US yields to take the lead from tonight’s Treasury auction


MAJOR HEADLINES – PREVIOUS SESSION

  • US Sep. Chicago Fed Nat’l Activity Index out at -0.81 vs. revised -0.65 prior 

  • US Oct. Dallas Fed Manuf. Activity out at -3.3% vs. -0.5% expected and -6.4% prior

  • AU Q3 NAB Business Confidence out at +16 vs. -4 prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • Swiss UBS Consumption Indicator (0700) 

  • HK Trade Data (0830) 

  • Sweden PPI (0830) 

  • Sweden Household Lending (0830) 

  • EU ECB’s Stark to speak (0845) 

  • EU Euro-zone M3 Money Supply (0900) 

  • UK CBI Distributive Trades Survey (1100) 

  • US S&P/Case-Shiller House Prices (1300) 

  • US Consumer Confidence (1400) 

  • US Richmond Fed Manuf. Index (1400) 

  • CA BOC’s Carney to speak (1500)

Market Comments:

Dollar bears saw a hefty shakeout overnight, taking their cue from a sharp fall in equity markets and an uptick in US yields. It was interesting to note that Wall St has failed to maintain the upward momentum despite the Q3 earnings season continuing to provide more surprises to the upside. (Similar results in Q2 saw an extended stock market rally, and beyond). The weakness was witnessed predominantly in the financial and home builder sectors.
The former as a result of talk of downgrades to some major US banks and rumours that BOA would be raising capital to satisfy regulators. The latter amid speculation Congress would extend, but then gradually fade out, the first-time home buyers’ tax credit. It is currently due to expire end-November.

Following last week’s disastrous Q3 GDP report in the UK, quantitative easing featured heavily in the headlines overnight. Ex-MPC member Blanchflower, a well-known dove of doves, commented in a Bloomberg interview that there is every chance Q3 GDP will be revised down from Friday’s -0.4% first estimate and suggested the BOE may have to increase its QE Asset purchase Programme to £250 bln from the current £175 bln. To current MPC members, new recruit Posen stated that there was no evidence that quantitative easing leads to high or sustained inflation. He tacitly suggested that he is in favour of further asset purchases but opined that the policy may be more effective if it was extended beyond Gilts.

So, with risk appetite on the wane, and US Treasuries softer ahead of this week’s record issuance, the dollar staged a comeback and, while previous rebounds had been shallow and seen as a good opportunity to sell more dollars, last night’s correction proved deeper and more aggressive. Strong moves, and closes through technical levels, may suggest that this correction has a bit further to go.

The Asian session opened with the dollar dramatically higher from when traders left and the gist of the session was for a small claw-back by most currencies after their steep falls overnight. The AUD led the field higher following the release of economic data showing a strong rebound in confidence among Australian businesses in Q3. The NAB business confidence reading leapt to +12 from -4, its highest since Q4 1994. The AUD was also given a lift by market reports of reserve manager bids and the rebound in gold.

Japan’s Finance Ministry has raised its assessment on the economy for a second quarter by saying in its September report that "some areas of the economy, such as production, are showing signs of picking up, even though the economy is in a severe state". The ministry upgraded its assessment on 7 out of the 11 regions and left the remaining 4 unchanged. This echoes the shift in the BOJ’s assessment on all of its nine regions covered in last wks regional report. However, it was noted the central bank continues to reflect more optimism over the economy than the government, with Fin Min Fujii in fact remarking that the BOJ, when saying the economy is getting better, is looking at the economy “in its own way”.

Later today, the US Treasury will auction the first of its record issuance this week. Tonight’s auction features $44 bln in 2-yr notes (then $41 bln in 5-yrs on Wednesday and finally a sale of $31 bln in 7-yr notes on Thursday afternoon). As we have noted, The 2-year auction may be the weakest auction this week considering the paltry 1.00% yield on these notes compared to the juicier yields on the 5-year (currently trading around 2.50%) and 7-year notes (currently trading around 3.17% ). The US data slate features S&P/Case-Shiller house prices, consumer confidence and Richmond Fed manufacturing index. Prior to that, Europe will see Swedish PPI and household lending, Euro-zone money supply and the UK distributive trades survey.