Markets Daily
Upbeat sentiment in equities markets saw the S&P500 rise 1.2% to a record high. US consumer inflation expectations fell. The US dollar was mostly slightly softer, AUD edging up to 0.6585. Bond yields were mixed. Today’s calendar is very light.
Friday
Australia’s data calendar was empty. AUD probed a little higher early, to 0.6589, but then faded to 0.6570, little changed net. Regional equities were somewhat mixed but mostly positive, following the US/European lead. The ASX 200 rose 1.0%. Japan December CPI was near expectations, 2.6%yr, 2.3% ex-fresh food and 3.7%yr ex-fresh food and energy prices. Finance Minister Suzuki said he was watching FX markets closely, as USD/JPY edged up to fresh highs since November.
Currencies/Macro
The US dollar was mostly softer on Friday. EUR/USD rose 0.2% to 1.0895. GBP/USD softened slightly to 1.2700. USD/JPY ranged between 147.84 and 148.80. AUD/USD rose 25 pips to 0.6585. Underperformer NZD edged down to 0.6110. AUD/NZD rose 0.4% to 1.0790.
January US consumer sentiment (University of Michigan) rose sharply to 78.8 (est. 70.1, prior 69.7)). Expectations rose from 67.4 to 75.9 and current conditions rose from 73.3 to 83.3. Inflation expectations were lower than expected, the 1yr ahead measure at 2.9% (est. unchanged at 3.1%) – lowest for three years, and the 5-10yr at 2.8% (est. 3.0%, prior 2.9%). US home sales in December fell -1.0% (est. +0.3%), while the median price rose to a record high of USD389k.
Chicago Fed president Goolsbee said: “If we continue to make surprising progress faster than was forecast on inflation, then we have to take that into account in determining the level of restrictiveness.” Atlanta Fed president Bostic repeated his view that cuts could start in Q3, adding: “I’d be open to changing that outlook and my view about when we need to start cutting rates, but we need to make sure that we are well on our way to 2% before we move off of our restrictive stance.”
San Francisco Fed president Daly said: “While I think it’s appropriate for us to look forward and ask when would policy adjustments be necessary so we don’t put a stranglehold on the economy, it’s really premature to think that that’s around the corner. Do I get consistent evidence that inflation is coming down, or do I get any early signs with the labour market starting to falter? Neither one of those right now is pushing me to think that an adjustment is necessary.” The media blackout period ahead of the FOMC’s 30-31 January meeting has now commenced.
Swiss National Bank Chair Jordan said that their inflation forecasts suggest no further rate increases but that their battle was not yet won and that they would not necessarily follow expected Fed easing. He also mentioned that CHF strength had been sufficient to affect their inflation outlook.
Interest rates
The US 2yr treasury yield initially rose from 4.34% to 4.42% before retracing to 4.38%, while the 10yr yield fell from 4.16% to 4.12% via 4.19%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 1 February, with a 45% chance of a cut in March. Australian 3yr government bond yields (futures) ranged between 3.82% and 3.88%, while the 10yr yield ranged between 4.29% and 4.34%. Markets are pricing the RBA cash rate to be unchanged at the next meeting on 6 February, with a 70% chance of a cut in September. New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged on 28 February, with a 60% chance of a rate cut in May.
Credit spreads remained positive to close the week with Main a bp tighter to 60 to be a couple of bp off its tights while CDX was half a bp tighter at 54.5 and US IG credit was flat to a bp better, extending the strong open to the year. Primary markets saw little activity on Friday with La Banque Postale’s EUR750M covered deal the only notable transaction, taking Euro supply to ~EUR257bn (including SSA). The US closed last week at USD149bn of IG supply ytd, requiring a further ~USD26bn to get to the January record set in 2017.
Commodities
The geopolitical picture in the Middle East deteriorated further into and through the weekend with the US launching its fifth round of attacks on Houthi targets, Iran blaming Israel for the killing of five members of its elite Revolutionary Guards in an air strike in Damascus on Saturday which came 4 days after Iran launched an attack on what it described as an Israeli “espionage centre” in Iraq. Iran also struck targets in Pakistan on Thursday with Pakistan launching reciprocal strikes the following day. In addition, on Saturday, US forces in Iraq were hit by missiles by Iran-backed militants with reports of US personnel being evaluated for “traumatic brain injuries”. Despite clear signs of more direct and open conflict involving Iran, crude markets remained capped by supply concerns. The February WTI contract closed down 0.9% Friday at $73.41 while the March Brent contract closed down 0.68% at $78.56.
Over the weekend, the Libya restarted oil exports and production from its largest field, the 270kbpd Sharara field, after protests closed the field on the 4th of January. Meanwhile in the US, a state official said that oil producers in North Dakota may need at least a month to restore output to normal levels after more than half of the state’s flows were cut off last week due to extreme cold though the forecast volume that has been shut in was cut back to 350kbpd to 400kbpd as of Friday. Wood Mackenzie estimated that 1.5mbpd of crude capacity across the Gulf Coast and 1.8mbpd of refining capacity may have been idled due to extreme cold weather. In gas markets, a fire broke out at a Baltic Sea terminal belonging to Novatek, Russia ‘s largest LNG producer after a suspected drone attack.
Metals were modestly better bid Friday with copper up 0.8% at $8,380 and aluminium managing to rise 0.4% to $2,172 though nickel fell 0.7% to $16,040. There was little fresh news though the Sulawesi Mining Investment plant in Indonesia shut down a nickel smelter after an overflow of hot slag on Friday. The incident follows an explosion at the Tsingshan Stainless Steel facility in the same industrial park which killed 21 workers early January, prompting the government to carry out safety checks on the country’s smelters. The AFR reported that Andrew Forrest’s Wyloo private company was putting the Kambalda nickel mine into care and maintenance from May 31 due to the steep decline in nickel prices.
Iron ore markets regained some lost ground into the weekend with the February SGX contract up $2.15 from the same time Friday at $129.70 while the 62% Mysteel index rose 50c to $130.65. Tata announced it would shut down two loss-making blast furnaces in the UK in a widely expected move that is designed to reverse a decade of losses at the Port Talbot plant in Wales. China Steelhome reported another rise in iron ore port inventory Friday, the 9th consecutive weekly rise.
Day ahead
The People’s Bank of China is expected to keep its 1-year loan prime rate steady at 3.45%, the 5-year rate at 4.20%.
US: December’s leading index is likely to show signs of activity dampening (market f/c: -0.3%).
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