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MT: Pivotal discussion killed by resilient services ISM read

Another volatile session in the markets; U.S. stocks opened lower, not helped by early news of a bigger OPEC+ oil-cut supply deal.


Today’s Podcast

Presentation: Keep doing what we do

  • US ISM services exceeded expectations. Expansion continues with slight decline
  • OPEC+ accepts 2 mb/p oil supply cut. Energy stocks outperform
  • After opening lower, US stocks rally but still end slightly lower
  • The UST curve is accentuated. 10-year UST: +12bp at 3.75%
  • Fed Daly – The bar is high to slow the pace of policy tightening
  • USD overall stronger but NZD and AUD outperform
  • Sterling and EU currencies under pressure
  • Upcoming: AU Trade Balance, BoJ Kuroda, ECB Accounts, Unemployment Insurance Claims, Fed Speakers

Overview of events
New Zealand : Official RBNZ exchange rate (%), October: 3.50 vs. 3.50 exp.
WE: Change in employment ADP (k), sept: 208 against 200 exp.
WE: Trade balance ($bn), August: -67.4 vs. -67.7 exp.
WE: ISM Services index: 56.7 vs. 56 exp.

It was another volatile session in the markets, with US stocks opening lower, not helped by early news of a bigger OPEC+ oil cut supply deal. Then, the initial reaction to a better-than-expected US Services ISM prolonged the rout for stocks, followed by a big turnaround before the close. After falling nearly 2%, US stocks ended the day slightly lower while the US Treasuries curve steepened with the yield on 10-year notes climbing 12 basis points to 3.75 %. Fed Daly reiterates the “data dependency” message, noting that “when the data doesn’t show it, we’ll have to keep doing what we’re doing.” The USD strengthened overall, mainly at the expense of European currencies, while the NZD and AUD managed to hold up.

After much speculation about the extent of the oil supply cuts, news ahead of the OPEC+ meeting hinted at a supply cut at the high end of the expected 1-2 million range. Expectations of a supply cut have been a supporting factor for oil prices in recent days, with news of a 2m cut giving further upside momentum. . OPEC+ has agreed to cut their collective production by 2 million b/d from November. Given outdated production baselines that did not take into account actual production (which was lower than official figures), the actual reduction in oil supply should be around half of the overall figure, but it s It’s still the biggest cut since 2020 and undesirable inflationary dynamics. to the global economy.

Reacting to the news, the White House accused OPEC+ of siding with Russia, with President Biden noting in a statement his disappointment “with OPEC+’s short-sighted decision.” The United States also announced a decision to release an additional 10 million barrels of oil from the Strategic Petroleum Reserve in November, adding that “the President will continue to direct SPR releases as appropriate to protect American consumers and promote the energy security”. Oil prices closed the New York session up 1.7% (Brent) and 1.47% (WTI) and are up 5-7% over the past five days.

Half an hour after New York opened, the release of the ISM Services survey was greeted with a classic case of good news being bad news. The survey slightly beat expectations lower to 56.7 vs. 56.9 vs. expectations for a decline towards 56. Reaction to the release extended the rout in US stocks with the S&P 500 falling to an intraday low of -1.80%.

The details of the survey revealed a picture of a robust expansion in the sector with a slight return in the pace of activity. The key new orders sub-component remained at very healthy levels above 60 and notably for Fed policy expectations, the jobs sub-index hit its highest level in six months , rising to 53 from 50 in September. The prices paid component fell again, but at 68.7 it remains relatively high (the manufacturing equivalent is only 51.1), which is consistent with still high inflationary pressures in the services sector. services.

So after rising expectations of an imminent Fed pivot given the weaker-than-expected U.S. ISM manufacturing survey last Friday, the strength of the services ISM overnight not only dampens fears of a looming US recession, but also refutes any notion that the Fed is looking to get its foot off the tightening pedal anytime soon . Speaking to Bloomberg TV, Fed Daly reaffirmed this view noting that “We depend on data. When the data shows what we need to see, we backslide,” then adding that “when the data doesn’t show, we’ll have to keep doing what we’re doing.” Daly then also pointed out that it is “really difficult” to slow the pace of policy tightening amid rising underlying inflation. Attention now turns to the nonfarm payrolls report on Friday and the US CPI next week, where, as Daly noted, the Fed’s focus will be on the core readings rather than on headlines.

After trading lower on the open and extending lower following the ISM release, US stocks staged a decent rally during the afternoon session, returning to positive territory before to close slightly lower. The S&P 500 closed down 0.2% while the NASDAQ was -0.25%. Earlier in Europe, all regional indices closed sharply lower with the Euro Stoxx 50 down 1.05%.

Meanwhile, the rise in UST yields that began in our APAC session yesterday accelerated in the overnight session with the bearish curve. . The 2-year note is up 5 basis points in the past 24 hours at 4.142% while the 10-year is up 12 basis points at 3.75%. The 10-year rate is now essentially back to where it was on Monday, before the manufacturing data. Short-term Fed rate expectations haven’t changed much (70 basis points still set for next month’s meeting and a terminal rate just above 4.50%), but the market has cut a part of the rate cut from the middle of next year. Similarly, the USD is up around 0.7% to 1.1% in index terms overnight, reversing most of the previous day’s move.

USD gains largely come from European currencies, with GBP leading the decline, down more than 1% to 1.1324, while after almost touching parity, the Euro is down 0 .9% to 0.9893. USD/JPY remains far less volatile than other majors and has cautiously pushed higher to 144.65 as investors are likely wary of the potential for further Japanese FX intervention above 145. The NZD and the AUD have been the two best performing currencies over the past 24 years. hours, both slightly higher against the USD from this time yesterday. The NZD starts the new day at 0.5738 and the AUD at 0.6491.

The statement stressed that underlying inflation, both in New Zealand and overseas, was still too high and that it was appropriate The RBNZ raised the OCR by 50 basis points at the MPR yesterday, as expected, taking the cash rate to 3.50%. continue to tighten monetary policy “at pace”.

My BNZ colleague Nick Smyth notes that the main surprise was the revelation that the MPC had debated a 75bp hike, on the grounds that it might reduce the expected spike in OCR, before s ‘set up on a 50 basis point move. The discussion is intriguing since, logically, the higher the cash rate rises (and the closer it gets to the likely terminal rate), the smaller the interest rate increases become. Unlike the RBA of course, which was the first of the major central banks to slow the pace of its tightening cycle the day before, when it raised its key rate by 25 basis points to 2.60%.


  • This morning Australia gets trade data for the month of August ($4.7 billion trade balance exp vs $5.4 billion prior) and at some point in our day the Governor of the BoJ Kuroda speaks at a meeting of branch managers.
  • Later in the day, the ECB publishes the minutes of its September policy meeting, Germany publishes its factory orders for August (-0.7% m-o-m. -1.1% in forecast) and the Euro zone gets retail sales (August -0.4% in monthly forecast against 0.3% in forecast). ).
  • Unemployment claims are released in the US tonight (203,000 exp vs. 193,000 prior) and the Fed’s Evans, Cook, Waller and Mester speak.

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