FX Daily
Sentiment turned sharply negative over the course of US trading. The defensive US dollar rose, AUD/USD slipping slightly to 0.6905.
US bond yields retraced initial gains. US consumer confidence fell again in June. Today’s calendar includes Australia May retail sales and more central bank commentary from the annual ECB conference in Portugal.
Yesterday
Regional risk sentiment was mostly positive, with some focus on China’s announcement of looser Covid activity restrictions, notably for arriving travellers. The ASX 200 rose 0.9%. Australia’s economic data calendar was empty, though with plenty of releases from the 2021 census e.g. 27.6% of the population was born overseas. AUD/USD seemed enthused by the China quarantine headlines, popping from 0.6925 to 0.6964, then steadying around 0.6940.
Currencies/Macro
The US dollar rose against most of the G10 on the day. EUR/USD fell from 1.0580 to 1.0520, GBP/USD from 1.2270 to 1.2185. USD/JPY rose from 135.45 to 136.20. AUD/USD surrendered its Sydney session gains, slipping to 0.6905, down a net 20 pips on the day. Underperformer NZD fell from 0.6305 to 0.6240. AUD/NZD rose from 1.0990 to 1.1070.
US Conference Board consumer confidence fell to 98.7 in June (est. 100.0, prior revised from 106.4 to 103.2), led by decidedly softer expectations (66.4, prior revised to 73.7 from 77.5). This is still well above the pandemic lows around 86, in contrast to the U Michigan consumer sentiment survey, which is at the lowest levels since the series began in 1978.
The Richmond Fed manufacturing activity survey fell to -19 in June (est. -7, prior -9), similar to the weakness seen in yesterday’s Dallas Fed survey. New orders fell to -38 from -16, and shipments fell to -29 from -14. Wages remained elevated, while there were early signs of supply chain relief and receding prices. US housing data for April was mixed but close to estimates. FHFA prices rose +1.6%m/m (est. +1.4%m/m), and CoreLogic’s rose +1.8%m/m (est. +1.9%m/m).
New York Fed president Williams said the Fed needs to get to a 3% to 3.5% funds rate this year, and the debate at the July 26-27 FOMC will be about 50bp vs 75bp. He believes rates will get into restrictive territory in 2023, and expects the economy to slow enough to push the unemployment rate a little above 4%, but a recession this year is not his base case. St. Louis Fed president Bullard published an essay on inflation, noting that getting ahead of inflation will keep it low and stable and promote a strong real economy. He noted the lessons learned from the 1974, 1983, and the 1994-5 experiences, concluding that the latter two approaches were the better examples to follow.
ECB President Lagarde said that they would take the first step of applying flexibility in reinvesting maturities and coupons from PEPP to counter “fragmentation” pressures from 1 July.
Interest rates
Long end US bond yields ended its two-day ascent, after rising earlier in the session but closed lower on the day. 2yr government bond yields rose from 3.08% to 3.11%, and 10yr government bond yields fell from 3.18% to 3.17% via 3.26%.
Australian bonds took trend from US price action, long end yields rose initially but closed lower on the day. 3yr government bond yields (futures) traded at 3.53%, and 10yr government bond yields (futures) fell from 3.84% to 3.83% via 3.89%. Cross market spreads narrowed on the day, with the AU-US 10yr bond spread at 66bps.
Credit indices reacted to the shift in sentiment with Main giving up a positive open to close 5bp wider at 114.5 (around series wides) while CDX pushed wider throughout the session to close out 4bp at 99.5 and cash spreads were another 1-2bp wider. Primary activity was limited with Europe seeing 3 issuers pricing just EUR1.45bn, while the US saw 4 deals total USD2.9bn including a USD1.9bn 3 tranche deal from Nomura Holdings (3/5/7yr) and 2 more FA backed deals (F&G and Protective Life).
Commodities
Oil rose again as G7 leaders agreed to “urgently” look at ways to introduce a cap on Russian oil and gas exports. The August WTI contract is up $2.19 at $111.76 while the August Brent contract is up $3.06 at $118.15. Signs of aggressive tightness in the physical market re-emerged with the dated-to-frontline swap hitting a record of more than $5, beating previous records set in March of this year. The WTI-Brent spread also widened to $6.19, the widest in 3 months. The G7 “will consider a range of approaches” including a ban on services that “enable transportation of Russian seaborne crude oil and petroleum products globally, unless the oil is purchased at or below a price to be agreed in consultation with international partners”. A potential price cap comes on top of recent outages from Libya and Ecuador, adding to the physical premium for crude.
Metals were mixed with copper down 0.2% at $8,400 and aluminium down 0.3% at $2,487 though nickel rose 1.1% to $23,145 and zinc by 1.2% to $3,358. JP Morgan no longer has exposure to Tsingshan Holding Group’s nickel position after the final positions were closed out in the last few days according to market sources though JP Morgan declined to comment. Truck drivers went on indefinite strike Monday in Peru over the price of diesel though mines in Peru were said operating normally due to lack of blockades.
Finally note that iron ore jumped after China appeared to loosen strict virus quarantine rules. The July SGX contract is up $5.35 at $123.90 while the 62% Mysteel index is up $4.60 at $124.75. The National Health Commission changed rules so that travellers will now only need to spend 7 days in quarantine, and then monitor their health at home for a further 3 days. Officials noted though that “It’s absolutely not loosening up, but a more scientific and targeted approach”.
Day ahead
At 11:30am Syd/9:30am Sing we see Australia May retail sales data. Retail sales increased 0.9% in April following strong gains in averaging 1.7% over the previous three months, annual growth hitting 9.6%yr. Momentum was relatively well sustained despite various headwinds from the omicron outbreak, weather events and a surge in fuel prices. May is likely to be a softer result as spending rotates towards nonretail items and given additional headwinds around rising fuel prices and interest rates, and a sharp fall in consumer sentiment. While reopening dynamics were still very positive for wider consumer spending during the June and September quarters, much of this will bypass retail. On balance we expect a softer result with a 0.3% gain and some risks to the downside (median forecast 0.4%).
Eurozone: Economic and consumer confidence should continue to be affected by the Russia-Ukraine conflict and historically elevated prices in June.
US: The final estimate for Q1 GDP is due (market f/c: -1.5%). Meanwhile, Fed Chair Powell will participate in a panel at the ECB’s Central Banking forum. Cleveland Fed president Mester will also speak at the forum and St. Louis Fed president Bullard is due to speak at a different event.
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