RBA surprises with smaller than expected rate hike

• The Reserve Bank of Australia raised the benchmark cash rate by 25bp to 2.6%, less than the 50bp hike the market had been expecting, but noted that further rate increases were likely in the period ahead.  AUD weakened on the news, down 1% as of this writing.
• The UK Chancellor announced a sharp U-turn on the government’s plan to scrap the 45p rate of income tax. The plan, which would have benefited those tax payers earning over £150,000 a year, had come under criticism across the political spectrum, and many Conservative MPs had indicated they would not support the legislation in parliament. Ultimately the reversal does little to plug the large funding gap arising from the full set of measures announced in last week’s “mini budget” and we remain bearing on the pound unless further significant adjustments are made to the fiscal plans.
• Conditions in the UK manufacturing sector remained in contractionary territory despite improving marginally into September. The headline index rose to 48.4 in September (below the flash estimate of 48.5) from 47.3 in August. Manufacturers cut production in September as a result of falling new orders; while new export business contracted sharply despite the recent sterling depreciation.
• PMI readings out of Europe confirmed deteriorating business conditions in the manufacturing sector in September, as the energy crisis crimped production and weighed on demand. The Eurozone manufacturing PMI fell to 48.4 in September from 49.6, its lowest level since June 2020. Within the set of Eurozone countries monitored by S&P Global, only Ireland recorded an index value consistent with an expansion (51.5). Manufacturing conditions in the Eurozone’s two largest economies, France and Germany, fared the worst on the month; with the headline index recording values of 47.7 (from 50.6 in August) and 47.8 (from 49.1 in August), respectively.   
• US manufacturing PMI rose slightly to 52.0 in September, above analysts’ consensus and still in expansion territory. The ISM manufacturing index was also above 50 although it did slip from August. Overall, the US data points to a relatively resilient economy that has been able to withstand the monetary policy tightening so far this year.
• Turkey’s manufacturing PMI index fell to 46.9 in September from 47.4 in August. This decline is the 7^th consecutive fall in the Turkish headline index; and reflects weakness in the new order, output and purchasing activity sub-components. In addition, respondents reported cut-backs in employment on the back of the sustained slow-down in new work orders. Turkish inflation numbers provided further downbeat news, with headline CPI reaching 83.5% year-on-year in September, consistent with analysts’ expectations of 83.45%. Large year-on-year price rises were observed in the transport, household appliances and utility sub-components; although even when more volatile sub-components are removed, core inflation still rose 68.09% year-on-year.
• In contrast, India’s manufacturing PMI of 55.1 was the 15^th consecutive month in expansionary territory. The September value did however mark a decline from the 56.2 recorded in August, and was lower than the consensus forecast. The performance of the index was underpinned by increases in new orders and production, while businesses benefited from lower input cost inflation.
• Tokyo CPI came in as expected at 2.8% y/y in September, slightly lower than the 2.9% recorded in August. Core CPI accelerated to 1.7% y/y last month however, up from 1.4% y/y in August as the second-round impact of higher energy costs likely feeds through to other parts of the index.  A weaker yen has also likely contributed to faster inflation for imported goods.  

 Today’s Economic Data and Events

• 08:30 KSA and Egypt PMIs (Sep)
• 18:00 US factory orders (Aug) forecast 0.0%
• 18:00 US durable goods orders (Aug) forecast -0.2%

Fixed Income

• European government bonds led markets higher overnight as there was some enthusiasm to the UK government reversing plans to scrap the highest rate of income tax. Yields on the 2yr gilt sank 23bps overnight to 3.936% while the 10yr gilt yield fell 13bps to 3.945%. While the situation for the UK economy and policymaking still remains fraught, at least in the near term there will be some relief.
• Bund markets also followed the UK higher with a 19bps drop in 10yr yields to 1.908%. Moves were bigger across the rest of the Eurozone with a 27bps drop in Italian bond yields to 4.225%.
• In the US yields were also lower as a general rally took hold of markets and a softer than expected ISM reading for September. The 2yr UST yield dropped 16bps to 4.1134% while the 10yr fell 19bps to 3.6387%.  

FX

• Currency markets moved higher against the dollar overnight as a general improvement in risk appetite took hold in markets. The UK chancellor’s reversal of one of the more contentious tax cut policies helped to put a bid under sterling with GBPUSD adding 1.4% to 1.1323 though some gains are being given back in early trade today.
• EURUSD managed a gain of 0.24% to 0.9826, starting the new quarter on a stronger footing while USDJPY fell by 0.13% to 144.55.
• Commodity currencies bounced strongly with USDCAD down by 1.5% to 1.3624 while AUDUSD added 1.8% to 0.6516 and NZDUSD managed a 2.2% gain to 0.5722.

Equities

• Equity markets started the week on the front foot with sizeable gains in most major indices as risk-on sentiment held the day. In the US, the Dow Jones was the biggest gainer with 2.7% but the S&P 500 (2.6%) and the NASDAQ (2.3%) also had a good day.
• There were also gains earlier in the session in Europe, albeit not to the same degree. The composite STOXX 600 added 0.8% with the DAX also closing 0.8% higher while the CAC added 0.6%. In the UK, the FTSE 100 gained 0.2%.
• Locally, the DFM was an outlier as it dropped -0.6% but the ADX added 0.1%. Saudi Arabia’s Tadawul closed up 1.1%.

Commodities

• Oil prices bounced strongly on expectations that OPEC+ will announce a sizeable cut at this week’s meeting, perhaps by as much as 1m b/d or even more. December Brent futures rose by 4.4% to USD 88.86/b while WTI added 5.2% to USD 83.63/b. In order to secure the gains in oil markets OPEC+ will need to deliver on the cuts though it does appear to be some unanimity among producers for lower output.
• Time spreads have also widened in the structure of the market to nearly USD 12/b of backwardation in Dec 22-Dec 23 spreads.

Charts and tables