US dollar extends gains
Markets indulged in a choppy but ultimately range-trading day overnight. Equities and bonds moved sideways, while base metals had a mixed day as did energy, where oil remained steady but natural gas gave back some of its recent gains. The exception was currency markets where the US dollar rallied aggressively versus both developed and emerging market currencies.
There was no obvious driver behind the move. The overnight central banker forum stayed in Team Transitory, although that mantra appears to be falling on more and more deaf ears. Much talk was made of the reality of the Fed taper, something that has been telegraphed ad nauseum by the author in recent times. However, before jumping on the “team taper” bandwagon with regards to the overnight US dollar rally, I would note that currency markets may also be being distorted by end of quarter and end of month rebalancing flows. I’d like to see the US dollar hold on to all its gains and possibly advance further before jumping in with both feet on that. Although US yields have risen, equity markets are still trading sideways in the big picture. The scale of those moves is not yet consistent with a full-on taper repricing.
Certainly, Asia-Pacific equity markets are not in taper-tantrum mode, with price moves heading in polar opposites across the region. That may be due to the various data inputs we have seen in Asia today after what was a sideways session for most asset classes in New York overnight.
South Korean Industrial Production outperformed year-on-year, but underperformed month-on-month for August, falling by -0.70%. MoM retail sales also lagged falling by -0.80%, although once again, the YoY data outperformed. While the South Korean data was unspectacular, the Japan data was disappointing. MoM industrial production fell by a whopping -3.20% for August and retail sales MoM slumped by -0.40%. Covid restrictions will be dampening retail demand and should improve as restrictions are lifted this week. But industrial production is challenging with car manufacturing and electronic devices leading the charge lower. The new Japanese prime minister said as much, blaming supply-chain woes and semiconductor shortages. Mr Kishida has promised to open the fiscal pumps again and looking at the data, it comes none too soon.
China’s PMI data was a mixed bag. The official NBS Manufacturing PMI for September fell into contractionary territory at 49.60, while the Caixin PMI rose slightly to 50.0. Official Non-Manufacturing PMI rebounded from last month’s sharp drop as Covid restrictions eased, jumping back to 53.2. The data itself won’t be filling the street with confidence though against the developing background of China’s energy shortages, the relentless “shared prosperity” crackdown, and the Evergrande situation. Yesterday it was the turn of banking trading floors with government officials arriving to put a clamp on excessive speculative trading and ordering trading spreads to be tightened. With China on holiday for a week from tomorrow, the manufacturing PMIs are unlikely to rebound anyway for October.
In contrast, Australian data was relatively healthy. Building Permits leapt higher by 6.80% MoM for August, and MoM private sector credit expanded at a healthy clip, rising by 0.60%. With a lower Australian dollar overnight, natural gas prices holding up, iron ore rallying ahead of the China holiday and an earlier easing of restrictions being dangled by the NSW premier, it’s perhaps not surprising that Australian equities are rallying today.
Sentiment in Asia appears to be receiving a modest lift from news that a deal to extend funding of the government until December this year seems to have been agreed upon among Senate leaders. Markets love kicking the can down the road almost as much as outright certainty. It is unlikely to be enough to lift the gloom across most Asian markets entirely though.
Except for German inflation this afternoon, the rest of the day’s data calendar is second tier. US Q2 GDP Prices and Growth and Q2 PCE Prices will be old news. US markets are likely to be much more engaged with happenings on Capitol Hill today, with Thursday a pseudo deadline for the debt extension and infrastructure/spending votes across both houses.
Tomorrow’s Japan Tankan survey, Eurozone Inflation and US Personal Spending and Income (a Fed fav) and ISM Manufacturing PMI will be of far greater interest. Asian liquidity tomorrow will be sapped by a China and Hong Kong holiday and markets tonight, will be left to the tender devices of month-end and quarter-end flows.
