Overnight Market & Currency Developments – From Our Bankers

Overnight Developments:

• USD strengthened in overnight trade as annual U.S. October core inflation rose slightly more than expected, lifting from 1.7% to 1.8%. And as headline U.S. October retail sales rose more than expected, up 0.2% (MoM) following on from last month’s upwardly revised weather‑affected surge in retail activity to 1.9% (MoM) from 1.6%. The lift in the USD was initially driven by a corresponding sharp spike in U.S. two year bond yields, before they finished largely unchanged, at 1.68%. U.S. ten‑year yields fell 3.7bpts to 2.33% as U.S. stocks retreated on concerns of a flattening yield curve and a turn down in credit spreads. The U.S. 10‑2 year yield curve is at its flattest level in ten years, since November 2007. The U.S. yield curve and credit markets are suggesting U.S. stocks are ripe for a relatively large move lower.
• AUD/USD looks vulnerable to more near‑term downside. For the last 20 years, a flatter U.S. yield curve has been associated with a lower AUD. And in overnight trade, AUD/USD moved to a fresh four‑month low. If AUD/USD declines another cent, it will be testing long‑term technical support around 0.7473.
• Australian two‑year bond yields declined 5bpts to 1.78% yesterday as the Australian Q3 wage price index fell short of expectations, rising only 0.5% (QoQ) to be 2.0% (YoY). The wage result is worse than it appears because it was supported by a larger than normal increase in the minimum wage, so expectations were for a lift in Australia’s annual wage growth to 2.2%.

Overnight Data:

• US consumer prices rose by 0.1% in October in line with forecasts. The core CPI (ex food and energy) rose by 0.2%. Retail sales rose by 0.2% in October (forecast flat) while sales excluding autos and gasoline rose by 0.3%. The September result for retail sales was revised up to show a gain of 1.9% rather than 1.6%. And the New York Federal Reserve manufacturing index eased from +30.2 to +19.4 in November (forecast +26).

Global Equity Markets:                                                                                                                  

• European shares fell to 8‑week lows on Wednesday. Investors continued to take profits while falls in the basic resources and auto sectors weighed on key indexes. The pan‑European STOXX 600 index fell for the seventh straight day, dropping by 0.4%. The German Dax fell by 0.4%. The UK FTSE lost 0.6%. In London trade, shares in Rio Tinto fell by 0.9% while BHP fell by 1.5%.
• US sharemarkets fell again on Wednesday. Energy and other commodity‑dependent stocks fell in response to weaker oil and metal prices. Shares in Target fell by 9.3% after the retailer issued a disappointing forecast for the holiday season. With an hour of trade to go the Dow Jones was lower by 120 points or 0.5% after being down 167 points in early trade. The S&P 500 was down by 0.4% and the Nasdaq lost 19 points or 0.3%.

Commodities:                                                                                         

• Global oil prices fell by 0.5‑1.0% on Wednesday. The US Energy Information Administration reported that crude oil inventories rose by 1.9 million barrels in the last week. Brent crude fell by US34 cents or 0.5% to US$61.87/bbl. US Nymex fell by US37cents or 0.7% to $55.33/bbl.
• Base metal prices were mixed on Wednesday on the London Metals Exchange. Aluminium, copper and zinc rose up to 1.2% while other metals fell up to 1.4%. The gold futures price fell by US$5.20 or 0.4% to $1,277.70 an ounce. The spot gold price was trading around US$1,278 an ounce in late US trade. Iron ore fell by US$1.60 or 2.5% to US$61.20 a tonne.

Ahead: 

• In Australia, October employment data is out.
• In the US, data on industrial production is released with the Philadelphia Federal Reserve index, the NAHB housing market index and import and export prices.

Indicative Rates (Bank to Sell):