The Opening Belle

October 15, 2020 • Estimated Reading Time: 8 minutes

"If we buy bonds in the five to 10-year range, will that create more jobs?"

What a quote that is.

We'll come back to it.

Risk sentiment remained under pressure overnight, with most Asian indices lower.

U.S. Futures were also lower, Nasdaq down by 0.7%.

Back to that quote from RBA governor Lowe.

“If we buy government bonds in the 5-10 year range, is that going to create more jobs? How would it create more jobs?”

(Spoiler: It won't, but they'll do it anyway)

The RBA are looking at further easing options.

Currently, the cash rate is set at 0.25% and the central bank is targeting the 3 year bond with yield curve control.

The governor noted that the Australian 10 year yields are higher than “almost everywhere in the world.”

Today's speech and subsequent Q&A set the cat amongst the pigeons.

These charts speak for themselves.

3s10s down 6.5bps via @LongConvexity

 Great work from Lowe today... Aussie 10yr breakevens +2bp (5s+3bp), and ACGB 10yr nominals -9bp...so a chunky 11bp fall in real rates, takes 'real' ACGB 10s to -63bp - new lows and 33bp>US real rates and falling...get real rates down and might get the currency down too #fx #RBA pic.twitter.com/ihuC7nKCeP— Chris Weston (@ChrisWeston_PS) October 15, 2020 

A rate cut to 0.1% is pretty much nailed on for the next meeting, with increased QE likely to bring down those longer-dated yields.  

Lowe also confirmed how the RBA will be viewing inflation in the future, and that they have no intention to hike for at least three years;

The Board will not be increasing the cash rate until actual inflation is sustainably within the target range.

It is not enough for inflation to be forecast to be in the target range.

While inflation can move up and down for a range of temporary reasons, achieving inflation consistent with the target is likely to require a return to a tight labour market.

On our current outlook for the economy – which we will update in early November – this is still some years away.

So we do not expect to be increasing the cash rate for at least three years.

Back to the employment commentary

“In terms of unemployment, we want to see more than just ‘progress toward full employment,”

“We want to see a return to labor market conditions that are consistent with inflation being sustainably within the 2% to 3% target range.”

Handily, the Australian employment data was released right after the speech.

 - Australia Employment Change (Sep): -29.5K (est -40K, prevR 129.1K)

- Unemployment Rate: 6.9% (est 7%, prev 6.8%)

- Participation: 64.8% (est 64.8%, prev 64.8%)

- Full Time Employment Change: -20.1K (prevR 12.1K)

- Part Time Employment Change: -9.4K (prevR 117K)— LiveSquawk (@LiveSquawk) October 15, 2020 

On the face of it, things could have been worse...

Digging into the numbers, it's clear there is still a long way to go.

 While Australia's unemployment rate is officially 6.9%, the actual rate is likely much higher. Controlling for changes in the participation rate, the unemployment rate would actually be 8.7% in September (up from 8.4% in August but well down on the 12.3% peak in May). pic.twitter.com/qmYU8iCMwX— Callam Pickering (@CallamPickering) October 15, 2020 

 There was little good news in today's labour force data but hours worked did increase, despite employment overall falling. Nevertheless, hours worked is still 5.1% below its peak #ausbiz #auspol pic.twitter.com/L9rSYBRMiR— Callam Pickering (@CallamPickering) October 15, 2020 

 The very nature of the COVID-19 has transformed some full-time workers into part-time workers. Also worth noting that 96% of employment growth since May has been part-time.— Callam Pickering (@CallamPickering) October 15, 2020 

China’s factory gate prices fell at a faster-than-expected pace in September and consumer inflation slowed to its weakest in 19 months, underscoring the challenges still facing China as it recovers from the COVID-19 pandemic.

The producer price index (PPI) fell for an eighth straight month on an annual basis while consumer prices grew more slowly than expected.

“The PPI has not rebounded strongly despite the improving trend, pointing to continued weakness in industrial demand. It is unlikely to return to positive territory this year,” said Wang Jun, chief economist at Zhongyuan Bank.

“It is possible that the economic recovery in the fourth quarter may not be as strong as it has been in the third quarter.”

The data really isn't matching the narrative on the Chinese recovery, especially as they are supposed to be transitioning to a more internal economy.  

Comparing IP & Retail Sales in Germany vs China highlights the difference.

German industrial production has remained lower, while retail sales have strengthened.

China is exactly the opposite.

@themarketear

Lots of production, and weak domestic demand led to China exporting deflationary pressures before...

News that absolutely no-one could have seen coming;

Today was the official deadline for these talks of course.

To my mind the saga has another 3-4 weeks before a deal is reached.

Expect plenty of conflicting headlines that should be taken with a large dose of salt.

Each side is playing to the crowd while the spotlight is on them.

GS view has just come through the wires on that point.

@priapusiq

On the calendar, it's all happening at 13:30, with U.S. imports/exports, weekly unemployment data, and the two manufacturing index releases.

Keep an eye out for any further Covid restrictions in Europe, plus the OPEC meeting (time TBC).