Todays podcast

Overview Land of Confusion

• Quiet night with no data of note; news flow marginally softer with China virus outbreak
• S&P500 up +0.2% after five consecutive days of losses, now just 1.5% away from its peak
• Yields down with US 10yr -1.5bps to 1.33%, driven by inflation breakeven -2.4bps to 2.37%
• Commodity FX lifts on higher oil prices (Brent +1.0% to $73.65): AUD +0.2%, USD/CAD -0.4%
• Coming up today: RBA’s Lowe, AU NAB Business Survey, UK Jobs, US CPI

“Can’t you see this is the land of confusion?; This is the world we live in; And these are the hands we’re given; Use them and let’s start trying”, Genesis 1986

It has been a slow start to the week with little in the way of market moves outside of commodities. Markets overall appear to be in a holding pattern ahead of US CPI figures tonight and the FOMC next week . The S&P500 swung between small gains and losses to finish up 0.2% after five consecutive days of losses, helped along by energy stocks (energy sub-index +2.9%). Today’s gains see the S&P500 now just 1.5% away from its early September peak. Brent oil rose 1.0% to 73.65 on a combination of a better demand outlook and ongoing supply disruptions in the Gulf of Mexico due to recent storm activity. As for rates, it was very quiet with the US 10yr yield ticking down -1.5bps to 1.33%, only partly reversing the 4.8bp rise on Friday. Interestingly the move was driven by the implied inflation breakeven which fell -2.4bps to 2.37%, and thus not following the movement in energy prices. Commodity linked currencies though did take their que from energy with the AUD +0.2% to 0.7369, USD/CAD -0.4% to 1.2647 and USD/NOK -0.3% to 8.6426. The broader USD (BBDXY +0.0%) was little changed with EUR -0.0%, GBP -0.0% and USD/Yen +0.1%.

There was little in the way of data, while news flows continued to play to the view of doubt around the magnitude of further US stimulus. Proposed legislation released on Monday showed that the House Democrats’ tax reform plan to help fund President Biden’s proposed $3.5 trillion budget plan is smaller in scale than the original proposal. Reports show that the plan is to increase the top rate on capital gains to 25%, from 20%. Including the 3.8% Medicare surtax on high income earners this would take the top capital gains rate to 28.8%, still well below Biden’s proposal of a 39.6% rate (43.4% if include surtax) for incomes of $1 million or higher. For the corporate tax rate, the proposal is to increase this from 21% to 26.5% versus Biden’s proposal of 28% (see WSJ: Democrats Release Details of Proposed Tax Increase). Senator Manchin who’s vote is crucial to pass legislation in the Senate continues to object to a $3.5 trillion stimulus, stating on Sunday “It’s going to be $1, $1.5 [trillion]. We don’t know where it’s going to be. It’s not going to be at $3.5 [trillion], I can assure you.” (see Politico: Manchin suggests he may support a $1T-$1.5T spending agenda).

Elsewhere China is battling another delta outbreak that involves at least 75 positive cases. The latest modelling by health officials suggest that the outbreak might peak later in September. Another round of lockdown restrictions due to China’s elimination strategy threatens to further weaken momentum after surprising softness in the recent PMIs. S&P Ratings overnight also warned China needs to start to transition to living with the virus, noting that while restrictions are effective, “ the need to manage recurring episodes of outbreaks and lockdowns under the zero-COVID approach adds additional burdens to corporates in the country, which have yet to fully recover and are seeing weakening credit trends” and that going forward ratings could be pushed “further into the negative” if outbreaks continue to disrupt the country.

In more optimistic virus/vaccine news, latest research continues to show vaccines provide a high degree of protection and that the surge in virus cases due to delta is from the unvaccinated. An analysis of more than 50,000 Covid-19 deaths in England this year shows only 256 deaths occurred amongst fully vaccinated people, equivalent to just 0.5% of all COVID-19 deaths (see UK ONS for details ). Similar statistics are being seen across the pond with the WSJ noting at a Tampa General Hospital, about 90% of recent Covid-19 patients were unvaccinated (see WSJ: Unvaccinated People 11 Times as Likely to Die From Covid-19).

As for commodities, oil prices pushed up nearly 1% taking Brent Crude just shy of $74 overnight. A monthly report from OPEC showed global consumption of oil expected to rise by 4.2m barrels a day for 2022, about a million barrels a day higher than last month’s estimate on the back of the global economic recovery. In addition supply disruptions out of the Gulf of Mexico continue with Tropical Storm Nicholas set to make landfall in Texas, while the mess after Hurricane Ida still sees nearly 50% of oil supply down in the Gulf. Aluminium prices also continued their strong rally, breaking up through $3000 per ton for the first time since 2008 on the back of supply disruptions across many regions.

Finally across the ditch, NZ extended level 4 lockdown in Auckland for another week, though Cabinet had agreed to an “in-principle” move to Level 3 thereafter. Interestingly lockdown restrictions do not appear to be hampering NZ business confidence with the preliminary ANZ business survey for September largely retaining the poise that was evident in the post-lockdown portion of the survey responses for August. While activity expectations have been bruised, and profit expectations undermined, the survey’s inflation gauges remained relatively strong. My BNZ colleagues note these results are in stark contrast to what we saw during previous lockdowns. This suggests the majority of businesses are not only better able to see their way out of the present predicament, but that a capacity constrained economy will accompany them out the other side.

Coming up today:

A busy day for Australia with RBA Governor Lowe speaking along with the NAB Business Survey. Offshore the most interesting piece is the US CPI with signs that some of the transitory price components have peaked. Details below:

• AU: RBA Governor Lowe and the NAB Business Survey. Governor Lowe speaks to the Anika Foundation on “Delta, the Economy and Monetary Policy ” at 1.00pm AEST. Given the RBA went ahead with its scheduled taper of bond purchases, expect lots of questions on the Governor’s confidence in the rebound once restrictions ease. An SMH article by Shane Wright suggests the Governor will cover both the long-term impact of the pandemic on the jobs market as well as the property market (see SMH: Lowe to talk up economy’s post-pandemic recovery as clouds grow ). Also speaking earlier is Assistant Governor Ellis to Parliament’s Standing Committee on Tax and Revenue at 10.00am AEST. In terms of data the NAB Business Survey will provide the latest read on the business sector, even if overshadowed by RBA speak.
• UK: Employment/Unemployment – July; & BoE’s Bailey . The consensus sees unemployment ticking down a tenth to 4.6% from 4.7%, while employment is likely to lift to 199k from 95k (in 3m3m terms). Focus will also be on average hourly earnings which are expected to be 6.8% y/y. The BoE’s Bailey is also speaking, though it is unlikely to touch monetary policy given he is addressing the Bloomberg event on the “The Future of Global Financial Centres Forum:  The new London”.
• US: CPI – August; & NFIB. Inflation figures are back in the spotlight with a number of Fed hawks raising concerns that the lift in inflation may be more long-lived than previously thought (e.g. Kaplan). Consensus sees core CPI at 0.3% m/m and 4.2% y/y. Key figures to watch are used car prices where other leading indicators suggest used car values have fallen for three consecutive months as demand as eased (e.g. see Manheim Use Car Value Index ), while aviation prices could fall given the fall in bookings associated with the rise of the delta variant in July and August. As for the Fed’s inflation tolerance, the Fed can look through transitory price increases so long as inflation expectations are anchored.  Also out is the NFIB survey.

Market Prices

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets

Read our NAB Markets Research disclaimer