Markets Daily
US bond yields rose slightly on hawkish Fedspeak though lower inflation expectations capped gains. JPY was weak after the Bank of Japan’s steady hand while AUD remained around 0.6875. Today’s data calendar is very low-key and US markets are closed for the Juneteenth holiday.
Friday
Australia’s data calendar is now quiet for several days. AUD/USD extended its recent rally to a high of 0.6900 (high since 21 February) but then retreated to 0.6885 for no net change. Regional equity sentiment was upbeat, the ASX 200 outperforming most with a 1.1% gain. The Bank of Japan kept policy on hold as widely expected by economists but the yen still weakened, USD/JPY +60 pips to 140.70 initially and then higher again later.
Currencies/Macro
The US dollar was little changed against most G10 currencies Friday, JPY weakness the main exception. EUR/USD ranged between 1.0918 and 1.0971, returning to 1.0940. GBP/USD rose 40 pips to 1.2825, sterling outperforming as this week’s Bank of England meeting draws closer. USD/JPY rose 1.1% to 141.92 – a 7-month high – in the wake of the BoJ’s steady hand. AUD/USD is net flat around 0.6875, having touched 0.6900, a high since 21 February. NZD/USD returned to 0.6235, leaving AUD/NZD at 1.1030.
US June consumer sentiment (University of Michigan) rose to 63.9 (est. 60.0, prior 59.2), with higher expectations at 61.3 (est. 55.2, prior 55.4) and current conditions at 68.0 (est. 65.1, prior 64.9). 1yr-ahead inflation expectations slumped to 3.3% (est. 4.1%, prior 4.2%), and the 5-10yr ahead measure edged down to 3.0% (as expected, prior 3.1%).
Richmond Fed president Barkin said inflation remains too high and stubbornly persistent, and he is comfortable with more tightening if necessary. He reiterated the lesson of the 70s: "if you back off inflation too soon, inflation comes back stronger, requiring the Fed to do even more, with even more damage. That's not a risk I want to take." He added that with "forward looking real interest rates now positive across the curve, we have been moderating the pace of those increases."
Fed governor Waller (hawk) said he is not sure whether the recent bank turmoil intensified credit tightening. He also said inflation is not declining as quickly as he had expected, and is concerned that core inflation has stalled. Chicago Fed president Goolsbee (dove) said the central bank needed to pause interest rate increases to be able to better assess conflicting economic data: “I think of it as a reconnaissance mission, pausing now to go scope it out before charging up the hill another time.”
ECB centrist Villeroy appeared more cautious about the lagged effects of policy tightening, but the clear message from the majority of ECB speakers was that July is highly likely to result in a hike and that September should be live. A couple even suggested that post-September hikes should not be ruled out, while others emphasised data dependency.
Interest rates
US 2yr treasury yields rose from 4.64% to 4.71% via 4.77%, while the 10yr yield rose from 3.72% to 3.76% via 3.80%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 20bp higher at the next meeting on 27 July, and another 4bp higher in September.
Australian 3yr government bond yields (futures) ranged between 3.94% and 4.00%, while the 10yr yield ranged between 3.98% and 4.06%. Markets are pricing the RBA cash rate, currently 4.10%, to be 17bp higher at the next meeting on 4 July, and another 41bp higher in November.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be 3bp higher at the next meeting on 12 July and to peak at 5.61% in October.
Credit spreads were firmer to close the week with Main in 2.5bp to 75.5, CDX a bp tighter at 69.5 and approaching its lows for the year (67.5), while US cash spreads were also 1-3bp tighter as primary markets remained shuttered in the US ahead of the long weekend (just USD10bn priced for the week). Europe was also quiet with just the single IG issuer (BPCE covered).
Commodities
Crude markets finished the week on a high, helped by optimism surrounding China stimulus and the Fed on hold decision. The July WTI contract closed up $1.16 Friday at $71.78, up 2.29% on the week while the August Brent contract closed up 94c at $76.61, up 2.4% on the week. The gains were despite Iran’s May crude exports being assessed at the highest in 5yrs, exceeding 1.5mbpd in May and rumours of a ‘crude exports for nuclear pause’ deal. A Turkish delegation will also meet Iraqi officials in Baghdad today to discuss the resumption of oil exports through the Iraq Turkey pipeline which halted on March 25. Head of Rosneft argued that OPEC needs to monitor not just production but also exports noting that some countries export 90% of what they produce while Russia exports only about 50% “which puts our country at a disadvantage given the current monitoring mechanism in OPEC+”. Russian exports of fuels like diesel were up 12%mm in early June according to Vortexa data with cargoes being snapped up by nations like Saudi Arabia and Turkey. Greg Sharenow from Pimco noted that lost Russian barrels plus the wildfires in Canada have contributed to tightness in the heavy, sour market, but this has been balanced by ample availability of light sweet crude production from the US which is confusing the market. As a sign of rising supply US supply, the June22 June 23 WTI spread flipped in contango after Cushing stocks hit the highest since June 2021.
In fuel markets, Germany’s Vohburg refinery halted supply of heating oil on Wednesday last week with no signs of a near term restart. Shell was also said to be grappling with outages at its two biggest oil refineries in Europe, with both the Rheinland complex near Cologne in Germany and the Pernis plant in Rotterdam being forced to cut runs. Diesel’s premium to Brent hit its highest since March. The July NY heating oil contract rose 8% last week, hitting a 2-month high while the NYMEX gasoline crack spread hit a high back to July 2022. And US gas markets posted their biggest weekly gains in 3 months last week, with the July contract up 17% on hotter than usual weather in Texas and falling rig counts. European contracts saw profit taking into the end of the week with the July TTF contract down 15% Friday though still up 9% on the week.
Metals markets were mixed with copper up 0.3% to $8,585 while zinc fell 0.4% to $2,471. Metals saw solid gains on the week helped by talk of China stimulus and the Fed’s ‘skip’ outcome. Copper gained 2.55% on the week while zinc rose 2.8% and nickel 8.55%. Speculative positions on Comex copper flipped to the most bullish in 2 months, helped by global copper inventory falling 15% so far this month and 25% so far this quarter. However, LME warehouses saw the biggest jump in copper inventories in almost a year driven by inflows from New Orleans.
Iron ore markets saw further gains Friday as the State Council met to consider various plans to boost demand, strengthen the real economy and defuse risks in key areas. No details were given on what the measures were discussed or when details will be released though Xinhua reported they will be “promptly unveiled and implemented without delay”. The July SGX contract closed up $2.10 from the same time Friday at $114.00 while the 62% Mysteel index closed up 20c at $115.80. Dalian iron ore is up 16% month to date while billet prices are up 7% so far this month at 2-month high.
Day ahead
US markets will be closed for the Juneteenth public holiday. A lack of inventory should provide some level of support to the NAHB housing market index in time (market f/c: 51).
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