Aussie/Kiwi dive on dovish RBA/RBNZ vibes

20th October 2020 – Macro Daily

Markets

Major European equity bourses trade with losses this morning (Stoxx 600 -0.3%), as the region plays catch up to the slump on Wall Street yesterday evening; various US political journalists reported yesterday that, according to their sources, progress towards a new US fiscal stimulus deal between the White House and Democrats has not yet been sufficient and that “language” continues to present a problem in agreeing on an overall package. This is one factor being attributed as contributing yesterday’s downbeat market tone (the S&P 500 closed 1.6% lower), while virus concerns are being cited as another. SEB this morning notes that “in the US, especially states in the Midwest that have previously been less hit by the Covid-19, have seen the virus spread increase rapidly while the positivity rate is alarmingly high (i.e. increased testing is not the reason)… the number of new cases in the US is now starting to approach the previous top levels seen last summer.”

Elsewhere, others point to a rising S&P 500 VIX (still below 30, but only just off highs for the month) and elevated post-election implied vols as evidence that fears of a contested outcome are on the rise. This coincides with a minor improvement in Trump’s re-election chances over the course of the last week, ahead of Thursday night’s debate; “With two weeks before election day” notes TD Securities, “Joe Biden has maintained a healthy lead over President Trump in national polling. The former VP’s advantage has remained close to an election-cycle-high at 10.6pp, up modestly from 10.4pp last week… Polling at the state level, however, shows a marginal pullback in tossup races, with Biden losing ground in FL and IA, while OH has flipped back to Trump… Although no states flipped for the President, MN and NV have now shifted to “leaning ” from “solid Biden”… (and) Florida is still “leaning Biden,” but just barely.

In terms of other asset classes, US yields are a little higher this morning amid a mild recovery in US equity futures overnight and crude oil markets are also higher, having been buffeted over the last 24 hours by a combination of broader risk appetite, yesterday’s OPEC+ JMMC meeting (no indication from the Russians that they will make up for recent overproduction), rising Libyan supply, but also the news that demand from China is strong (premiums for Russian ESPO crude for December delivery hit three-month highs).

Looking at FX markets, things have been broadly flat/subdued this morning, although AUD and NZD have seen selling pressure amid dovish RBA and RBNZ commentary (more below).

G10 FX

The Day Ahead

0900BST/0400EDT, Riksbank Governor Ingves and Deputy Governor Ohlsson will participate in an open hearing on current monetary policy.

1030BST/0530EDT, BoE MPC Member Vlieghe speaks at “Assessing the Health of the Economy”… Vlieghe hasn’t featured much over the past few months. His most recent comments came on the 2nd of September and were quite pessimistic; while he said he was fairly confident that, in the months ahead, the economy will bounce back, he noted this would still leave GDP 5% or more below its pre-pandemic level and that there is a material risk in my view that it could take several years for the economy to return to full capacity.

1250BST/0750EDT, ECB’s Hernandez de Cos delivers speech at the honorary closing of annual financial event organized by KPMG… Last week de Cos noted that it is important to retain flexibility in asset purchases to avoid fragmentation.

1330BST/0830EDT, US Building Permits & Housing Starts (Sep)… Wells Fargo are looking for a below-consensus modest 0.8% rise in September housing starts to 1.427 million units, while he consensus is looking for a slightly larger gain. With the NAHB homebuilders’ index at an all-time high of 85 yesterday, Wells Fargo note that it is not difficult to make a case for another strong report, adding that “starts also likely fell less this September than they normally do, which would boost the seasonally-adjusted data.” They explain that their below-consensus forecast is based on some mean reversion of starts in the Midwest and West, which jumped this past month, adding that “the Western wildfires might lead to an even larger pullback.”

1550BST/1050EDT, FOMC Member Quarles speaks on “Financial Stability Board Agenda” before virtual SIFMA Annual Meeting… Most recent comments; negative repo rate “has not been on the agenda at all”, that the sheer size of treasury market may have outpaced the private market’s ability to absorb any stress and that he expects the recovery to proceed somewhat better than expected.

1600BST/1100EDT, Global Dairy Trade Price Index… Australian Bank Westpac “expect(s) whole milk powder prices will lift a touch at this auction and thus build on the previous increases. Prices have risen a cumulative 5% or so over the last two auctions. We are marginally more bearish than the dairy futures market. It is pointing to a slightly larger price lift of around 2% as at the time of writing. Global dairy prices continue to prove resilient as evidenced by Fonterra’s 2020/21 milk price forecast range upgrade to $6.30/kg to $7.30/kg. The strength or otherwise of New Zealand production, though, remains a swing factor.”

1800BST/1100EDT, FOMC Member Evans speaks on current economic conditions and monetary policy before virtual event, “Detroit Economic Club: The Pandemic’s Impact and the Future of the U.S. Economy”… Most recent comments; on QE, the Fed has capacity to do more asset purchases, but does not see need for it now and, on fiscal stimulus timing of fiscal stimulus is important, as delay could mean more economic scarring.

2000BST/1500EDT, FOMC Member Brainard speaks on “Community Reinvestment Act” before virtual event hosted by the National Housing Conference.  

2130BST/1630EDT, API Weekly Crude Oil Stocks

2200BST/1700EDT, FOMC Member Bostic participates in “Perspectives on Fair Housing: Economics” virtual panel before the Penn Institute for Urban Research.

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