ON DECK FOR TUESDAY, OCTOBER 18
KEY POINTS:
- Risk-on sentiment continues with a little help from earnings
- Uncertainty around BoE selling drives gilts volatility
- NZ inflation soared, driving higher RBNZ rate hike expectations
- RBA minutes reinforced decision rationale…
- …but it’s not a template for other central banks
- German investor expectations remain at GFC levels
- Another strong US bank earnings beat
- Canada’s bifurcated housing market
- US industrial production expected to be soft
Risk-on sentiment continues as US equity futures are up by 1–2%, TSX futures are up by 1% and European cash markets are up by between ¾% and as much as 1 ½% in Italy. The USD is little changed but that’s masking some outliers like another drop in sterling and a strong gain by the NZ$. Sovereign curves range from slightly dearer US Treasuries and Canadas to generally cheaper gilts and EGBs but with the NZ front-end among the biggest underperformers.
What’s a day without more volatility in gilts? An FT piece argued that the BoE was going to delay selling of gilts again beyond the already delayed start on Halloween which perhaps wasn’t the best choice. The BoE issued a comment that the report was “inaccurate” but didn’t slam the door on the suggestion. 10-year gilts are cheaper by about 7bps this morning.
Hotter than expected Q3 inflation out of New Zealand drove the NZ$ to appreciate and the sovereign curve to bear flatten. CPI landed at 2.2% q/q SA non-annualized for a large overshoot of consensus at 1.5%. The annualized rate climbed to 8.9% q/q SAAR (chart 1). That drove the year-over-year rate to 7.2% (7.3% prior, 6.5% consensus). There was high breadth to the overshoot. Pricing for the next RBNZ move on November 23rd moved up from 58bps to 70bps as local banks increased their calls to 75bps. From 3.5% now, OIS markets have a peak rate priced at between 5½% and 5¾% next year.
Minutes to the RBA meeting on October 4th when they hiked by just 25bps said that arguments for 25 or 50 were ‘finely balanced’ and that 250bps of hikes since April justified downshifting the pace given lagging effects. Guidance continues to point toward further rate increases in data dependent fashion. Next up is Q3 inflation on October 25th as there hasn’t been a report since July.
As previously written, the RBA is not really a test case for other central banks in my view. For one, the Fed has gone the other way as a more impactful effect upon other central banks. For another, the RBA has had multiple pivots this year. Third, market pricing for the terminal RBA case rate was getting too aggressive at 4 ¼% prior to the October meeting when Governor Lowe had said he hoped it would come to rest within a 2.5–3.5% rate and so part of the aim was to rein in pricing. Markets reacted by downshifting a bit but are still pricing a terminal rate toward 4% by mid-2023 from 2.6% now. Australia also has materially softer wage growth than elsewhere such as the US and Canada and so wage-price spiral concerns are less acute.
German ZEW investor sentiment traded off a deterioration in the current situation assessment with a very slight improvement in the expectations component that nevertheless remains at its weakest level since the GFC.
Canadian housing starts for September (8:15amET) will land in the context of continued strength in building permit volumes as the new build segment of the housing market continues to struggle with supply shortages and given the need to expand the housing stock in the face of the sharp increase in immigration targets (chart 2). US industrial production in September is expected to be soft (9:15amET) as ISM’s slippage has served as an advance signal for the manufacturing component (chart 3).
As for earnings, Goldman Sachs once again delivered the goods. Q3 EPS of US$8.25 handily beat consensus expectations by fifty cents. FICC trading revenues drove much of that beat. Netflix reports in the after-market.
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