Markets Daily
Sentiment weakened amid headlines on US banks and some softer US economic data. The Bank of England hiked as expected. The US dollar made broad gains, AUD sliding to 0.6700. Today’s low-key calendar includes UK Q1 GDP and US May consumer sentiment.
Yesterday
Australia’s data calendar was quiet. China April CPI eased to just 0.1%yr while producer prices also printed below expectations, -3.6%yr. Regional equity markets were mixed to a little weaker. The ASX 200 closed virtually flat. AUD/USD traded mostly 0.6770/90 until early London trade when a wave of USD buying spilled over to the Aussie, which slid to 0.6730.
Currencies/Macro
The US dollar index is up 0.6% on the day a somewhat puzzling rise. EUR/USD fell from 1.0980 to 1.0900 and then ranged for much of the session around 1.0915. GBP/USD rose about 40 pips in the initial response to the BoE rate hike, but soon succumbed to broad USD strength, eventually down 1.1 cents at 1.2515. USD/JPY traded a volatile range of 133.75 to 134.84 and starts Friday Sydney trade around 134.50. AUD/USD fell 75 pips or -1.1% over the day to 0.6705. NZD/USD 70 pips to 0.6300. AUD/NZD fell further, from 1.0640 to 1.0604 – a one-month low, before recovering to 1.0640.
The Bank of England MPC raised the bank rate 25bp to 4.50%, as was widely expected, the 7-2 vote (two dovish dissenters voting for no change) also as expected. A more favourable economic outcome of low growth rather than recession and tight labour market conditions were noted. Guidance remained hawkish – if high inflation persists, they will tighten policy further.
US PPI inflation in April was +0.2%m/m and 2.3%y/y (est. +0.3%m/m and 2.5%y/y), with ex-food and energy +0.2%m/m and 3.2%y/y (est. +0.2%m/m and 3.3%y/y). Weekly initial jobless claims rose to 264k (est. 245k, prior 242k) although continuing claims were benign at 1.813m (est. 1.820m, prior 1.801m).
The US FDIC announced plans to increase fees on all large banks (assets over USD50bn) in order to help covering insured (and potentially uninsured) deposits. The proposals also indicated that holders of bank shares would not be protected.
Interest rates
US 2yr treasury yields fell from 3.93% to 3.81% before rebounding to 3.90%, while the 10yr yield fell from 3.44% to 3.34%, currently 3.38%. Markets currently price the Fed funds rate, currently 5.125% (mid), to be 1bp higher at the next meeting on 15 June, but around 80bp lower by year end.
Australian 3yr government bond yields (futures) fell from 3.08% to 2.96%, the 10yr yield from 3.43% to 3.30%. Markets currently price the RBA cash rate, currently 3.85%, to be 2bp higher at the next meeting on 6 June, with a peak of 3.90% priced for August.
New Zealand markets were yesterday pricing the RBNZ OCR, currently 5.25%, to be 23bp higher at the next meeting on 24 May and to peak at 5.56% in August 2023.
Credit indices were little changed with Main giving up early gains to close flat at 87 and CDX half a bp wider at 81, with cash spreads also fairly muted. Primary markets were active in Europe where 11 issuers priced EUR10.25bn. Corporates were led by AT&T’s EUR3.25bn 3 tranche offering (2/8/11yr) and L’Oreal’s EUR2bn (2/5yr) deal, while banks saw 3 of the 5 deals in covered form. There was also talk that Melbourne Airport’s EUR deal may be in the mix this evening. The US saw just the 2 issuers with Texas Instruments pricing USD1.6bn in 3 parts (5-40yr) and EIDP USD1.2bn of 3/10yr.
Commodities
Crude gave back the rest of the week’s gains as risk sentiment soured on potential US debt default and softer US jobs data. The June WTI contract is last down $1.08 at $71.48 while the July Brent contract is down 89c at $75.52. The losses were despite US Energy Secretary Jennifer Granholm suggesting that after a congressionally mandated drawdown from the SPR in June is completed “we will flip the switch and hope to be able to purchase” crude for the SPR. The OPEC monthly also increased oil demand by 50kbpd in 2023, helped by China which “seems to have improved further after its reopening efforts and growth in the first half of 2023 appears to be well supported”. However, China was reported to have issued an additional batch of fuel export quotas to its biggest refiners as domestic demand slowed. And in energy markets, the North American Electric Reliability Corp warned that most of the US “may experience shortfalls” of power amid temperature spikes in coming months. The group will release its full seasonal assessment next week. Thermal coal markets in Europe weakened further with the June ARA contract down 3% to a fresh 15-month low.
Metals were slammed on soft US jobs data with copper down 3.4% to $8,188, zinc down 3% to 2,543, nickel down 2.9% to $21,780 and aluminium down 2.4% to $2,213. That’s a low back to December last year for copper, to November last year for aluminium, to October last year for nickel and to November 2020 for zinc. Weak Chinese inflation data added to the level of concern in metals markets. The Chilean government approved a copper tax hike after a series of concessions were made to win over support. The bill now heads to the lower house for a potential vote. The new operating profit tax will be set at 46.5% for large copper producers, with the average effective rate set at 45% according to Plusmining versus 41 to 44% for Chile’s main rivals.
Finally note that iron ore slumped back below $100 with weak China CPI adding to the waning risk sentiment. The June SGX contract is down $2.70 to $98.70 while the 62% Mysteel index is down $4.45 to $106.70. Mysteel noted that 11 Chinese steel mills have lowered prices for construction related steel by 30-250 yuan a ton due to weak sentiment and a lack of inquiries from the construction industry.
Day ahead
The Q2 RBNZ inflation expectations survey could show some softening from 3.30%yr in Q1.
China: Intra-regional trade expansion should act as an underlying support to the current account surplus in Q1.
UK: A weak showing in GDP growth is anticipated in Q1, reflecting a subdued outlook for the year as inflation and interest rate pressures impact (market f/c: 0.1%qtr, 0.2%yr, with March month GDP flat). The trade deficit is also expected to widen slightly in March (market f/c: -£5.0bn).
US: With lasting headwinds around the cost-of-living, University of Michigan consumer sentiment will likely remain in pessimistic territory in the preliminary May reading (market f/c: 63). Meanwhile, April import prices will continue to decline on an annual basis (market f/c: -4.8%yr). SF Fed president Mary Daly and St. Louis Fed president Jim Bullard are also due to speak.
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