Daily Market Update 23 October 2013 - ‘QE for longer’ propels markets higher

Daily Market Update 23 October 2013 - ‘QE for longer’ propels markets higher

Adding to the already built-in notion that the FOMC will not alter monetary policy from current levels until well into 2014, US non-farm payrolls growth disappointed to the downside in September with an increase of 148k reported<http://www.bls.gov/news.release/pdf/empsit.pdf>. The figure was below both the upwardly-revised 193k pace of August and expectations for a decline to 180k with the number adjusted for revisions to prior data coming in at just 157k. Despite the fact unemployment underperformed and participation held steady at multi-decade lows of 63.2%, the unemployment rate fell unexpectedly, dropping 0.1% to 7.2%, the lowest level seen since November 2008. On a sector-by-sector basis, private payrolls increased by a paltry 126k, well below the 180k clip expected by economists, with most of the increase coming from construction, wholesale trade, transportation and warehousing. In what surprised many, including ourselves, government payrolls, something has been detracting from payrolls of late, rose by 22k after jumping 32k in August. Perhaps even more of an oddity that that, full-time employment soared by an additional 691k while the part-time workforce shrunk by 594k, an outcome that is likely to have derived from sampling rather than any gigantic shift in employment patterns. Of the other items to come from the release, average hourly earnings rose 0.1% to $24.09, just half the rate expected, while the average workweek held at 34.5h for a second-consecutive month.


US construction spending<http://www.census.gov/construction/c30/pdf/totsa.pdf> rose for a fifth-consecutive month in September with total expenditure rising to $915.1b from a year earlier. The increase, some 0.6% higher than the upwardly-revised 1.4% gain of August, was ahead of expectations for an increase of 0.4% with private residential construction and state and local government expenditure doing most of the heavy lifting.


Manufacturing activity across the Richmond, Baltimore and Charlotte regions expanded fractionally in October with the Richmond Fed index<http://www.richmondfed.org/research/regional_economy/surveys_of_business_conditions/manufacturing/2013/pdf/mfg_10_22_13.pdf> rising to +1. The figure was above the 0 reading of September, subsequently the same figure that had been expected by the markets, with improvements in inventory levels for raw and finished goods helping to offset weakness in shipments, new orders and backlogs.


Canadian retail sales missed to the downside in August with an increase of 0.2% reported<http://www.statcan.gc.ca/daily-quotidien/131022/dq131022a-eng.pdf>. The figure was below the 0.5% rise of July and expectations for an increase of 0.3% with slower auto-related sales largely responsible for the data miss. Excluding those items, ‘core’ retail sales outperformed, rising 0.4%, double the rate expected.


UK public sector finances improved modestly in September with total borrowing<http://www.ons.gov.uk/ons/dcp171778_331734.pdf> ex-financial interventions coming in at £11.072b. The number was below both the £12.5b level of August and the £12.067b figure recorded in September 2012.


The Day Ahead (All times AEDT)


Having rallied for six sessions on the trot, the ASX 200 looks set to make it ‘lucky seven’ today with SPI futures pointing to an increase of 31pts on the open. While gains should be broad-based as witnessed in the US, if there is anything that could derail the current bull-charge, it will be a stronger-than-expected ‘core’ CPI print at 11.30am. While the markets are looking for an annualised increase of 2.2%, should we get a reading of say 2.4%, something that’ll snuff out any chance of a near-term rate cut and make the AUD rally, it’ll definitely be detrimental to stocks following the stellar run of late.


Poor data equals more FOMC easing equals risk on. That’s the simple equation buoying the AUDUSD this morning with the pair currently sitting above .9700, the highest level seen since June 4 this year. While the notion of QE ‘unchanged for longer’ will continue to underpin the pair over the medium-term, all the action today will be centred around the CPI release at 11.30am this morning. Given that the pair has already rallied 8.8% since the beginning of September, we suspect that a hotter-than-expected print, rather than what is forecast, will be required to propel the AUD ever higher. Support is found at .9700, .9680 and .9644 with resistance kicking in at .9715, .9772 and again at .9792.


A big day on the domestic data front arrives today with the release of all-important Q3 CPI figures at 11.30am. Economists expect headline inflation to have risen 0.8% for the quarter, a result that would leave the annualised increase at a benign 1.8%. While that will garner initial attention, as is always the case, markets will be solely focused on the ‘core’ reading, that which strips out volatile items that tend to augment the data, with a quarterly increase of 0.6% expected. If this was to occur, it’d leave the year-on-year rise at just 2.2%, a figure at the lower end of the RBA’s 2-3% target band. In reality it’ll likely come down to what tradable inflation does, that which derives from offshore rather that domestically, with the fall in the AUD likely to place upward pressure on prices having detracted from them previously. While this will be partially be reversed on the recovery of the AUD, any hotter-than-expected print will all but cement the notion that the RBA easing cycle is done, at least for the remainder of 2013. While the CPI release will override all others, we’ll also receive the Conference Board leading index for August along with DEWR skilled vacancies for September.


Data releases this evening include consumer confidence and Q2 public-sector debt figures from the Eurozone, the minutes of the Bank of England MPC meeting for October along with French business confidence. Across the pond the data flow goes up a cog with the MBA mortgage market index, Chicago Fed national activity index, house price index, leading index and import prices for September released in the US while the Bank of Canada will also announce their October monetary policy decision.


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