Markets Daily
The US dollar and bond yields rose sharply on strong US GDP data and a report that the Bank of Japan could tighten monetary policy today. AUD slipped to 0.6700. EUR fell after the ECB softened its guidance on any future hikes after delivering the expected 25bp. Along with the BoJ today we will see Australia June retail sales and US Q2 employment costs and June personal income and spending.
Yesterday
Australia’s terms of trade turned sharply lower from historically elevated levels in Q2. Export prices dropped -8.5%qtr, import prices only -0.8%. AUD/USD was choppy, rallying sharply from 0.6760 to 0.6815, slipping back under 0.6800, rising to a 0.6821 session high then easing to 0.6790. The sharpest A$ gains aligned with broad USD decline, but not aligning with obvious news or data. Regional equities were mostly quite upbeat in the wake of the FOMC meeting, the ASX 200 +0.7%.
Currencies/Macro
The US dollar rose against all G10 FX except JPY on the day. EUR/USD initially rose pre-ECB, but then fell from around 1.1150 to 1.0980, the strong US GDP data also weighing. GBP/USD dropped 1.5c or -1.1%. USD/JPY pushed above 141.00 following the firm US data but then tumbled to around 139 as Nikkei News claimed that the BoJ today would discuss allowing the 10-year JGB yield target greater flexibility. AUD/USD unwound its local session rally, eventually steadying around 0.6700, down half a cent on the day. NZD/USD fell a net 25 pips to 0.6185. AUD/NZD fell from 1.0885 to 1.0845.
The ECB raised its policy rates by 25bp (refinancing rate to 4.25%, marginal lending rate to 4.50% and deposit rate to 3.75%), as was widely expected. However, there was a less hawkish nuance, dropping the “need to do more” tightening to get inflation towards target, and stating that they are now operating on a meeting-by-meeting basis and driven by data dependency.
US GDP in Q2 was stronger than expected at 2.4%q/q annualised (est. 1.8%). Within the report, personal consumption rose 1.6% (est. 1.2%), the price index rose 2.2% (est. 3.0%), with core PCE at 3.8% (est. 4.0%). Durable goods orders in June were stronger than expected, rising 4.7%m/m (est. +1.3%m/m), with ex-transport +0.6%m/m (est. +0.1%m/m) and non-defence/ex air +0.2%m/m (est. -0.1%m/m).
Weekly initial jobless claims at 221k (est. 235k) and continuing claims at 1.690m (est. 1.750m), indicated the labour market remains robust. Pending home sales rose 0.3%m/m in June (est. -0.5%m/m). The Kansas Fed’s manufacturing survey remained weak at -11 in July (est. -10, prior -12). New orders fell to -20 from -14, and production fell to -20 from -10. However, employees rose to +4 from -12, and prices paid rose to +9 from +4.
Interest rates
US 2yr treasury yields jumped from 4.82% to 4.93%, while the 10yr yield rose from 3.85% to 4.00%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 6bp higher at the next meeting on 21 September.
Australian 3yr government bond yields (futures) rose from 3.80% to 3.92%, the 10yr yield from 3.93% to 4.07%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 7bp higher at the next meeting on 1 August, and another 17bp higher by February.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be 6bp higher at the next meeting on 16 August and to peak at 5.65% in November.
Credit indices reflected the momentum shift in the US session with Main closing 2bp tighter at a record low for the year of 67.5bp, however CDX, which had seen positive early momentum (to 62.5) is now 1.5bp wider on the day at 65. Cash credit has been slower to react and is little changed, while the positive backdrop early saw activity return to US primary markets with 4 issuers pricing USD6.95bn.
Commodities
Crude markets pushed higher despite the surge in US yields as strong US data and expectations of further tightening in the physical market into Q4 lifted sentiment. The September WTI contract is up $1.02 at $79.80 while the September Brent contract is up 92c at $83.84. BoA’s Francisco Blanch warned that Saudi Arabia and Russia’s supply cuts had drained inventory to lows that the market is “just not positioned for”. UBS hoped that “oil investors [had] fastened their seat belts as prices took off,” noting that “oil markets should tighten further” as Saudi cuts take effect. Finally, StanChart noted they expect large supply deficits over the next two months as a seasonal increase in demand combines with producer output restraint.
In products markets, the NY Harbor August diesel contract jumped another 2.6%, bringing gains for the month to 22% with prices approaching highs for the year. A fire at Repsol’s Bilbao refinery in northeast Spain, coming on top of the Exxon Baton Rouge FCC being taken offline for up to 3-4 weeks added to the tightness in diesel markets with the August European gasoil contract up 3.6% yesterday and 11% over the last week. And finally in gas markets, Shell CEO Wael Sawan noted “I am encouraged by the stockpiles that Europe has”, while forecasts of cooler temperatures into the next week helped prices decline. The August TTF contract is down 17% from the previous day’s highs.
Strong US data saw metals giving back more of the gains earlier in the week as the US$ jumped. Copper is down 0.77% to $8,551 while zinc fell 0.8% to $2,454. The head of the mining ministry in Chile was said to be planning an international roadshow for a copper-smelting proposal as it seeks to modernise existing plants and new smelters and refineries with a new “mega” smelter needed in Antofagasta.
Iron ore markets showed signs of retracing some of the recent gains with signs of weaker global demand for steel weighing on sentiment. The September SGX contract is down another $2.90 to $110.10 while the 62% Mysteel index is down $3.60 to $117.05. ArcelorMittal cut its steel demand outlook on weaker US and European consumption. Apparent global steel demand ex-China is set to rise between 1 and 2%, down from 2 to 3% forecast in February. In China, the Minister of Housing and Urban-Rural Development called for “further efforts to consolidate the trend of real estate market stabilisation” after a meeting with property developers. Press has been speculating that regulators are weighing scrapping rules that disqualify people who have had a mortgage but repaid it from being considered a first-time buyer, meaning they are subject to higher downpayment and more restrictive borrowing limits.
Day ahead
Australia releases retail sales and producer price data at 11:30am Syd. Another weak reading on nominal retail sales is anticipated in June given the pressures around interest rates and cost-of-living (Westpac f/c: –0.2%). It will also be interesting to see how supply chain improvements will impact the PPI in Q2.
The Bank of Japan announces its policy decision today (no set time but likely any time from 12:30pm Syd, press conference 4:30pm Syd). Multiple BoJ ‘source’ stories hit newswires a week ago, suggesting that while policy change would be discussed at the meeting, a steady hand was very likely. This is despite new quarterly forecasts expected to confirm an upward revision to FY23 core inflation. There is however some debate over the FY24 and FY25 projections. BoJ rhetoric including Governor Ueda points to ongoing concern over the sustainability of the rise in underlying inflation. Despite the apparently high probability of a steady hand, the BoJ retains the element of surprise so markets will be on edge in case of e.g. a Yield Curve Control change from 10yr to 5yr (keeping “around” 0% target). A greater risk of a YCC change is now priced in following the Nikkei story released overnight.
NZ: June’s employment indicator should provide another robust read on labour market activity (Westpac f/c: 0.4%).
With growing pessimism among businesses, EC survey of consumer and industrial confidence likely remains in a fragile state (market f/c: 95).
US: Given the lasting tightness in labour market conditions, the Employment Cost Index is set to post another solid gain in Q2 (market f/c: 1.1%). A similar theme has been seen in the personal income data, allowing momentum in personal spending hold up over the near-term (market f/c: 0.5% and 0.4% respectively). The June PCE deflator will provide some extra detail on inflation, but it will likely post a similar result to the CPI (market f/c: 0.2%m/m and 4.2%y/y, prior 4.6%y/y).
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