The massive bond sale saw a “reversal of the reversal”.
The big picture: A bear rally amid hopes (again) of a spike in inflation
- Bond rally (global) on FT report that BoE will delay QT reversal after BoE announces from Nov 1
- US equities posted gains of around 1%, led by industrials. Netflix up 10% after NYSE close
- US industrial production is stronger than expected
- In FX, NZD fares best (worst in GBP) holding onto instinctive gains after ultra-strong CPI in Q3
- The UK (and Canada) CPI today is important ahead of upcoming BoE and BoC decisions
Tuesday was another volatile, albeit ultimate, fairly featureless day in terms of net price movements in bonds, currencies and stocks. The latter have just closed in New York with the S&P500 and the NASDAQ up around 1%. Netflix jumped 10% after the close on a stronger-than-expected pace of earnings and subscriber growth. The massive bond sell-off, globally and not just in New Zealand following the shocking upside surprise in its CPI report (both the headline and the underlying metrics) which was later reversed in part on a report from the FT indicating that the Bank of England was unlikely to proceed with QT bond sales at the end of the month, experienced a “reversal of the reversal”. This after the Bank issued a statement that QT would proceed from November 1 – and that the shortfall in its bond sales target (£80bn over 12 months) would be made up by further sales. The CPI from the UK and Canada is the highlight of the data in the next 24 hours, both important ahead of the upcoming BoC and BoE policy meetings.
Incoming economic datawhether it’s the real economy or inflation, moves the markets, and where the highlight of the past 24 hours was yesterday morning’s shocking New Zealand Q3 CPI report , then overnight, the choice of the group was US industrial production stronger than expected in September. The latter posted an increase of 0.4% against the market consensus of 0.1%, plus 0.3% upward revisions from the previous months, with manufacturing output of 0.4% against 0, % expected with 0.2% upward revisions. Industrial production is expected to make a positive contribution to GDP in Q3 (and with a solid base for Q4) and does this so far defy the (recession-like) signal coming from the ISM manufacturing survey (latest to 50.9 and in a strong downtrend since the end of last year).
On the other hand the The NAHB US Homebuilders Index fell even lower (38 versus 46 versus an expectation of no change) and which, after the peak of the pandemic-era crisis, is the weakest in more than 10 years. A sharp decline in new home sales over the coming month is part of the cake, and tonight’s housing starts and building permits should offer further indication of the alarming state of the housing market. A key question for markets and policymakers is how quickly this might start to affect rents (drops) and owner equivalent rents in inflation readings. Not right away is the current indication.
Other offshore data of note were the German ZEW surveywhere expectations were better than expected at -59.2 vs -61.9 (-66.6 expected) but current conditions were even worse than expected (-72.2 vs -60.5% and -68.5 expected ).
Across all markets, bond market volatility continues unabated although it has fallen slightly in recent days , although the flagship 10-year US Treasury yield ended the day in New York barely changed on Monday, very close to 4.0%. This is in a range of 10 basis points (3.96% to 4.06%), and which has (again) been largely exceeded by the 10-year gilts, the latter tracing a range of 20 points ( 3.89% to 4.09%) before ending in London at 3.94%. The rally in bonds over our time zone (including Australian and US guvvies) which, following a report from the FT, the BoE is likely to delay the planned sale of billions of pounds of government bonds in an effort to foster greater stability in gilt markets after the UK. “mini” budget failed, was canceled by confirmation from QT Bank will start on November 1 (just one day later than the originally scheduled start date of October 31)
The Bank’s press release indicates: “On 28 September 2022, the executive of the Bank of England (Bank) postponed the start of sales of UK government bonds (gilts) held in the Asset Purchase Facility (APF) in light of the conditions market at that time. The first sale of gilts was scheduled to take place on October 31, 2022 and continue thereafter. In light of the government’s budget announcement now scheduled for October 31, 2022, the first gilt sale operation will now take place on November 1, 2022. The Bank is currently planning to conduct APF gilt sale operations in the fourth quarter of 2022 at a similar size and frequency to those previously announced, with any shortfall resulting from the earlier deferral from its previous sales plan being rolled into subsequent quarters’ revenue.
So £80bn sales over 12 months (£40bn from balance sheet run-off and again from active sales) will continue under current plans, with the intention of also selling the same amount which he bought during his emergency operations earlier. late September and earlier this month (for a total of over £8bn). As for BoE bank rate pricing, ahead of tonight’s September CPI report (17:00 AEDT), market prices are almost exactly 100 basis points of tightening on November 3rd. Canadian money markets are pricing the BoC 56 basis points for next Wednesday’s meeting, ahead of its CPI tonight.
For less impact on the local bond market yesterday than the reaction to the NZ CPI report or the FT BoE report, RBA Deputy Governor Michelle Bullock gave a hawkish take on the RBA’s October meeting, despite moving to the 25 basis point increment. She notes that “there was no doubt that a further increase in rates was warranted”, there was an “active discussion” on the appropriate magnitude of the increase. Bullock’s minutes and comments suggest that 25 bps rather than 50 bps was a (very) finely balanced move. We don’t rule out the RBA going back to a 50bp hike at its November (or December) meetings, depending on what the third quarter CPI interim report reveals next Wednesday and later WPI data. of the third trimester.
In foreign currencies not much change in the AUD over the past 24 hours, from just under 0.63 at the start of Tuesday’s range to slightly above now (0.6310). The NZD has been by far the best performing G10 currency since the New Zealand CPI report, spending some time above 0.57 (just below now). The USD is overall very slightly stronger at the end of New York trade (DXY +0.03%) with the worst performing GBP (-0.4%), giving it back a bit more of its post gains – reversal of the government’s budgetary policy. USD/JPY hit another new high of ¥149.38, and that no doubt prompts Treasury officials to speak today, but not, we suspect, intervention below. from ¥150.
To finish, US stocks, after a choppy session, ended in New York with the S&P500 and NASDAQ up +/-1%. A 2.3% rise for industrials led the gains, following upside surprises in industrial production. netflix reported after the close, with the market appreciating third-quarter earnings and stronger-than-expected new subscriber count (2.41 million vs. 1 million expected) even as fourth-quarter revenue forecast of $7.78 billion are a little below the consensus of the street.
- Against a backdrop of rapidly fluctuating market sentiment/price on what the Bank of England decides to do with rates on November 2, a key point of reference (rather than fiscal policy) will be UK inflation data from today in September. Headline CPI is estimated at 10.0% from 9.9% in August, but within a wide range of market estimates (9.5% to 10.4% in the Bloomberg survey) and with a little more analysts (14) looking for 10.1% or 10.2% than those (13) sitting on the median estimate of 10.0%. Either way, after last week’s upside surprises in the US CPI and yesterday’s New Zealand CPI, today’s whisper count is likely to be at the upper end. of the median.
- Canada has its CPI data tonight, where the consensus is for the stock at 6.8% vs. 7.0%, but with the average of the 3 core measures unchanged at 5.2%
- Highlights of the US data are US housing starts and building permits, where housing starts are expected to offset much of August’s curiously strong 12.2% gain (consensus -7.0% ). Permits are probably the best guide to the trend here, and they fell 10.0% in August and fell another 0.8% in September.
- IBM, Alcoa and Procter & Gamble are among the S&P500 quarterly results