Euro area construction set to have fallen

Chris Scicluna
Emily Nicol

Equities generally firmer as bond yields pullback from highs
Despite opening in the red, the S&P500 advanced a further 0.3% on Monday, as consumer discretionary stocks continued to benefit from Friday’s surprising lift in retail sales and as technology stocks also moved higher. Investors shrugged off news of a very disappointing 1.3%M/M decline in US IP in September, which was largely due to the impact of Hurricane Ida and supply bottlenecks impacting production in the auto sector, while the NAHB index of homebuilders’ sentiment rose unexpectedly to a three-month high in October. After continuing to weaken during the European session, especially as Brent crude traded briefly above $86/bbl for the first time in three years, Treasury bonds found some support with the 10Y UST yield closing at 1.60% – up 3bps from Friday’s close but a couple of bps below the intraday peak. Yields have moved lower in Asia today, with the 10Y UST sitting presently just above 1.58%.

Against that background, and after a slightly soft start to the week, bourses in the Asia-Pacific region have firmed today, assisted by the pullback in bond yields. After declining more than 1% yesterday in the wake of disappointing GDP and IP data, China’s CSI300 is presently on track to erase most of that loss today, while stocks in Hong Kong have rallied for a third consecutive session. A quiet day in Japan, which marked the first official day of campaigning ahead of the Lower house election on 31 October, has seen the TOPIX post a modest 0.3% gain. Markets in South Korea and Taiwan have made greater headway, helped by a rally in tech stocks, with little reaction to news of another North Korean missile test.

In Australia, the ASX200 has nudged lower, weighed down by weakness in materials stocks. Meanwhile, after rising sharply yesterday, spooked by the sell-off in USTs and a very high Kiwi CPI reading, longer term AGCB yields have declined modestly today with investors perhaps taking some comfort from the reaffirmation of the dovish policy outlook in the minutes from this month’s RBA Board meeting. However, yields have finished well above the intraday low – and above yesterday’s close at the short end – with a further rebound in the weekly measure of consumer confidence boding well for a recovery in the economy as restrictions ease. In New Zealand, long-term bond yields fell slightly from yesterday’s three-year highs, with the country reporting 94 new virus cases today – a record for a single day and increasing the likelihood that tight restrictions will remain in place until the government’s as yet unpublished vaccination target is met.

Euro area construction set to have fallen again in August; no major UK data scheduled today
Another relatively quiet day for euro area releases bring construction activity data for August. Given the weakness in Germany (-3.1%M/M) and France (-1.8%M/M), aggregate euro area output seems bound to have fallen for the fourth month out of the past five, as shortages of key materials and labour continue to disrupt activity in the sector. Today is also due to see the BoF retail sales survey for September published. Meanwhile, there are no major economic reports scheduled in the UK today. And after his comments at the weekend reaffirming his assessment for the need for tighter policy, BoE Governor Bailey’s appearance at a conference on the macro financial impact of climate change might well prove less market moving.

Housing starts and building permits ahead in the US today, together with Fedspeak and corporate earnings news
Today’s US economic data is focused on the construction sector with the Census Bureau releasing figures on housing starts and building permits for September. Yesterday saw the welcome news that the NAHB’s measure of homebuilders’ sentiment had climbed to a three-month high in October, led by a lift in the index measuring single-family sales. However, Daiwa America’s Mike Moran forecasts that housing starts might have declined slightly in September, weighed down by a pullback in multi-unit starts from comparatively high levels. Today’s diary also features a number of speaking engagements by Fed policymakers (Daly, Barkin, Bostic and Waller). Meanwhile, the corporate earnings diary includes reports from the likes of Proctor & Gamble, Johnson & Johnson, Bank of New York Mellon and Netflix.

RBA Board minutes reaffirm commitment to maintaining “highly supportive” monetary conditions; Australian consumer confidence improves for a 6th consecutive week
Today brought the release of the minutes from this month’s RBA Board meeting. As is usually the case, the minutes contained no startling new insights into the Bank’s outlook for the economy and monetary policy beyond that communicated in the post-meeting statement. But in light of the substantial sell-off in Australian bond yields in recent weeks, especially yesterday after the market was spooked by a very high Kiwi CPI outcome, investors took some comfort in the minutes’ reinforcement of the Bank’s dovish policy outlook.

Specifically, as in previous months, the minutes stated that “The Board remained committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target. It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The central scenario for the economy is that this condition will not be met before 2024.” In that scenario, the Board expects the economy to return to growth in the current quarter and to its pre-Delta path in the second half of 2022. However, Board members noted that the recovery was likely to be slower than in late 2020/early 2021 – albeit to be expected given the larger downturn which the latter followed – and that much would depend on health outcomes and the nature and timing of the easing of restrictions on activity.

On the data front, the only news in Australia today was the release of the weekly ANZ-Roy Morgan consumer confidence index. With restrictions now beginning to ease in New South Wales, and scheduled to start easing in Victoria later this week, the headline index increased a further 1.3% to 107.9. This marks the sixth consecutive week of increase with the index now at its highest level since the second week of July. Perhaps not surprising, most of the improvement was due to a 4.5% increase in the index measuring expectations for the economy over the year ahead – that index also rising to the highest level since the second week of July – while respondents were also more positive about the outlook for their finances over this period. 

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