Markets Daily
Another wave of concern over US regional banks drove US Treasury yields and equities sharply lower. Oil prices plunged. AUD trimmed its post-RBA hike gains to 0.6665. Today’s calendar includes Australia March retail sales and US April services ISM ahead of the FOMC policy decision. Japan and China are closed.
Yesterday
The RBA raised the cash rate 25bp to 3.85%, as forecast by only 9 of 30 economists in the Bloomberg survey and priced a mere 3bp in markets. The statement focused on “returning inflation to target within a reasonable timeframe” given headline CPI at 7% and services inflation “still very high.” The RBA Board concluded that “Some further tightening of monetary policy may be required” despite weakening household consumption and “below-average” global growth. AUD/USD jumped from 0.6630 to as high as 0.6715. AUD/NZD popped from 1.0730 to 1.0830.
Currencies/Macro
The US dollar was mixed on the day. EUR/USD dipped to 1.0942 amid the early NY wave of risk aversion around US banks but later rebounded to 1.1000, net +0.3%. GBP/USD steadied down 25 pips or -0.2% at 1.2470. The Japanese yen was strongest in the G10 as US yields plunged. USD/JPY fell from 137.50 to 136.50. AUD/USD initially extended RBA-related gains to 0.6717 but then partially retraced, to 0.6665. The Kiwi outperformed for no obvious reason, NZD/USD up 0.5% over the day to 0.6210. AUD/NZD completely retraced the earlier reaction to the RBA’s surprise 25bp hike, returning to 1.0725.
RBA Governor Lowe spoke at a dinner in Perth following the Board meeting there. His speech added little to the statement but we will receive plenty more detail from the RBA both today and especially in Friday’s quarterly policy statement.
US March JOLTS job openings pulled back to 9.59mn (est. 9.736mn, prior revised to 9.974mn from 9.931mn) to confirm the slide back below 10mn (to lowest since May 2021 when the post-pandemic surges were already in play), though the levels are historically high.
US March factory orders missed estimates. Headline orders rose +0.9%m/m (est. +1.3%m/m) after a revised -1.1%m/m in Feb. (initially -0.7%m/m). The more important ex-transport orders fell -0.7%m/m (est. flat) with prior Feb reading revised to -0.7%m/m from -0.3%m/m.
Eurozone preliminary April CPI was firmer than anticipated. Headline CPI actually lifted to 7.0%y/y (est. unchanged at 6.9%y/y) while core CPI was in line at 5.6%y/y (prior 5.7%y/y). Although the slowing of core CPI, if marginal, was mildly encouraging, market attention was also focused upon services inflation, which ticked up to 5.2%y/y from the prior 5.1%y/y and helped stoke market expectations for a more hawkish ECB.
Eurozone final April manufacturing PMI edged up to 44.5 (Flash 44.0) with UK also ticking up more firmly to 47.8 (Flash 46.6).
Interest rates
US bond yields fell and the yield curve steepened following safe haven buying after renewed banking sector fears, as well as some weak economic data showing a slowdown in the labour market. Markets look towards Wednesday’s FOMC meeting, where an 85% chance of a 25bp hike is priced in. 2yr government bond yields fell 18bps to 3.96%, and 10yr government bond yields fell 14bps.
The RBA delivered a 25bp hike yesterday, which was a surprise to most in markets, which only had the hike 10% priced in. Overnight movements in AU bonds followed US price action but underperformed their US counterparts. 3yr government bond yields fell 8bps to 3.09%, and 10yr government bond yields (futures) fell 7bps to 3.37%. The AU-US 10yr bond spread widened following the sell off after RBA’s hike, currently at -55bps.
Credit spreads reacted to the risk off move with Main 4bp wider at 87 as it played catch up to yesterday’s moves and CDX out another 2bp to 80. US cash spreads were also 2-4bp wider in the corporate space with banks underperforming once again, and while primary activity got away in Europe, it was quieter in the US with mixed outcomes. Europe saw 6 issuers price ~EUR4.6bn including post earnings deals from BBVA, Nordea and StanChart and an SLB from Carrefour. StanChart priced its EUR1bn 8nc7yr at MS+185 (BBSW+259). The US saw just the 2 issuers last night with Glencore pricing USD1bn across 5/10yr after originally looking to include a 3yr tranche and looking for USD2bn. Barclays produced the largest deal of the day with its 2 tranche, USD4bn deal split evenly across a 4nc3yr at T+215 (BBSW+224) and an 11nc10yr at T+280.
Commodities
Weak US jobs data ahead of a likely Fed hike plus concerns about mid-sized banks all played a part in the largest percentage fall in crude markets back to the beginning of the year. The June Brent contract is down $4.09 to $71.57 while the July Brent contract is down $4.05 to $75.26. Morgan Stanley slashed its forecast for Brent crude for Q3 to $77.50 from $90 due to higher-than-expected Russian supplies and the return of Chinese demand largely having played out. Russia’s seaborne flows jumped above 4mbpd in the week to April 28 according to Bloomberg shipping data, suggesting there has been no sign of a sustained drop in crude exports and Iranian Oil Minister Javad Owji said that output has increased to more than 3mbpd. However, a Bloomberg survey had OPEC output in April down by 310kbpd to 28.8mbpd due to the Iraqi pipeline halt and force majeure in Nigeria. One tanker being tracked by Bloomberg gave up waiting for the pipeline to reopen and left the port of Ceyhan Monday. Turkey halted Iraqi shipments late March. Workers in Nigeria returned last week, allowing production and exports to restart.
Meanwhile demand for fuels in the US continues falling with some describing the economy as in a “freight recession”. The FT noted that demand for diesel in the US was about 6% lower in Q1 2023 compared with the same period last year while petrol sales volumes sold in the week to April 22 were down 3% versus the same week last year, down 6% versus the same week two years ago and down 20% in 2019. The June NY diesel contract hit a fresh 16-month lows.
In gas markets, European prices fell to fresh 21-month lows on subdued demand. And in industry news, Sinopec and Total are among companies said to be in talks with Saudi Aramco on plans to fund midstream and downstream projects at the $100bn Jafurah gas development. The field is estimated to hold a massive 200tcf of gas with production expected in 2025, reaching 2bcfpd of sales by 2030.
Metals markets were mixed with copper down 0.75% to $8,531, zinc down 2.1% to $2,592 but nickel up 3.2% to $25,000. Codelco’s Chairman Pacheco said that Q1 production “wasn’t good” with lower ore quality and operation setbacks impacting output. Codelco produced 326kt of copper in Q1.
Iron ore markets remained soft though activity was subdued due to the Chinese holiday. The June SGX contract is down 35c from the Sunday night session to $101.50 while the 62% Mysteel index is down $1.95 to $104.75. China’s Baoshan Steel has joined forces with Saudi Aramco to sign a deal to build a steel plant in Saudi Arabia that will produce 1.5mta of steel plate rom 2026.
Day ahead
At 11:30am Syd, another subdued gain in Australia nominal retail sales is anticipated in March (Westpac f/c: 0.2%). When we see the inflation-adjusted Q1 retail sales data next week, it should show a considerable quarterly contraction.
The RBA’s Marion Kohler (Head of Economic Analysis) is due to speak at a CEDA conference in Perth at 2:55pm Syd.
China markets remain closed today, reopening tomorrow. Japan markets are now closed for the rest of the week.
Eurozone: The unemployment rate is expected to hold at a historic low in March (market f/c: 6.6%).
The FOMC decision is due at 2pm NY (4am Syd), with Chair Powell’s press conference 30 minutes later. Data received since the March meeting has consistently characterised the US economy as losing momentum but yet to stall. As a result, inflation risks have continued to recede only slowly. Commentary from FOMC members ahead of the pre-meeting blackout consequently indicated a desire to take out a little more insurance before pausing. To us and the market, this points to one further hike in this cycle to a peak of 5.125%. This last hike is unlikely to tighten financial conditions. Indeed, with risks around growth and the labour market growing, term interest rates and the US dollar are expected to weaken over coming months. By year-end, it is our expectation that the US will be in recession and inflation will no longer be the pre-eminent concern. Therefore, the first cut is now expected in December, with a further 200bps of easing to follow in 2024.
Ahead of the FOMC we see the ISM services PMI for April. Consensus is for a muted 51.8 after 51.2 in March.
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