Markets Daily
UK inflation was softer than expected, sparking a slide in UK yields and the pound and a surge in UK equities. Other market movements were muted, the US dollar mostly firmer, trimming AUD to 0.6775. Today’s calendar includes Australia June employment and second-tier US data.
Yesterday
The six-month annualised growth rate in the Westpac-Melbourne Institute Leading Index, which indicates the likely pace of Australian economic activity relative to trend three to nine months into the future, lifted to -0.51% in June from -1.01% in May. AUD/USD started to weaken late morning, perhaps in sympathy with a decline in the Chinese yuan, printing a low of 0.6769 before steadying around 0.6785, -0.4% on the day. China equities were weak in morning trade but later trimmed losses, while other regional bourses were mostly upbeat in line with the US rally. The ASX 20 finished +0.6%.
Currencies/Macro
The US dollar was either flat or stronger against G10 currencies on the day. EUR/USD fell 25 pips to 1.1200. GBP/USD sank from 1.3030 pre-UK CPI to as low as 1.2868, later trimming losses to 1.2940, sterling weakest in the G10. USD/JPY rose 0.6% to 139.60. AUD/USD extended its local session decline to 0.6750 before edging back to 0.6775, net -0.6% on the day. NZD/USD spiked to 0.6315 on the above-consensus Q2 NZ CPI but later steadied at 0.6260, a touch lower over the day. AUD/NZD slipped -0.4% over the day to 1.0815.
UK CPI in June was softer than expected, rising 0.1%m/m and 7.9%y/y (est. +0.4%m/m and 8.2%y/y, prior 8.7%y/y), while core rose 6.9%y/y (est. unchanged at 7.1%y/y).
Eurozone CPI in June was finalised unchanged from the preliminary release at 5.5%y/y, but core was revised up to 5.5%y/y from 5.4%y/y.
Interest rates
A mixed session in fixed income markets overnight, as supply weighed on European governments and US Treasuries rallied. After an initial boost from a lower than expected UK CPI number which helped Gilts and EGB yields drop, there was a push higher in yields as supply came to the market. Gilts still managed to hold significant gains given the inflation drop.
Treasuries rallied, but finished off the lows in yield. The curve shape once again saw flattening, particularly in the sub 10 year tenors. The US auctioned $US12bn of 20 year bonds, which came a little wider than the market at the time. The rush to market from corporates and banks as yields have dropped and earnings are released has weighed on the market.
Credit spreads were fairly subdued in line with equity moves. Main was unchanged at 69.5, CDX half a bp wider at 65.5 and cash spreads flat to a bp tighter with most interest remaining in bank supply in the US.
Commodities
Crude markets saw modest losses despite a bullish EIA inventory read as the US$ clawed back some of its recent losses. The August WTI contract is down 40c at $75.35 while the September Brent contract is down 10c at $79.53. The EIA reported crude inventory fell 708kb last week but stocks at Cushing fell 2.9mb, the largest draw since October 2021. Gasoline inventory fell by 1.06mb, helping the August RBOB gasoline contract to a 1 year high. However, distillate demand fell for the 8th consecutive week to the lowest seasonal level since 2009. Goldman argued that crude markets can push higher in the second half of 2023 as the market flips into deficit, but Brent is unlikely to rise to $100 this year. Citigroup’s Ed Morse argued that crude is unlikely to fall below $70 but it would take a “wild card” to trade above $90. In LNG markets, Woodside CEO Meg O’Neill was reported as being in talks with the Australian government to resolve policy concerns given that LNG buyers are “seeking certainty that Australia will remain a trustworthy and reliable supplier of LNG”.
Metals were lower again across the board as concerns about Chinese property developers and copper supply from the DRC weighed on sentiment. Copper is down another 0.48% to $8,432 while aluminium fell 0.8% to $2,185 and nickel fell 0.9% to $20,900. As noted yesterday, the settlement of a dispute between CMOC and Gecamines in the DRC will allow billions of dollars’ worth of copper and cobalt that have been stored at the Tenke Fungurume mine to start being shipped to China. SHFE copper inventory has risen for the last 3 weeks to a 1 month high. And Ecuador’s Mirador copper mine received approval for an expansion that would allow it to more than double capacity to 140kt/d from 60kt/d. Alcoa reported worse than expected Q2 earnings though it is forecasting an improvement in production costs in the third quarter and maintained aluminium guidance at between 2.5 and 2.6mt for the year.
Iron ore markets were mixed as Rio warned that China’s economic recovery had “fallen short of initial market expectations, as the property market downturn continues to weigh on the economy” and steel demand encounters “persistent headwinds”. The September SGX contract is up 90c from the same time yesterday at $112.50 though the 62% Mysteel index is down $1.40 at $114.55. Rio maintained guidance for full year iron ore shipments at the upper end of 320 to 335mt range. Vale maintained its guidance for full year shipments at 310-320mt. BHP will report later today. Rio noted that negotiations over the co-development of the massive Simandou project in Guinea continued to show progress though gave no production timeline.
Day ahead
At 11:30am Syd, Australia’s June labour force statistics should reflect stronger vacancies which will have boosted employment (Westpac f/c: +25k, market f/c: +15k). The unemployment rate is expected to remain steady as is facilitated helped by strong jobs growth (Westpac f/c: 3.6%, market f/c: 3.6%).
US: Initial jobless claims should echo signs of labour market tightness (market f/c: +240k). Existing home sales in June are expected to remain low as supply and affordability constraints weigh in (market f/c: -2.2%mth). The July Philadelphia Fed Index should highlight risks to the manufacturing sector (market f/c: -10pts).
Eurozone: July’s consumer confidence should reflect persistent inflation and rate pressures.
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