Earnings season kicked off and today was a great day to do something. Citi and JPM were reporting and they both reported solid gains. JPM increased its lending and reaped the benefit. Meanwhile, Citi saw solid gains from its investment banking division. In addition, the PPI was released and everyone cheered as there was a slight increase. The PPI for September rose 0.4%, and is 2.6% yoy. Core PPI was up 0.2% and 2.1% yoy and jobless claims fell 15,000. So all should be good right?
Well, it wasn’t. The markets got into a knot over the persistently confusing inflation numbers as traders and investors alike pondered what the diviners at the Fed will do next. So, bonds had a meek rally, the yield curve flattened and both those events led to the sale of financials. The 30-year auction yelled hurrah for Trump and bid somewhat aggressively with the CPI due tomorrow. The bid to cover ratio was 2.53, a number not seen since September 2015. There was good support and this is troubling the equity market.
Also of concern is Trump’s attitude towards tax reform and there appears to be a standoff between he and the GOP. Mnuchin is confident it can all be done by year end, but we have heard that rhetoric before. In addition, there are rumours circulating about Tillerson either resigning or being sacked, after all he never admitted to not calling Trump a moron and, of course, Kelly appears to be taking fire.
Kelly has been one of the few to be able to corral Trump and maybe Trump no longer wants to be caged. In other news, it appears as though the Kushner’s Manhattan Tower is on track to record its worst year since 2011. Trump’s attention and the attention of his acolytes appears to be wavering.
At risk for the market is that Trump becomes so engrossed in raising his media profile, a.k.a. using the Richard Nixon method. Nixon when he was at odds with the press threatened to cancel their licences to operate and it appears as though Donald has dusted down the book and adopted a similar tactic. Divert attention away from what is really happening.
So, on the day the equity market fell slightly in lack lustre trading and bonds saw a strong bid. It would appear as though the bond market is once again betting against the Trump administration.
All eyes are on the Fed but with expectations that a hike will come in December and the market has a 76.3% chance the bond market is likely to remain range bound. Equities may struggle to move higher as much of the gains to be made are anticipatory.
Brexit continues to hit the news and there is some concern that time is running out and there is more likely to be a chaotic withdrawal in March 2019.
Equities: the S&P 500 rose 0.2%, the Dow fell 0.14% while the Stoxx 600 was unchanged. JPM fell 0.9% and Citi fell 3.4% after releasing their quarterly results.
Currencies: the euro fell 0.2% and the Bloomberg Dollar Spot Index gained 0.1%
Bonds: were slightly stronger. The U.S. 10-year closed at at 2.32% a rally of 3 bp. The two- year bond closed steady%. The 30-year closed at 2.85% down 3 bp on the day. The yield curve flattened about 4bp.
The U.S. bond curve flattened with the 2/10 closing at 80.2 bp, the 2/30 at 133.4 bp, and the 10/30 closed at 52.8bp.
Commodities: Gold rose 0.1% and WTI fell 1.3%. Iron ore has fallen below $60 a tonne. Demand for copper continues with copper up 1.3%. Nickel rose 2.3%, zinc was up 1% and lead fell 0.4%. Much of the rise in prices are related to the closure of plants come the winter months. The wintering may see prices slide.
Aussie Market Today.
Aussie bonds will continue to trade in a tight range and are likely to rally after the strong lead from the U.S. Expect some short covering to continue however as the day progresses traders may square their books ahead of the U.S. CPI. Equity market to be slightly weaker on the day.