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It was a choppy session for US equity bourses yesterday, as stock investors digested the implications of the latest bout of strong US data and its potential implications on FOMC policymaking decisions over the coming weeks and months. In the end, the S&P 500 ended the session modestly lower in the 4470s, having failed to recover back to the north of its 21DMA (currently at around 4490), though remained well supported to the north of lows under 4450 set earlier in the week. For reference, the August Retail Sales report was much stronger than expected, showing a surprise MoM gain in both headline and core retail sales, though the optimism about the report was somewhat tempered as big negative revisions were made to the July retail sales report. Perhaps as important as the retail sales numbers, we also had the release of another regional Fed manufacturing survey for September; the headline Philly Fed index number unexpectedly leapt to above 30 against expectations for a slight moderation to 18.8 in September from August’s 19.4. That was in fitting with a strong NY Fed manufacturing survey (which also saw a big, unexpected jump in September), easing concerns about a further economic slowdown in the US economy in September. In pre-market trade this morning, major US index futures are trading slightly in the red with E-mini S&P 500 futures currently in the 4460s.
Trade may be choppy in US markets today given it is “quad-witching day” – essentially a lot of heavily traded equity index futures and options expire today, which could result in unusual market flows distorting the price action. We already saw some choppiness in European markets this morning, where the “quad-witching” has already occurred, where the Stoxx 600 sharply reversed from early session highs close to 470 (when it was up about 0.8% at the time) and now trades about 0.1% lower in the 465.00s. Sticking with an overview of global equity markets; sentiment in the Asia session was broadly positive despite the recent uptick in China vs US/UK/Australia tensions following the latter’s announcement of the A UK/US defence pact (which will see the US and UK help Australia deploy nuclear submarines to counter Chinese influence), and despite ongoing concerns about any spill over impact on the Chinese economy from Evergrande’s looming default after Chinese press seemingly ruled out the prospect of a government bailout. The Hang Seng ended the session up over 1.0% after hitting annual lows yesterday and the Shanghai Comp closed out trade up 0.2%, with traders citing a big CNY 100B liquidity injection via the PBoC as boosting sentiment – the bank injected the liquidity via 14-day reverse repos, the first time it has used this instrument in seven months. Chinese markets will be closed on Monday and Tuesday next week, as the country enjoys its Mid-Autumn four-day holiday.
Looking at other asset classes; the US dollar and US bond yields were boosted yesterday following the above-mentioned strong US data, which some traders said supported the case for earlier/more aggressive QE tapering from the Fed, as well as potential earlier than expected rate hikes in 2022. The DXY yesterday managed to squeeze out fresh multi-week highs, surpassing resistance in the 92.80s, but failed to test the 93.00 level and has since fallen back to consolidate in the mid-92.80s this morning. That may be because US yields also failed to manage a significant breakout; 10-year yields have pushed back into the mid-1.30s% but continue to trade close to the centre of the recent 1.27%-1.37%ish range that has prevailed for most of the last three weeks. Real yields, despite rising modestly yesterday, are also still well within recent ranges, with 10-year TIPS yields currently around -1.01% having spent most of the last four weeks between -0.97% and -1.10%. Rangebound US bond market trade is perhaps not surprising given that market participants are awaiting further clarity/guidance from the Fed next week as to what their QE taper might look like as well as to get an update from the bank regarding its view of the economy and the prospect for rate hikes in 2022/23. The lack of direction in bond markets suggests that bond market participants have not deemed recent US data releases (such as this week’s slightly cooler than expected August CPI report, but stronger than expected September regional Fed manufacturing surveys and August Retail Sales report) as likely to have too much impact on FOMC policy decision making in the coming weeks/months about. This is consistent with the message from the Fed to markets, which has essentially been that the bank is prioritising watching labour market data as it assesses whether “substantial further progress” towards its full-employment goal (the condition for QE tapering) has been reached yet.
Looking at European FX and bond markets; GBP has shrugged off this morning’s week August Retail Sales report, as focus remains on market participants bringing forward their BoE rate hike bets for 2022 in wake of stronger than expected UK jobs and inflation data earlier in the week. GBP has also not paid much attention to reports regarding next month’s UK budget. Allegedly, Chancellor Sunak is set to use the budget as an opportunity to lay out new rules aimed at reining in government borrowing, which may include the requirement that the nation’s public debt-to-GDP ratio (currently around 100%) starts falling from 2024-2025. At present, GBPUSD trades just to the south of the 1.3800 level and is nearly perfectly flat on the session. EURUSD, meanwhile, is modestly higher on the session, though only amid some profit-taking in the US dollar after the latter’s strong gains yesterday in wake of strong US data. The pair currently trades around 1.1775 having dropped under 1.1800 yesterday. Reports overnight that typically dovish ECB chief economist Lane has in private told German banks that the ECB expected to hit its inflation target by 2025 and rate hikes could come within two years were denied by the ECB this morning and market participants seem to have dismissed the report as lacking credibility given the ECB’s new dovish interest rate guidance that it implemented earlier in the year (the new guidance essentially pledges not to hike rate until it has actually reached its 2.0% inflation target and remains on course to continue to achieve its target throughout its forecast horizon, which is not consistent with what this report was saying). Elsewhere in G10 FX markets, the Aussie is currently the outperforming G10 currently and is up about 0.2% on the day versus the buck, as it continues to shrug off concerns about heightened tensions with China after the announcement of the AUKUS defence pact (lookout for signs of further Chinese economic coercion which could come in the form of regulators there targeting Australian imports). Meanwhile, JPY is a modest underperformer, down about 0.2% despite a lack of fresh fundamental catalysts. According to strategists, FX and bond markets are likely to remain subdued today ahead of a plethora of key G10 and EM central bank and risk events next week, including the FOMC, BoE, BoJ, SNB, Norges Bank, Riksbank, PBoC, Canadian and German elections and in EM, the CBRT, SARB and BCB as well as Russian elections over the weekend.
The Day Ahead
If there is going to be anything to stir up trading conditions it is likely to be the release of the preliminary September University of Michigan Consumer Sentiment survey at 1500BST, which (like the NY and Philly Fed manufacturing surveys out earlier this week) will give timely insight into the health of the US economy (specifically in this case the health of the consumer). One and five-year inflation expectations in the report will also be closely watched.
