ON DECK FOR WEDNESDAY, SEPTEMBER 23rd
KEY POINTS:
- Volatile markets enter the funny season for US politics...
- …as Trump drives volatility in oil, potash and diesel prices
- Global PMIs—mixed growth signals, faster inflation
- SARB likely to hike this morning
- BI held rates
Global markets are kind of, well, dull this morning. U S Treasury yields are little changed, ditto for gilts, while EGBs are slightly bear flattening. Oil prices are slightly lower again (see below). Equities are mostly treading water across N.A. futures and European cash markets. The dollar is broadly firmed against major crosses.
We’re clearly in the funny season for manipulated markets with about a month and a half to go before the US midterms. Market participants need to be more sceptical and informed when reacting to the headlines.
Take oil, for instance, where Trump has been jawboning prices lower with misleading talk. Oil prices are little changed this morning but have fallen significantly over recent sessions as Trump talks up negotiations with Iran and markets drink the Kool-Aid in unquestioning manner. Trump says there is no evidence of activity at Pickaxe Mountain despite abundant evidence in satellite feeds showing intense efforts to rebuild and fortify. Trump says negotiations with Iran went well in a three-hour session yesterday yet show me any evidence that the US has achieved goals it set out to accomplish from the beginning. Nuclear stockpiles are still intact, the regime is still in power, Iran has large stockpiles of drones and missiles and is building more, and Iran still has plenty of friends in low places. Trump also says the war will end right after the midterms, and oil prices will crash at that point. Personally, I think it’s the opposite; he’s jawboning oil—and more importantly, gasoline—prices lower as Americans start to vote but the war isn’t going away and that could drive renewed price spikes after the midterms.
Or take potash. Two days ago, Trump claimed that a “massive deal” was in the works to buy from Belarus instead of Canada before back peddling yesterday saying the US will continue buying from Canada. Perhaps he should have checked with the Belarusian dictator Lukashenko first, who said within hours of the claim that his country has no surplus to sell the US as it’s committed to major buyers like China. In any event, Canadians know this is an empty threat; Canada is the world’s biggest and closest producer of the fertilizer ingredient. Belarus would have to ship through St. Petersburg given EU sanctions that prevent doing so through Baltic ports. That means shipping via Russian rail which is clogged by the war and shipping its own potash and other products through St. Petersburg because of the war’s impact upon shipping through the Strait of Hormuz. Then load the stuff onto ships across the ocean, unload at US ports, load onto US trains to transport inland, and presto, the US just paid way more for potash all-in including transportation costs than getting it from Canada. Oh, and buying from Belarus would line the pockets of a brutal regime that is basically Putin’s puppet. Good one.
Or take diesel, given Trump’s talk of a potential diesel export ban as a solution to record high diesel prices (chart 1) and the impact on US farmers, truckers and others. Diesel prices ignored the talk yesterday. Folks close to the market note that a ban would likely result in US refineries shutting due to the lost sales which could adversely impact global supply and boomerang back through yet higher prices. US diesel exports are highly diversified by country. US diesel inventories are abnormally low while refining capacity utilization is high. The Iran war is the culprit.
GLOBAL PMIS—MIXED GROWTH, FASTER INFLATION
The monthly parade of PMIs reported mixed outcomes on growth but consistently greater pressure on inflation across the regions. They are available here, with brief observations below.
Australia’s economy decelerated in September according to its PMIs. The composite fell by almost two points to 50.8 as manufacturing slipped into sub-50 contraction (49.3, 52.0 prior) and services decelerated (51.4, 53.2 prior).
India’s economy accelerated as the composite PMI climbed 2.2 points to 56.5 mostly due to a nearly three points rise in manufacturing to 55.7 and a solid gain in services (55.8, 54.1 prior). Service price inflation decelerated but manufacturing price inflation picked up.
The UK economy slowed a bit. A 0.8 deceleration in the overall PMI to 51.7 was entirely due to slower growth in services as manufacturing was little changed. There was faster growth in both input and selling prices.
The Eurozone picked up the pace (53.1, 52.0 prior) entirely due to services (53.0, 51.6 prior) as manufacturing grew at an unchanged pace (52.7). Input costs and selling prices grew at a faster pace.
The US S&P PMIs will be refreshed this morning (9:45amET). Japan’s PMIs are off cycle this month and will arrive tonight.
CENTRAL BANKS—A HOLD AND A POSSIBLE HIKE
Bank Indonesia left its policy rate unchanged for a third straight meeting and met consensus for a 5.75% rate. The bank emphasized stability particularly in terms of the rupiah that weakened very slightly post-statement but was otherwise firmer to the dollar overnight. Indonesia’s rates curve yawned throughout it all.
The South African Reserve Bank is expected to hike its repo rate by 25bps to 7.25% this morning (9amET). It last hiked in May. Inflation readings for August were released earlier this morning and while they came in a touch lower than expected they are still too high. Total CPI was up 4.4% y/y (4.5% consensus, 4.3% prior) with core up 4.1% (4.2% consensus and prior). That puts inflation in the middle of the 3–6% inflation target range and threatening to go higher alongside elevated inflation expectations.
DISCLAIMER
This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor any of its officers, directors, partners, employees or affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.
These reports are provided to you for informational purposes only. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any financial instrument, nor shall this report be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. The information contained in this report is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading Commission Regulation 23.434 and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a “call to action” or suggestion that you enter into a swap or trading strategy involving a swap or any other transaction. Scotiabank may engage in transactions in a manner inconsistent with the views discussed this report and may have positions, or be in the process of acquiring or disposing of positions, referred to in this report.
Scotiabank, its affiliates and any of their respective officers, directors and employees may from time to time take positions in currencies, act as managers, co-managers or underwriters of a public offering or act as principals or agents, deal in, own or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to securities or related derivatives. As a result of these actions, Scotiabank may receive remuneration. All Scotiabank products and services are subject to the terms of applicable agreements and local regulations. Officers, directors and employees of Scotiabank and its affiliates may serve as directors of corporations.
Any securities discussed in this report may not be suitable for all investors. Scotiabank recommends that investors independently evaluate any issuer and security discussed in this report, and consult with any advisors they deem necessary prior to making any investment.
This report and all information, opinions and conclusions contained in it are protected by copyright. This information may not be reproduced without the prior express written consent of Scotiabank.
™ Trademark of The Bank of Nova Scotia. Used under license, where applicable.
Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including; Scotiabank Europe plc; Scotiabank (Ireland) Designated Activity Company; Scotiabank Inverlat S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Casa de Bolsa, S.A. de C.V., Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Derivados S.A. de C.V. – all members of the Scotiabank group and authorized users of the Scotiabank mark. The Bank of Nova Scotia is incorporated in Canada with limited liability and is authorised and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia is authorized by the UK Prudential Regulation Authority and is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available from us on request. Scotiabank Europe plc is authorized by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation Authority.
Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V, Grupo Financiero Scotiabank Inverlat, and Scotia Inverlat Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.
Not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law.