Markets Daily
US bond yields eased lower after Tuesday’s surge, aided by some dovish Fedspeak. UK yields and the pound fell sharply after sub-consensus UK CPI. Equities rebounded, as did AUD, at 0.6490. Today’s calendar features testimony from RBA Governor Bullock, Australia January employment, Japan Q4 GDP and US January retail sales.
Yesterday
Regional markets that are not still closed for Lunar New Year were mostly weaker, taking their cue from Wall Street’s slide on the CPI data. The ASX 200 closed down -0.7%. AUD/USD regained some of its lost ground, edging up from 0.6455 to 0.6475. The Kiwi made a similar gain, as US Treasury yields slipped somewhat (2yr -4 basis points). Japan FX official Kanda declared that some FX moves (i.e. the yen’s tumble against the USD post-CPI) looked speculative. There was no data of note.
Currencies/Macro
The US dollar softened against much of the G10 on the day after Tuesday’s steep gains. EUR/USD rose 20 pips to 1.0730. Sterling was weakest in the G10, undermined by the downside surprise on UK CPI, GBP/USD sliding from 1.2610 to 1.2540 then steadying -0.25% at 1.2560. USD/JPY softened 25 pips to 150.55. AUD/USD extended its local session recovery 0.6% to 0.6490. NZD/USD rose 25 pips to 0.6080. AUD/NZD rose 0.2% to 1.0670.
US producer prices inflation in December was revised lower to -0.2% (was -0.1%) and to -0.1% (was 0.0%) for the ex-food and energy measure. These left the annual rates at 1.0% for the headline and 1.8% y/y for the core.
Chicago Fed president Goolsbee (usually dovish) said slightly higher inflation data for a few months would still be consistent with a path back to the central bank’s 2% goal: “Rate cuts should be tied to confidence in being on a path toward the target. More data like we have seen in the past six months would indicate that path, but that’s probably too stringent... Even if inflation comes in a bit higher for a few months (as many forecasts suggest), it would still be consistent with our path back to target”. He also said that the Fed’s 2% target is based on the personal consumption expenditures price index, not CPI, and that the two metrics can differ “somewhat significantly.”
UK inflation data for January was softer than expected. CPI fell -0.6%m/m (est. -0.3%m/m) and rose 4.0%y/y (est. 4.1%y/y), core at 5.1%y/y (est. 5.2%y/y). Notably, services remained sticky at 6.5%y/y (est. 6.8%y/y, prior 6.4%y/y).
Bank of England Governor Bailey restated that their stance is now about how long to keep policy on hold, and although there were signs of wages growth cooling, they need more evidence. He also spoke of signs of economic recovery and that the softer inflation data was not out of line with their forecasts.
Eurozone industrial production in December surprised higher at +2.6%m/m (est. -0.2%m/m, prior revised to +0.4%m/m from -0.3%m/m) +1.2%y/y (est. -4.0%y/y).
Interest rates
The US 2yr treasury yield fell from 4.66% to 4.58%, while the 10yr yield fell from 4.32% to 4.26%. Markets price the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting in March, with a 100% chance of a cut by June.
Australian 3yr government bond yields (futures) fell from 3.87% to 3.81%, while the 10yr yield fell from 4.29% to 4.22%. Markets currently price the RBA cash rate to be unchanged at the next meeting on 19 March, with a 70% chance of a cut by September.
New Zealand rates markets price the OCR, currently at 5.50%, to have a 25% of a hike at the next meeting on 28 February, and a 55% chance of one by May.
Credit indices joined broader risk markets in recovering a portion of the CPI-led losses from Tuesday with Main half a bp tighter to 57.5 and CDX in a bp to 54, however cash spreads were little changed as supply came back to market. Europe saw 3 issuers price ~EUR3.4bn, all in the corporate space, while the US has seen 5 issuers head back to the market after a zero session yesterday with supply headlined by Bristol Myer’s USD13bn jumbo deal.
Commodities
Crude markets fell on larger than expected EIA inventory build, which jumped by a hefty 12mb last week. The March WTI contract is down 1.5% at $76.71 while the April Brent contract is down 1.4% at $81.63. The jump in crude inventory was partially offset by yet another slump in product inventory with gasoline down 3.659mb and distillate down 1.916md. Fuel demand measures remained very weak with 4-week average of distillate demand at the lowest level since 2016 while gasoline demand was at the lowest since 2021. Refinery utilisation rates fell for the 6th straight week to the lowest since December 2022. US crude production was unchanged at a record 13.3mbpd. In Gulf news, commodity shipping company Star Bulk Carriers Corp said it would no longer sail through the Red Sea after attacks by Houthi rebels on two of its ships. Russia’s crude shipments fell from a 7-month high, down circa 290kbpd in the week to Feb 11 according to Bloomberg. The fall comes after the US has sanctioned circa 50 ‘Russia friendly tankers’ since October and about half of those appear to have experienced at least some level of disruption, idling or failing to load cargoes. Citi warned that a summer gasoline supply problem “looks inevitable” in Europe.
Asian natural gas prices fell to 8-month lows on weak demand while the US equivalent tested 3 ½ year lows on expectations of another bearish inventory report. The March Henry Hub contract has lost a third of its value so far this year.
Metals fell again with copper bearing the brunt of moves to price out Fed cuts in the first half of the year. Copper is down another 0.7% at $8,201 though nickel is up 0.4% at $16,320 and aluminium up 0.5% at $2,237. Nickel appears to be being supported by the closure of operations in New Caledonia and Australia so far in 2024, with Glencore recently announcing care and maintenance for its Koniambo operations. Norsk Hydro announced a plunge in its profits due to a slump in aluminium consumption. The CEO noted “challenging markets” though the company was “managing the short-term volatility through continued execution on our improvement programs”.
Iron ore markets saw modest gains in thin LNY holiday trade with the March SGX contract up $1 from the same time yesterday at $129.15. BHP faces a train drivers strike tomorrow. BHP, Rio and BlueScope are tying up to produce ‘green iron’ according to company statements. The three companies announced a feasibility study of building a pilot electric smelting furnace, the country's first, with a potential start date of 2027.
Day ahead
At 11:30am Syd, Australia’s January labour force survey will likely provide another murky read on the labour market. Westpac expects employment to rise +15k (market f/c: 25k) after the shock -65k slide in December and given participation holds flat, a rise in the unemployment rate to 4.0% is anticipated (market f/c: 4.0% versus 3.9% in December).
RBA Governor Michele Bullock appears before the Senate Economics Legislation Committee in Canberra from 9am Syd.
Japan Q4 GDP should reflect fragile household consumption, with consensus for only a 0.2%qtr rise after the disappointing -0.7%qtr in Q3.
Eurozone December trade balance in Europe may show a surplus driven by lower imports as local demand falters.
The UK's Q4 GDP should reflect stalling activity with a risk of a technical recession (market f/c: -0.1%qtr, +0.1%yr).
In January, US retail sales are expected to post a modest 0.2%mth rise in each key measure, after the surprisingly strong December gains of 0.6%mth total, 0.6% ex-autos and gasoline and 0.8% control group (also excludes building materials).
US industrial production is estimated to have risen 0.2%. The February Philly Fed index should show regions struggling to shake off lingering uncertainty and growing pessimism (market f/c: -8.2pts). The February New York Fed Empire State manufacturing index for February is likely to reflect much the same (market f/c: -13.8pts). The February NAHB housing market index suggests a long road ahead for recovery in homebuilder sentiment (market f/c: 46).
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