Markets Daily
Bond yields and the US dollar rose slightly following solid US jobless claims data, while US and European equities rose for the first time this week. AUD outperformed the G10, up to 0.6575. Today’s calendar includes Japan December CPI, UK December retail sales and US January consumer sentiment.
Yesterday
Australia December employment collapsed –65.1k (–0.5%) in the month. That compares to Westpac’s forecast of +35k and a softer market consensus of +15k. The number of people employed full time declined by -106.6k – largest monthly fall on record outside of the COVID-19 period. Part time employment partly offset this fall, increasing by 41.4k. The ABS points to shifts in seasonal patterns as an important driver of recent results for employment. A possible explanation for this may be the growing importance of Black Friday Sales in Australia. This has likely meant that employers are hiring extra staff in October and November, instead of December. There was a contraction in the size of the labour force (–66.0k), reflecting that many individuals decided to “exit” the labour force in the month. That resulted in the unemployment rate holding flat at 3.9%. AUD slipped from 0.6550 to 0.6525 on the data but later recovered to 0.6565 with help from a softer USD/majors tone.
Currencies/Macro
The US dollar was mixed against G10 FX on the day. EUR/USD fell 15 pips to 1.0865. GBP/USD dipped after the US jobless claims data but later recovered to gain 0.1% at 1.2690. USD/JPY was net flat at 148.20. AUD outperformed the G10 despite the poor jobs data, overall up 0.3% at 0.6575. NZD/USD fell fractionally to 0.6110, leaving AUD/NZD up 35 pips at 1.0750.
US weekly jobless claims continued to indicate a robust labour market. Initial claims fell to 187k (est. 205k, prior 203k) and continuing claims fell to 1.806m (est. 1.840m, prior 1.832m). Housing starts in December fell -4.3% (est. -8.7%), and building permits rose 1.9% (est. +0.7%). The Philadelphia Fed business survey index rose to -10.6 in January (est. -6.5, prior -12.8 revised from -10.5).
Atlanta Fed president Bostic (voter at 2024 FOMC meetings) urged caution on interest-rate cuts: “In such an unpredictable environment, it would be unwise to lock in an emphatic approach to monetary policy. That is why I believe we should allow events to continue to unfold before beginning the process of normalizing policy…My outlook right now is for our first cut to be sometime in the third quarter this year, and we’ll just have to see how the data progress.”
ECB minutes from their last meeting cited concerns that market pricing of rate cuts could derail the ECB’s disinflation progress.
Interest rates
The US 2yr treasury yield fell 5bp to 4.31%, bounced to 4.38% on the jobless claims data then steadied at 4.35%, while the 10yr yield rose a net 4bp to 4.14%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 1 February, with a 50% chance of a cut in March. Australian 3yr government bond yields (futures) rose from 3.80% to 3.82%, while the 10yr yield rose from 4.25% to 4.31%. Markets currently price the RBA cash rate to be unchanged at the next meeting on 6 February, with a 30% chance of a cut by June. New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged on 28 February, with a 70% chance of a rate cut by May.
Credit indices reflected the regional moves with Main 1.5bp tighter at 61, CDX a bp better to 56 as it followed the late US equity rally and US cash credit was also 1-2bp tighter as primary activity continued. Europe saw 5 issuers price 2.95bn while in the US, 6 issuers priced USD12bn as post earnings bank supply continued.
Commodities
Crude markets rose again with signs of a widening in the conflict in the Middle East plus a bullish EIA inventory report lifting sentiment The February WTI contract is up 2% at $74.01 while the March Brent contract is up 1.5% at $79.05. Following an attack on another US-owned bulk-goods carrier, the US launched another round of strikes on Houthi rebels while Pakistan launched missiles against militants in Iran. On a positive note, the FT reported that Arab nations were developing a plan to end the Israel-Hamas war and create a Palestinian state. The Saudi foreign minister told a panel at the World Economic Forum in Davos “we agree that regional peace includes peace for Israel, but that could only happen through peace for the Palestinians through a Palestinian state”.
The EIA reported crude inventory down 2.49mb to the lowest level since October last year though gasoline stocks rose by 3.08mb to the highest since February 2022 and distillate by 2.37mb to the highest since August 2021, with implied demand at the lowest seasonal level since 2016. US crude production rose 100kb to 13.3mbpd while exports surged by 1.7mb to 5.029mbpd.
Gas markets continued falling with prices in Asia slumping to a 7-month low as well supplied importers were said to be curbing purchases. However, the recent freeze across Texas and Louisiana has disrupted exports of US LNG with the Cameron LNG plant cancelling at least one scheduled shipment and several other planned deliveries from the Corpus Christi facility in Texas also delayed.
Metals showed signs of stabilising on the back of the improved risk environment with copper up 0.5% to $8,312 and nickel up 0.57%. However, aluminium remained the weakest link, down another 0.5% at $2,168 and down almost 10% from the late December highs. That’s despite further signs of plants being shuttered with Alcoa warning of mounting losses at the San Ciprian facility in Spain which has been operating at half capacity for alumina output since Q3 2022 while aluminium production has been halted since December 2021. The company said that “if the situation does not change significantly in the months ahead, we anticipate that available funding will be exhausted in the second half of 2024”. This follows the earlier announcement that it would cut production at the Australian Kwinana refinery in the second quarter of 2024 and cease all production in the third quarter due to rising costs. First Quantum also recently said it would halt mining at its Ravensthorpe nickel and cobalt operations in Australia while Nyrstar also recently said that the Budel zinc plant in the Netherlands would be placed in care and maintenance due to production not being “economically viable”.
Iron ore recovered ground after the recent aggressive falls with the February SGX contract up $2.15 from the same time yesterday at $127.55 while the 62% Mysteel index rose $3.45 to $130.15. The move was despite the weakest month of steel production in almost 6 years reported for December in China and warnings from the chairman of China MinRes Group that steel mills should cut output and aim for “high-quality development”. Citi warned that it expects the weakness in the property sector would be felt in steel demand during the first half of 2024 with property sales and starts to continue slumping to levels not seen in more than a decade.
Day ahead
Japan’s December CPI read is expected to continue its decelerating trend as imported inflation eases. Consensus is 2.5%yr versus 2.8%yr in November, with CPI ex-fresh food 2.3%yr and CPI ex-fresh food and energy 3.7%yr.
UK retail sales volumes for December are not expected to build on November’s momentum, with consensus -0.5%mth versus +1.3%mth in November.
Fed officials Goolsbee, Daly, and Barr are due to speak on the eve of the media blackout period leading up to the FOMC’s 30-31 January meeting.
January’s University of Michigan consumer sentiment is expected to remain downbeat as inflation weighs in (market f/c: 70 vs 100 pre-Covid). December existing home sales are likely to have struggled to gain momentum as supply remains constrained (market f/c: 0.3%mth). We will also see US Treasury data on November capital flows.
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