel, actions by OPEC have certainly been positive in the short-term as expected, however getting back to the US$55-$60 level may be tougher with a rising rig count in the U.S. bringing higher cost producers back online.
Copper prices fell with natural gas, down -0.35% & -0.23% respectively as was the Thomson Reuters CRB index declined -0.16%. Precious metals spot gold & Silver were once again hammered by the stronger dollar, down -1.0% & -2.49% respectively shown on the second chart below.
Locally the S&P/ASX 200 index finished +0.55% higher at 5,483, the Australian was -0.41% weaker overnight at 0.7584 and we can expected a slightly higher open this morning with ASX SPI200 futures up 14 points in overnight trading.
Data releases:
- Australian AiG Performance of Construction Index (MoM Sep) 9:30am AEDT
- Japan Labour Cash Earnings (YoY Aug) 11:00am AEDT
- Japan Leading & Coincident Index (MoM Aug) 4:00pm AEDT
- German Industrial Production (YoY Aug) 5:00pm AEST
- U.K. Industrial & Manufacturing Production (YoY Aug) 7:30pm AEDT
- U.K. Trade Balance (MoM Aug) 7:30pm AEDT
- U.S. Non-farm Payrolls & Unemployment Rate (MoM Sep) 11:30pm AEDT
- U.S. Average Hourly Earnings (YoY Sep) 11:30pm AEDT
- Canadian Unemployment Rate (MoM Sep) 11:30pm AEDT
- U.S. Baker Hughes Rig Count (Oct 7) 4:00am AEFT
This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd.