Markets Daily
European and US bond yields fell and equities rallied on the eve of the annual central bank conference at Jackson Hole. The A$ outperformed, rallying to 0.6980. Today’s data includes US July personal consumption and spending.
Yesterday
The US dollar fell across the board as risk appetite improved and the Chinese yuan’s daily range midpoint was fixed firmer (CNY) than expected. This helped AUD/USD commence a rally that extended with the sea of green in regional equities (including the ASX 200 +0.7%) and US equity futures picking up. The Aussie rallied from 0.6905 to 0.6980. China’s latest fiscal stimulus plans also helped the mood.
Currencies/Macro
The US dollar was broadly weak as risk appetite improved and the 10-year Treasury yield fell. EUR/USD ranged between 0.9949 and 1.0033, overall net flat at 0.9975. GBP/USD rose about 40 pips to 1.1835. USD/JPY followed Treasury yields lower, from 137.10 to 136.50. AUD/USD consolidated its local session gains at 0.6980, up about 70 pips on the day and strongest in the G10. NZD/USD rose 35 pips to 0.6225. AUD/NZD thus rose from 1.1165 to 1.1215 – the highest since 2017.
The second estimate of US Q2 GDP was revised slightly higher than expected to -0.6%annualised (prior -0.9%, est. -0.7%). Consumption and corporate profits were the main driver of the uplift. Although headline PCE rose to 8.9% from the initial reading of 8.7%, the important core PCE was unchanged at 4.4%. Weekly jobless claims data were benign. Initial claims were 243k (prior revised to 245k from 250k) and continuing claims were 1.415m (prior 1.434m from initial 1.437m). The Kansas Fed manufacturing survey disappointed with a fall to 3 - the lowest since July 2020, (est. 10, prior 13). A special question on wages noted that almost 80% of responding firms were adjusting compensation due to inflation.
German Q2 GDP was finalised slightly higher, with an uplift to both personal and government consumption, offset by a fall in investment. The end result was a Q2 gain of 0.1%q/q from an initial reading of 0.0%. Germany’s IFO survey was slightly lower but beat expectations, at 88.5 (est. 86.8, prior 88.7), with less weak current assessment and expectations.
Interest rates
US bond yields fell and the curve flattened, despite hawkish rhetoric from Fed officials and expectations of a hawkish message from Powell at Jackson Hole on Friday. 2yr government bond yields range traded between 3.35% and 3.40% and settled at 3.36%, and 10yr government bond yields fell from 3.13% to 3.02%.
Australian bond yields took trend from US price action, long end yields slightly underperformed their US counterparts. 3yr government bond yields (futures) fell from 3.36% to 3.31%, and 10yr government bond yields (futures) fell from 3.72% to 3.63%. Markets are full priced for a 25bp hike in September, and pricing in an 90% chance of a 50bp hike. Cross market spreads widened on the back of AU underperformance, with the AU-US 10yr bond spread now at 60bps.
Credit indices reflected the broader sentiment to be better ahead of Powell this evening with Main in 2.5bp to 107 and CDX 2bp tighter at 81, with US cash spreads also 1-2bp tighter as supply was once again absent in the US. Funds flows data wasn’t positive as Lipper reported IG funds returned to outflows after a positive run in recent weeks and HY funds recorded their second largest outflow of the year. Primary activity was limited to Europe which saw 8 IG issuers priced ~EUR7bn. Deals were largely in the fins space with Johnson Controls EUR600M 6yr deal the only corporate on the board. We also saw BNP complete a EUR1.5bn 7yr SNP at MS+160, DB with a EUR1.5bn 8nc7yr SNP at MS+295 and SHBASS priced a EUR750M Sen Pref. at MS+65.
Commodities
Crude markets softened ahead of Fed Chair Powell’s speech in Jackson Hole. The October WTI contract is down $2.37 at $92.52 while the October Brent contract is down $1.37 at $99.85. The drop in prices was despite comments from the Iraqi state-run oil marketing company SOMO noting that “OPEC+ has effective and realistic means to deal with the various challenges facing the oil markets, such as the divergence between the physical and paper markets” adding weight to recent concerns expressed by Saudi officials. OPEC+ will meet Sep 5 and recent comments suggest OPEC+ members may be considering “activating new framework mechanisms that are compatible with the reality of the market” according to SOMO comments. Meanwhile gas markets continued their aggressive move higher with the European Sep TTF contract up another 10% on the day and 33% over the last 5 sessions ahead of another 3-day shutdown of the Nord Stream pipeline at the end of the month.
Metals rose helped by Chinese stimulus news with aluminium up 0.2% at $2,434, copper up 1.3% at $8,143 and nickel up 2.8% at $21,950. The circa CNY1tn of measures announced by the Cabinet including 300bn of investment in infrastructure may lift demand for physical metals while surging energy costs continue hitting smelting capacity in the months ahead.
Finally note that iron ore markets were surprisingly unexcited by the Chinese stimulus package. The Sep SGX contract is down a modest 25c at $104.05 while the 62% Mysteel index also fell 25c to $101.80. The ongoing energy crisis in the drought stricken southern region is being exacerbated by heavy rains and flooding in the top three coal-producing regions of Shaanxi, Shanxi and Inner Mongolia cutting coal output.
Day ahead
Australia’s calendar remains quiet today, with July retail sales data due Monday.
The Kansas City Fed’s annual Jackson Hole monetary policy symposium will begin at 10am AEST; Federal Reserve Chair Powell is due to speak at the event (Sat 12am Syd).
US personal consumption expenditure inflation is consolidating at high levels and is expected to fall as price pressures gradually abate through this year (market f/c: 0.0%mth, 6.4%yr headline; 0.2%mth, 4.7%yr core). Consequently, personal spending will remain at risk as inflation continues to erode the purchasing power of household’s personal income (market f/c: 0.5% and 0.6% respectively).
US wholesale inventories are expected to post another gain in July (market f/c: 1.3%) and the final estimate for August’s University of Michigan Consumer Sentiment survey is due (market f/c: 55.3).
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