Market Update November 26

RBA Deputy Governor Philip Lowe delivered a speech in Sydney overnight titled ‘Building on strong foundations’ which discussed the future composition of Australia’s economy, the benefit of our geographic location in Asia along with the  need to value-add and invest in human capital. While I can recommend the read, the link is found here, most of the headlines will focus on his language towards the Australian Dollar with Lowe stating that ‘a lower value would be helpful from a macroeconomic perspective’ and that concerns over high domestic wage levels were in essence ‘concerns about the exchange rate’ when expressed in foreign currency terms. While little should be read into it despite markets pricing in an increasing likelihood that it will occur, he also stated that Australia was in the fortunate position that if further easing was required the RBA could still cut rates further. While he also stated that there were ‘limits of what rates can do’, his words were enough to see the Aussie come under pressure with the AUDUSD falling to .8515, the lowest level seen since July 2010.

US economic growth exceeded expectations in Q3 with an annual rate of 3.9% reported. The reading was higher than the 3.5% advanced estimate and forecasts for a decline to 3.3% and marked the first time since 2007 that two-consecutive annualised rates above 3.5% have been recorded. Overall upward revisions to consumption, non-residential fixed investment and inventories were more than enough to offset a small downward revision from exports.

US consumer confidence fell sharply in November with the Conference Board index sliding to 88.7. The reading was well below the 94.1 figure of October and expectations for an increase to 96.0 and was the lowest level seen since June. Measures on current conditions and expectations fell by 3.1 and 6.8pts respectively, an outcome that lead to the headline gauge suffering its worst month-on-month points decline since October 2013.

US house price growth continued to ease in September with both the CaseShiller 20-city and FHFA house price indices slipping from levels seen in August. The CaseShiller gauge rose 4.9% from a year earlier, down on the 5.6% rate of August but stronger than forecasts for an increase of 4.6%, while the separate FHFA index rose 4.3%, below the 4.8% annual rate of August. While they remain in positive territory it’s clear that the trend is lower with both failing to register an increase in the annual rate for 10 and 9 months respectively.

Manufacturing activity across Mid-Atlantic States slowed sharply in November with the Richmond Fed manufacturing index slumping to +4. The reading was well below the +20 level of September and was the lowest level seen since June this year. 8 of 12 components deteriorated with new orders sliding to +1 from +22. Perhaps explaining the sharp drop in demand both inventories of finished and raw goods expanded during the month.

Canada retail sales bounced strongly in September, rising 0.8% compared to estimates for an increase of 0.5%. While the headline rate was strong core sales, that which excludes lumpy auto purchases, came in flat, an outcome that was below expectations for a gain of 0.3%.

Germany, the Eurozone’s largest economy, grew by 0.1% in the third quarter. The reading, unchanged from the preliminary estimate, left the annual rate of growth at 1.2%, up from 1.0% in Q2. Net trade and consumption of 0.2ppts apiece was able to offset a contraction in business capital spending.

French manufacturing confidence hit a 6-month high in November with INSEE’s business climate subindex rising to 99. The figure was higher than the upwardly-revised 98 level of September and expectations for a decline to 97 but below the series long-run average of 100.

 

The Day Ahead (AEDT)

The ASX 200 looks set to recoup some of yesterday’s losses in early trade with SPI futures pointing to a rise of 8pts on the open. Today I’ll be watching the movements on the Dalian commodity exchange, particularly iron ore futures, given large amounts of pessimism that are currently engulfing the materials sector. Yes, there should be given our chief export item has nearly halved in value year-to-date, but with positioning and sentiment stretched so far in one direction it’s clear that any small uptick in futures will have a leveraged upside impact for the sector, particularly the iron ore ‘pure plays’. Elsewhere the energy sector will be under pressure following further steep falls in the crude price overnight although, with OPEC due to meet tomorrow, there is a chance we’ll see some short covering. Last but not least and perhaps a little perverse, should Q3 domestic construction data come in under expectations it may actually benefit higher-yielding plays, particularly the banks, given implications for economic rebalancing and hence the outlook for domestic interest rates.

Weighed down by falling commodity prices, subtle jawboning from the RBA and a better-than-expected US GDP print, the AUDUSD has slipped overnight with the pair falling as low at .8515, a level last seen in Mid-2010. In the absence of some unexpected bullish news, a rally in commodity futures or an upside surprise in the local data today, the Aussie is likely to remain under pressure for the duration of the Asian session. Support starts at the overnight low of .8515 and again at .8500 with nothing else really emerging until the low .8300 region. On the topside resistance kicks in at .8540, .8564 and at .8600.

Australian Q3 construction work completed will be released at 11.30am this morning. All eyes will be on the breakdown between residential and engineering work to gauge how the fabled ‘economic rebalancing’ is currently playing out. Elsewhere in the region we’ll also receive South Korean consumer sentiment.

A plethora of economic data releases arrives this evening, particularly in the States due to the Thanksgiving Day holiday on Thursday. In order of importance, in my mind least, we’ll receive durable goods orders, personal consumption and expenditures including the all-important core PCE inflation figure, pending home sales, new homes sales, initial jobless claims, Chicago PMI, the University of Michigan-Thomson Reuters consumer confidence survey, MBA mortgage market index and Midwest manufacturing survey. Before we get our heads around that markets will also have to digest Q3 GDP and retail turnover from the UK, consumer confidence readings from France and Italy along with German import prices.

 

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