Supply chain issues weigh on US manufacturing

• Supply chain issues continue to weigh on the US economy recovery, with two major gauges of manufacturing indicating a slowdown in data released yesterday. While still strongly positive – the two indices were still some way above the neutral 50 level – both the Markit manufacturing PMI and the ISM manufacturing survey were weaker than the previous month. At 58.4, the final Markit reading came in lower than the initial reading of 59.2, which was itself a slowdown from the 60.7 recorded in September. Indeed, this was the lowest reading in 15 months, and manufacturers raised their prices at the fastest pace on record. Firms struggled to meet strong demand owing to the supply chain blockages and shortages of raw materials. Meanwhile, while the ISM survey at 60.8 did beat expectations of 60.5, it was also weaker than September’s 61.1. Again, ISM noted that ‘companies and suppliers continue to deal with an unprecedented number of hurdles to meet increasing demand.’
• The Reserve Bank of Australia held its benchmark interest rate steady at 0.1% at its November MPC meeting this morning in a widely anticipated decision. The key development was the scrapping of a yield-target on the 2024 bond of 0.1%; yields had been rising on this in recent weeks, going from close to zero through September to a high of 0.78% yesterday, and the bank acknowledged that the effectiveness of the yield target on capping rates had diminished. However, rate hikes remain some way off even as inflation has picked up and the outlook for the economy has improved as reopening has begun – the MPC board will not hike the cash rate until inflation is sustainably within its target 2-3% range.
• The COP26 summit has got underway in the UK. Key announcements from the start of the summit include a pledge by over 100 countries to halt deforestation, and India’s announcement that it is targeting net-zero by 2070. Meanwhile, after French President Emmanuel Macron and British Prime Minister met on the sidelines of the summit, France has postponed planned sanctions against the UK which were due to begin at midnight. Discussions around the fishing rights issues which prompted the spat are set to resume.

Today’s Economic Data and Events

12:50 France final Markit manufacturing survey, October. Prior: 53.5

12:55 Germany final Markit manufacturing survey, October. Prior: 58.2.

Fixed Income

• US Treasury markets showed little day to day change at the start of the trading week as a mid-day move higher in yields was unwound by the end of trading. The 2yr UST yield closed at 0.4992%, nearly unchanged, while the 10yr faded a move up to 1.60% to close at 1.5557%, marginally higher. The market will be likely trading sideways ahead of the FOMC meeting which begins today.
• Emerging market bonds showed a mixed performance overnight with Turkish 10yr government bonds rallying and yields dropping 26bps to 18.780% while South African bonds remained under pressure with yields above 10%. Indian bonds showed little material change.
• Regional new issuance is quiet for now.

FX

• The dollar started the week off on a softer footing with the DXY index dropping 0.26% to 93.879. With heavyweight data from the FOMC and NFP out later this week we would expect more sideways movement in FX markets over the next few days. EURUSD started to climb back after the sharp fall at the end of last week, rising 0.4% overnight to 1.1606 while USDJPY was more or less unchanged despite the political continuity assured after the weekend’s parliamentary elections.
• GBPUSD sank a second day running, dropping by 0.12% to 1.3665 in the run up to Bank of England later this week. Commodity currencies generally were higher with USDCAD falling 0.15% to 1.2369 and both AUD and NZD gaining modestly.

Equities

• All three major US equity indices managed to shrug off the weak survey data out of the US yesterday to close at record highs all round. The NASDAQ was the biggest gainer, adding 0.6%, while the S&P 500 closed 0.2% higher and the Dow Jones 0.3%. The Dow had crossed the 36,000 mark in intraday trading before ceding a little ground before the end of the session.
• There were also notable gains in Europe, with the composite STOXX 600 closing 0.7% higher. The FTSE 100 added 0.7%, the DAX 0.8% and the CAC 0.9%.
• Within the GCC, the ADX was a notable gainer, adding 0.8% by end-of-session. The Tadawul added 0.2% and the DFM 0.6%. In Egypt, the EGX 30 closed 1.3% higher.

Commodities

• Oil prices rose further at the start of November with Brent futures gaining 0.39% at USD 84.71/b and WTI up almost 0.6% to USD 84.05/b. OPEC+ will set policy toward the end of the week where there seems to be little public acceptance of pressure from the US to increase production at a faster pace amid high oil prices.

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