FX Daily
Bond yields fell before and after Fed chair Powell’s testimony, which was less hawkish than expected. That appeared to help US equities recover from early losses to finish about flat. The US dollar lost momentum, AUD/USD trimming losses to 0.6925.
Today we see flash June PMIs in a number of countries and Powell concludes his semi-annual testimony to Congress.
Yesterday's Highlights
- Regional equities opened positively, taking their cue from the sharp rally on Wall Street. But sentiment soon resumed a familiar tone, all major indexes rolling over. The Bloomberg APAC Index dropped -0.7%, Korea’s Kospi -2.7%, Hong Kong’s Hang Seng -2.4%. In this context, the ASX 200 held up fairly well, closing -0.2%. As US equity futures slid -1.5%, AUD/USD ratcheted down from 0.6970 to 0.6890.
Currency Markets
- The US dollar was mixed, low-yielders outperforming commodity currencies. EUR/USD rebounded from lows around 1.0470 to 1.0565. GBP/USD was also choppy, eventually unchanged at 1.2260. The fall in US yields saw USD/JPY slip 40 pips to 136.15. AUD/USD extended its local session decline to a low of 0.6881 in the London morning, then trimmed losses to 0.6925. NZD/USD steadied around 0.6285, down a net 45 pips on the day. AUD/NZD was little changed at 1.1015.
- Fed Chair Powell’s semi-annual congressional testimony referenced a possible peaking in inflationary pressures while also affirming the Fed’s intent to act against inflation. The challenge was to achieve a soft landing. He said there were signs that activity was slowing and labour market tightness was easing in response to their actions. The funds rate will probably be above 3% by year-end, and they would need to see evidence of inflation slowing before contemplating a change of course.
- Eurozone consumer confidence failed to stabilise fell to -23.6 (est. -20.5, prior -21.2) and remains at risk of breaching the pandemic record low of -24.4.
- UK inflation data was close to estimates. CPI in May rose 0.7%m/m and 9.1%y/y (a 40-year high), as expected, but core inflation fell to 5.9%y/y (est. 6.0%y/y, prior 6.2%y/y).
- Canadian CPI in May rose 1.4%m/m and 7.7%y/y (est. 1.0%m/m and 7.3%y/y) - the highest since 1983., with the average of core measures rising to 4.7%y/y.
Interest Rates
- US yields pulled back substantially following a lead from Europe from growth concerns and the rush to safe haven, as well as Chair Powell’s testimony which noted that a soft landing would be “very challenging” and US recession is a “possibility”. 2yr government bond yields fell from 3.20% to 3.04%, and 10yr government bond yields fell from 3.27% to 3.12%.
- Australian bonds took trend from global price action, and yields were lower overnight. 3yr government bond yields (futures) fell from 3.75% to 3.58%, and 10yr government bond yields (futures) fell from 4.05% to 3.87%. Cross market spreads narrowed, with the AU-US 10yr bond spread now at 74bps.
- Credit underperformed with Main 4bp wider at 111.5, CDX 2bp wider at 100 despite US equity holding up relatively well and US cash credit was also weaker. Primary activity was limited and featured large concessions. There were only 3 IG issuers in Europe with BASF the largest, pricing a EUR1.5bn deal across 6/10yr which saw NICs of 35 & 25bp respectively, and we saw debut covered bond issuer, POP Mortgage, pull its deal citing adverse market conditions. The US saw 3 issuers in the market for USD3.05bn including Eversource Energy, which priced USD1.5bn across 2yr and 5yr andTarga Resources with its USD1.25bn deal (5yr/30yr) with the 5yr and 30yr tranches from both issuers coming at a NIC of ~25bp.
Commodity markets
- When central bankers use the R word, markets move. And that was the case Wednesday with the August WTI contract down $5.03 at $104.49 while the August Brent contract fell $4.63 to $110.02. Fed chair Powell warned that a US recession is possible and a soft landing is “very challenging”. WTI hit a 5-week low during Powell’s initial comments, trading below $102. US President Joe Biden was doing his bit to reduce cost of living pressures too, calling on Congress to enact a 3-month federal gas tax holiday which would waive the 18.4c tax on gasoline and 24c on diesel. However, studies suggest that the full impact of gas tax cuts are not always passed onto the consumer. API data showed a sharp 5.6mb rise in crude inventory for last week though gasoline fell 1.2mb and distillate by 1.7mb. The EIA has delayed its regular data releases due to a “systems issue”.
- Metals don’t not like recession risks either, so we saw sharp falls across the board. Copper is down 2.3% to a fresh 15 month closing low of $8,786 while nickel fell 5.8% to a 3-month low of $24,430. Aluminium traded below $2,500 for the first time in 11 months. Tin fell below $30,000 for the first time in a year. If anything, industry news remained positive. Century Aluminium stated it will idle its Hawesville smelter in Kentucky due to high energy costs and Codelco copper workers in Chile began a strike with an estimated 35,000 workers downing tools.
- Finally note that iron ore markets remained weak as rising evidence of blast furnaces being idled due to slumping margins hit sentiment. The ongoing slump in the Chinese property market is not helping sentiment either, with Nomura’s chief China economists stating “this is the worst property downturn on record”. The July SGX contract is down $2.5 to $111.50 while the 62% Mysteel index fell $6.75 to $109.35, a 6-month low.
Event Risk
- Advance June PMIs from Markit/S&P Global are released for many jurisdictions today. The final May Australian services PMI was 53.2, manufacturing 55.7.
- In Japan, the easing of health restrictions should buoy the services PMI in June (previous 52.6); however, the lack of Chinese demand and supply issues are risks to the manufacturing PMI (previous 53.3.
- Ongoing cost pressures and supply chain issues are key concerns to European manufacturing and services in the Eurozone June S&P Global PMI report (market f/c: 53.8 and 55.5). The ECB watches this survey closely. The UK’s S&P Global PMIs are facing similar risks and a sharp slowdown in activity is on its way (market f/c: 53.6 and 52.9).
- The US is weathering similar headwinds, but prices pressures are also an ongoing risk to the June S&P Global manufacturing and services PMIs (market f/c: 56.0 and 53.5). Meanwhile, initial jobless claims are set to remain at a low level (market f/c: 226k) and the Kansas City Fed index should reflect a positive but fragile manufacturing outlook (market f/c: 15). Fed Chair Powell’s semi-annual monetary policy testimony continues, this time to the House Financial Services Committee.
Jessica Ren, Rates Strategist, 6128253 4214, jessica.ren@westpac.com.au
Duncan Chellew, Credit Strategist, (61 2) 8254 3509, dchellew@westpac.com.au
Imre Speizer, Head of NZ Strategy, (64 9) 336 9929 , imre.speizer@westpac.co.nz
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
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