FX Daily
Bond yields fell sharply again. US equities posted late rebounds to close higher. Havens JPY, CHF and USD were strongest on the day, AUD/USD trimming losses to 0.6900. June PMIs were mostly weaker than expected. Today’s calendar includes comments from RBA Governor Lowe, Germany June IFO business sentiment and final US June consumer sentiment.
Yesterday's Highlights
- AUD/USD remained fragile, chopping down from 0.6925 to late session lows near 0.6870 as the France June PMIs disappointed, adding fuel to recession talk that was amplified by Fed Chair Powell. Regional equities were however mixed, with many posting gains, including the ASX 200, +0.3%. USD/JPY dropped about 60-70 pips as a former Japan FX chief said unilateral intervention to support the yen was possible.
Currency Markets
- The US dollar was mixed on the day: down versus JPY, flat against the Swiss franc and British pound but up versus other G10 FX. EUR spiked down to 1.0485 on weak PMI data before clawing back to 1.0525 (-0.4%). USD/JPY slipped from 136.28 to 134.27 on intervention concerns with JPY trading +1% on the day at 134.90. GBP and NZD were flat on the day with AUD rebounding from a low of 0.6969 to trade around 0.6900 (-0.4%). AUD/NZD slipped about 30 pips to 1.0990.
- In the second leg of his semi-annual congressional testimony, Fed Chair Powell underscored the Fed's resolve to fight inflation while acknowledging the cooling of the US economy but stated that it could avoid recession.
- US Flash June PMI surprised to the downside. Manufacturing fell to 52.4 (prior 57.0, est. 56.0) and Services slipped to 51.6 (prior 53.4, est. 53.3). S&P cited a notable decline in demand causing new orders to contract for the first time since July 2020 and manufacturing production also fell into contraction (at 49.6, lowest in 24 months). The survey did suggest that there are signs that pricing pressures have peaked.
- US June Kansas Fed Manufacturing survey slipped to 12, close to the estimate of 13, from prior 223.
- US initial (226k) and continuing (1.315mn) claims were close to estimates and had little market impact.
- Eurozone Flash June PMIs were decidedly soft. Manufacturing slipped to 52.0 (est. 53.8, prior 54.6), Services pulled back to 51.9 (est. 55.5, prior 56.1) and Composite slid to 51.9 (est. 54.0, prior 54.8). The fall in activity was to the lowest in 16-months with S&P citing stalling demand as pandemic related pent-up demand fades.
- UK Flash June PMIs were less weak, though S&P cite expectations showing as declining. Composite held unchanged at 53.1 (est. 52.4) as services held solidly at 53.4 (prior 53.4, est. 52.9) though manufacturing did dip to 53.4 (est. 53.6, prior 54.6). S&P noted the slide in new orders to 50.8 (prior 53.8) and declining optimism suggest that UK faces “a troubling combination of recession and elevated inflation”.
Interest Rates
- European bonds rallied significantly, following safe haven buying on recession fears after flash PMIs surprised markets to the downside. The yield on the 10yr Bund was 21bps lower, closing at 1.43%, 10yr Gilts yields fell 19bps to 2.31%, and 10yr French yields fell 21bps to close at 1.96%.
- US bonds took a bullish lead from the rally in Europe, yields fell before rebounding slightly to finish overall lower on the day. 2yr government bond yields fell from 3.06% to 2.87% before lifting back to 3.01%, and 10yr government bond yields fell from 3.16% to 3.09% via 3.00%.
- Australian bonds took trend from global price action, and outperformed their US counterparts. 3yr government bond yields (futures) fell from 3.58% to 3.47%, and 10yr government bond yields (futures) fell from 3.87% to 3.76%. Cross market spreads narrowed on the back of AU outperformance, with the AU-US 10yr bond spread now at 67bps.
- Credit indices reflected sentiment with Main 2bp wider to 113 on a weak session for Euro risk markets, but CDX has closed a bp tighter at 99 as markets recovered in the US. Cash spreads remain under pressure and fund flows data (Lipper) saw another week of outflows (USD7.5bn). Primary activity was limited to Europe which saw 12 IG issuers price ~EUR6.7bn. Universal was the largest issuer in the corporate space with it EUR1bn 2 tranche (5/10yr) deal while banks saw supply across the capital structure including Barclays’ GBP1.25bn PerpNC5.75yr AT1 deal with an 8.875% coupon.
Commodity markets
- Crude markets dropped again as Chair Powell emphasised the Fed’s “unconditional” commitment to fighting inflation. The August WTI contract fell $2.05 to $104.14 while the August Brent contract fell $1.85 to $109.89. Crude is down circa 15% from the highs seen at the beginning of the month as concerns about global recession risks have increased. The EIA delayed inventory and production data after a power disruption caused a “systems issue”. Germany triggered the second stage of its national gas emergency plan with economy minister declaring “from now on, gas is a scarce commodity”. The European July TTF gas contract rose 4.86%.
- Metals fell again on rising recession risks with copper down a hefty 5% to $8,337 and tin down 7% to $26,985. That’s a fresh 16 month low for copper and 14 months low for tin. Tin has halved in price in the last 3 months. Copper union workers in Chile agreed to halt a strike after a working group was created to address the future of the Vedanta smelter and “ensure a fair transition agreement for the process”. The LME appointed Oliver Wyman to review the recent nickel squeeze, with the report expected in December. Meanwhile the spread for prompt to 3-month zinc hit its highest back to 1997 after inventories dropped to the lowest level in 25 years.
- Finally note that iron ore markets rebounded after Xi pledged to hit economic targets. The July SGX contract is up $5.70 to $117.20 while the 62% Mysteel index rose $7.15 to $116.50. Citi argued that prices will recover towards $140 through Q3 as it is “highly exposed” to policy easing.
Event Risk
- RBA Governor Lowe will participate in a panel concerning global monetary policy challenges at Zurich at 9:30pm AEST.
- NZ: Matariki public holiday; markets closed.
- Japan: Weakness in underlying consumer price pressures is anticipated in May. Consensus is for 2.5%yr but 2.1%yr ex-fresh food and only 0.8%yr ex-fresh food and energy, unchanged from April.
- China: The final estimate of the Q1 current account balance should confirm a healthy surplus.
- Ger/UK: The June German IFO business climate survey will continue to reflect an uncertain outlook (market f/c: 92.8). Russia-Ukraine and inflation headwinds has led GfK consumer confidence to the weakest level in series history dating back to 1980 (market f/c: -40).
- US: The final estimate of the June University of Michigan consumer sentiment survey will confirm the collapse in confidence amid historic inflation pressures (market f/c: 51.2). New home sales should be under pressure from rising interest rates and costs in May (market f/c: -0.2%). Meanwhile, the FOMC’s Bullard and Daly are due to speak at separate events.
Jessica Ren, Rates Strategist, 6128253 4214, jessica.ren@westpac.com.au
Duncan Chellew, Credit Strategist, (61 2) 8254 3509, dchellew@westpac.com.au
Robert Rennie, Head of Financial Market Strategy, (61 2) 8254 8063 , rrennie@westpac.com.au
Sean Callow, Senior Currency Strategist, Sydney, (61 2) 8253 4432 , scallow@westpac.com.au
Tim Riddell, Macro Strategist, (44 207) 6217129, tim.riddell@westpac.com.au
June PMIs were mostly weaker than expected. Today’s calendar includes comments from RBA Governor Lowe, Germany June IFO business sentiment and final US June consumer sentiment.
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