It was another savage session for Treasuries overnight with the 10yr yield spiking up to a high of 3.33% (+14bp from 1630) before a bid developed to calm things down. As I write, the 10yr is up about 5bp to 3.24%, the 5yr +7bp to 1.85% and the 2yr +7bp to 0.62% – 10yrs have had their biggest two day move since September 2008 which is quite remarkable. The $21bn 10yr treasury auction wasn’t even that bad, wasn’t that good, but it wasn’t that bad with cover at 2.92 compared to 2.8 last month and a 12 auction average of 3.07.
So it looks like those tax cuts have caused a bit of a long squeeze and there is plenty of chatter about how the additional stimulus, well the continuing stimulus, may result in the Fed cutting short their Qe2 plans, which is awesome if you live in fairyland and think Bernanke was actually targeting growth or inflation (or whatever else is convenient for him to mention).
For others, the Bernank is just monetising debt and trying to force a rebalancing of global growth, in which case the tax extension is unlikely to force a re-think of Qe2 (quite the opposite). Either way though, treasuries are a sell, although how much further they can go is unclear. I had thought that 3.25% would be the upper limit in this new range although we’re pretty much there already. And then of course there is the global data which continues to surprise on the upside. It’s pretty obvious that material 2H slowing didn’t eventuate and Q4 growth is looking rock solid; it not inconceivable that 10yrs could be closer to 4% over coming weeks.
Check out global industrial production, it is recovering at a rapid clip and German industrial production, out last night, again surprised on the upside. At 2.9% the October production figure was almost 3 times the market expectation. German exports dipped in the same month, yep sure, but this comes after a very strong September figure. It’s all good. Even the Brits are having a good run with their manufacturing output and according to the Confederation of British Industry, this may get better still with the new orders index rising to -3 (highest in over 2yrs) from -15 and a median expectation of -13. With all that to consider I think there is only one way for bonds to go (medium term).
Equities on the other hand, had a reasonably lacklustre session, the major indices in Europe between -0.4% and +0.4% with not much activity in the US either. With about 30mins to go the S&P500 is up only 0.2% (1226), the Dow is about 5pts lower (11354) while the Nasdaq is up 0.3% (2605). Financials look to be having a great session so far, up 1.4% and leading the overall index higher. Otherwise, technology and consumer stocks were the other main outperformers with basic materials industrials, utilities and energy stocks the main deadweight’s. The SPI for its part is 0.3% higher at 4714.
Commodities were mixed overnight with copper up another 1.4% although crude was down 0.3% ($88.43) and gold fell about $19 to $1383. Otherwise AUD is little changed at 0.9791, EUR is 24pips higher at 1.3257 while JPY also pushed a little higher and sits at 84.05. Sterling in contrast had a solid session rising 86pips to 1.5798 on the back of that manufacturing orders data.
That’s about it for price action, there were a couple of other news worthy item including the RBNZ which kept rates unchanged at 3% as expected. If anything though, the Bank has become more dovish and its pretty clear they aren’t going to do anything for a while. I’ll write more about this at a later date, but suffice to say I don’t think things are as bad as the Bank thinks, but certainly there won’t be any Bank action for a while yet. Finally, US mortgage applications fell 0.9% in the week to December 3 although applications for new purchases rose 1.8%.
Looking to the day ahead, there is some reasonably decent data today, including the final estimate of Japanese GDP, NZ credit card spending data and of course the Australian labour force print (1130). The median market expectation is that employment will rise 20k with the unemployment rate expected to slip to 5.2% from 5.4%. I’m not too far off that with 15k and 5.3%. As to the risks, I think they are fairly symmetric. History tells us its all to the upside, although jobs growth has been exceptionally and consistently strong, so it would be reasonable to expect a moderation at some point. Tonight, watch out for German CPI (final estimate), the BoE’s decision (some people are seriously talking about more money being printed) and US jobless claims.
Australian major banks may lift interest rates before the next meeting of the Reserve Bank board in November, despite the central bank’s decision to hold steady yesterday, Australian Finance Group’s Mark Hewitt has said.
Yesterday, the RBA board held the official cash rate steady at 4.5% for the fourth consecutive month.
However, AFG managing director Mark Hewitt said: “It will make it a bit harder to move outside an RBA rate rise but I still would expect we will see them moving some time – and I wouldn’t be surprised if that is before the next Reserve Bank meeting.”
The comments follow indications by banks that increasing funding costs would force them to move on rates regardless of the RBA setting, with CBA head of retail Ross McEwan having publicly called this a definite over coming months.
Commenting on the RBA decision, Hewitt said it would give people a bit more confidence in their property purchases, and would also give the RBA more time to digest conflicting economic data.
However, he said the official decision to hold was likely a “temporary reprieve”. “I think on balance, speaking to some economists whose opinions I respect, I think it is probably inevitable we will have at least a further rate rise before Christmas – I’m not so sure it’s justified but I think it’s pretty inevitable.”
In a statement accompanying yesterday’s announcement, Reserve Bank governor Glenn Stevens said the current stance of monetary policy is delivering interest rates to borrowers at close to their average of the past decade.
“The [Reserve Bank] board regards this as appropriate for the time being,” Stevens said.
However, Stevens advised that the RBA does expect to raise rates. “If economic conditions evolve as the board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target.”