Markets Daily
Soft US GDP data helped push bond yields lower, which encouraged equity markets. AUD/USD recovered to 0.6990. Today’s calendar includes Australia June credit, Eurozone Q2 GDP and US Q2 employment costs and June personal income and spending.
Yesterday
Australia retail sales came in a touch softer than expected, rising just 0.2% in June with May’s gain revised down from 0.9% to 0.7%. The trend suggests a modest slowing in momentum but with sales still running at a high level, up 12%yr. The June detail showed weakness centred on department stores (–3.7%mth) and softer food and household goods (both down 0.3%mth) but strong gains for cafes & restaurants (+2.7%mth) and clothing (+1.3%mth). By state, gains in Qld (+0.7%mth) and WA (+0.5%mth) combined with flat results in Vic and SA and a 0.2% dip in NSW. Regional equities generally ran with the positive post-FOMC lead from Wall Street, the Bloomberg APAC Developed Market Index up 1.4%, the ASX 200 1.0%. AUD/USD consolidated its Powell-driven bounce, trading either side of 0.7000 but within narrow ranges.
Currencies/Macro
The US dollar was little changed against most G10 FX on the day but plunged against the Japanese yen. EUR/USD initially fell from 1.0220 to 1.0114 before rebounding to 1.0195. GBP/USD is up a net 20 pips at 1.2180. USD/JPY fell from 136.50 to 134.20 – a one-month low. AUD/USD slipped as low as 0.6955 but then returned to just under 0.7000 for no net change on the day. NZD/USD rose 30 pips to 0.6290. AUD/NZD fell half a cent to 1.1115.
US GDP in Q2 fell -0.9% annualised (est. +0.4%, prior -1.6%). The miss was mostly due to inventories, with consumption remaining solid. Weekly initial jobless claims rose 256k (est. 250k, prior upwardly revised 261k), with continuing claims at 1359k (est. 1386k, prior 1384k), leaving intact 4-month and 8-month uptrends respectively.
German CPI in July rose 0.9%q/q and 7.5%y/y (est. 0.6% and 7.4%, prior 0.1% and 7.6%), with price increases increasingly widespread.
Interest rates
US bond yields fell and the curve bull steepened following US GDP data which reported a technical recession in Q2 for the US economy. 2yr government bond yields fell from 3.01% to 2.81%, 10yr government bond yields 2.82% to 2.65%.
Australian bond yields took trend from US price action, the curve bull steepened overnight. 3yr government bond yields (futures) fell from 2.99% to 2.79%, and 10yr government bond yields (futures) fell from 3.25% to 3.08%. Markets are fully priced for a 50bp hike at the RBA meeting next Tuesday. Cross market spreads narrowed on the back of AU outperformance, with the AU-US 10yr bond spread now at 43bps.
Credit indices followed the positive equity momentum to see gains in both Main (in 5bp to 105 making for a round trip on the week so far) and CDX (2bp tighter at 81.5), however overall activity was more muted with US cash spreads little changed and no activity in Euro primary markets. US primary was a little better as 4 issuers price USD5.1bn with NIC’s of 10-20bp across the various tranches. GM’s post earnings deal was the largest, pricing a USD2.25bn inaugural green bond (UOP to fund Clean Transport Solutions as per the group’s Sustainable Finance Framework) across a USD1bn 7yr (T+270, BBSW+313) and a USD1.25bn 10yr (T+295, BBSW+336) and CIBC also priced a USD1.35bn 3yr at T+115 (BBSW+132).
Commodities
With the US entering a technical recession, and recessions not being good for oil demand, but US stocks pushing higher and higher through the session, crude markets were pushed and pulled in differing directions during the day. The Sep WTI contract is last unchanged at $97.27 while the Sep Brent contract is last up $1.02 at $107.64. The spread between WTI and Brent continues widening aggressively as Europe scrambles for energy while US growth weakens. The Sep-Sep WTI Brent spread widened to -$10.45, the widest in more than 3yrs. With oil prices up 25% this year, oil majors are reporting bumper earnings with Shell and TotalEnergies yesterday reporting record earnings. Senate Democrats yesterday agreed details on the energy, climate and social spending bill after Joe Manchin shifted his position. The deal, if passed, will see nearly $370bn investment over 10 years to boost electric vehicles, jump-start renewable energy such as solar and wind power and develop alternative energy sources like hydrogen.
Metals again pushed higher with copper up another 1.3% at $7,739 and aluminium up 1.7% to $2,465. Zinc jumped 4% to $3,176. Production cuts in Europe due to surging power prices remains a potent source of support for aluminium, with LME stocks falling to a 31yr low. LME stockpiles have fallen for 60 consecutive days at the LME. Optimism about support for the construction industry in China helped drive gains in zinc.
Finally note that the week-long jump in iron ore markets continued yesterday as global press picked up on last week’s construction industry policy developments. The FT reported that the PBoC will issue about ¥200bn of low interest loans to state banks to help developers complete stalled projects. The Sep SGX contract is up $4.50 at $117.65 while the 62% Mysteel index is up $7.20 at $117.40. The index is up 22% over the last week on the raft of policy announcements in China designed to deal with collapse of the construction industry.
Day ahead
Aust: Private sector credit growth is set to ease back in June given the backdrop of rising interest rates and the emerging housing downturn (Westpac f/c: 0.6%). Significant upward pressure on producer prices will be evident in Q2.
Japan: Industrial production is set to bounce in June given the reopening, although supply issues remain as a concern (market f/c: 4.2%).
Eur/UK: July’s CPI should indicate a broadening of price pressures in Europe (market f/c: -0.1%mth; 8.7%yr). Eurozone GDP growth is set to weaken considerably in Q2 and will likely stall over the remainder of the year (Westpac f/c: 0.1%; market f/c: 0.2%). Meanwhile, net mortgage lending in the UK is expected to weaken in June given rising rates and a slowing economy (market f/c: £5.5bn).
US: The historically tight labour market will provide upward support to the employment cost index in Q2 (market f/c: 1.2%). However, weakness in personal income is still an ongoing concern as households’ personal spending continues to run down savings (market f/c: 0.5% and 0.9% respectively). PCE inflation is consolidating at high levels and should fall as price pressures gradually abate though H2 (market f/c: 0.9%mth headline; 0.5%mth core). Supply issues will be an ongoing concern in July’s Chicago PMI (market f/c: 55).
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