FX Daily
Bond yields jumped following a strong US manufacturing ISM survey. The US dollar bounced against JPY and European currencies, but AUD/USD was net unchanged at 0.7175. Equities were soft.
The Bank of Canada hiked by 50bp as expected. Today’s data includes Australia April trade balance and US May ADP private payrolls, while UK markets begin a 4-day weekend.
Yesterday's Highlights
- The Australian economy expanded by 0.8%qtr in Q1 2022, +3.3%yr, slightly above consensus. A key driver of growth was household consumption which increased by 1.5% including a 4.3% lift in discretionary spending as the economy reopened despite disruptions from the Omicron variant and floods. Inflation pressures were evident in the price measures. The domestic final demand implicit price deflator (the best measure of domestic price pressures) rose by 1.4% - the strongest growth since the introduction of the Goods and Services Tax in 2001. Economic growth in the quarter was severely impacted by the external sector. Exports contracted by 0.9% while imports surged by 8.1% with net exports subtracting 1.7ppt’s from growth. AUD/USD showed little reaction to the data but quickly started to slip, from just below 0.7190 to 0.7175, in apparent sympathy with a soft Chinese yuan. The Aussie eventually finished the day little changed at 0.7180. Regional equities were again mixed, the ASX 200 in the middle of the pack, +0.3%.
Currency Markets
- The US dollar rallied sharply against JPY and European currencies, with most gains occurring after the strong ISM manufacturing data. EUR/USD fell from 1.0740 to 1.0655. GBP/USD slid 1.2 cents or -0.9% to 1.2485. USD/JPY rallied back above 130.00 for the first time since 12 May, net up 1.45 yen or 1.1% at 130.10. AUD/USD was volatile, initially rising from 0.7180 to 0.7230 (a one-month high), but falling to 0.7156 post-ISM, and then settling around 0.7175 for little net change. NZD/USD was also whippy, but softer overall, -0.5% at 0.6485. AUD/NZD thus rose half a cent to 1.1065.
- US manufacturing ISM in May was stronger than expected at 56.1 (est. 54.5, prior 55.4). New orders rose to 54.2 (prior 53.5), export orders were solid at 52.9 (prior 52.7), and production rose to 54.2 (prior 53.5). However, employment slipped to 49.6 (prior 50.9) and prices paid remained high at 82.2 (prior 84.6). JOLTS job openings in May were solid at 11.4 million (est. 11.35m, revised record high of 11.9m in April).
- The Fed's Beige Book of regional economic conditions indicated some signs of slowing growth over the past six weeks. A majority of the 12 regions characterised growth as "slight or modest", and a few "explicitly noted that the pace of growth has slowed." Labour market difficulties were the "greatest challenge," followed by supply chain disruptions. Retail contacts reported some softening as consumers faced higher prices.
- San Francisco Fed president Mary Daly said she is "comfortable to do what it takes to get inflation trending down to the level we need it to be". She supports 50bp increases in June and July, and favours pushing the rate to neutral, estimated at 2.50%, by the end of the year. She suspects inflation has peaked, but is unwilling to declare victory yet. A recession is not in her outlook, nor does she see signs of a wage-price spiral.
- The Bank of Canada raised its policy rate by 50bp to 1.50% as was widely expected. Guidance was hawkish, indicating that it was prepared to act “more forcefully to achieve the 2% inflation target”, and that it is concerned about price pressures increasing and becoming entrenched.
- Eurozone May manufacturing PMI was finalised higher at 54.6 (from prelim. 54.4). UK final May manufacturing PMI was unchanged at 54.6.
- ECB hawks, led by Austria’s Holzmann, were more vocal about the potential for 50bp hikes to be considered, as ECB goes into its silent period ahead of next week’s meeting. The dovish members have suggested that policy normalisation should be measured and gradual, with 25bp hikes in July and September.
Interest Rates
- US bond yields rose for the second consecutive day, and the curve bear flattened as markets reacted to the BoC’s 50bp hike and hawkish FedSpeak from Bullard and Daly. 2yr government bond yields rose from 2.56% to 2.64%, and 10yr government bond yields rose from 2.83% to 2.95%.
- Australian bonds took trend from global price action, and yields were higher overnight. 3yr government bond yields (futures) rose from 2.97% to 3.06%, and 10yr government bond yields (futures) rose from 3.43% to 3.52%. Markets are pricing the cash rate to be 36bp higher at the June RBA meeting. Cross market spreads widened overnight, following AU bonds underperformance, with the AU-US 10yr bond spread now at 58bps.
- Credit was mixed as indices reflected equity downside that saw Main close 2bp weaker at 89 on a late move wider, while CDX was out 1bp to 80.5, however cash credit was firmer again (including NAB’s new USD deal 75/72 in 3yr and 103/100 in 5yr). Primary activity was sluggish in Europe where 3 IG issuers were in the market pricing EUR1.85bn ahead of the long weekend in London, with little expectation for supply into the end of the week. The US, conversely, saw a solid session with 9 issuers pricing USD14.3bn. Banks dominated proceedings once again led by TDs post earnings USD5.5bn deal which included USD2bn of 3yr at T+95/SOFR+102 (BBSW+105), USD1.5bn of 5yr at T+120 (BBSW+151) and USD2bn of 10yr at T+155, and SHBASS priced USD2bn across 3yr (USD1.2bn at T+85/SOFR+91, BBSW+95) and 5yr (USD800M at T+105, BBSW+137). John Deere was also notable with its USD1.5bn deal across USD1bn of 3yr at T+55 (BBSW+68) and USD500M of 10yr at T+100 (BBSW+137).
Commodity markets
- Crude oil prices rallied for a while, then slipped back as US Secretary of State Blinken said the US wanted to engage with Saudi Arabia on production. September 2022 Brent crude futures closed down $2 or -1.8% at $113.56/bbl. Front month West Texas Intermediate closed slightly higher, just above $115.
- Base metals were mixed, copper and tin closing higher on LME but nickel, zinc and lead slightly softer. Gold was able to rally despite the stronger US dollar and higher yields, bouncing from $1830 to $1846/oz, for a net gain of 0.5% on the day. Iron ore prices were only slightly higher despite all the upbeat talk from Chinese officials about Shanghai reopening. Spot printed flat at $136/tonne, SGX futures up 0.9% at $134.50.
Event Risk
- Australia’s monthly trade surplus has averaged $9.9bn since the start of 2021, including a $9.3bn outcome for March 2022. With exports and imports both anticipated to make modest gains in April, the trade surplus is expected to hold around current levels, at a forecast $9.5bn. We see export earnings up 0.8%, led by coal. Imports may be up by around 0.5%. Volumes, having rebounded sharply in Q1 on the post delta reopening, will continue to trend higher to meet rising domestic demand.
- UK markets are closed until Monday as the spring bank holiday is combined with the Platinum Jubilee holiday.
- US: May’s ADP private payrolls change should continue to reflect robust jobs growth (market f/c: 300k). The final estimate of Q1 productivity is due (market f/c: -7.5%) and initial jobless claims are set to remain at a low level (market f/c: 210k). Meanwhile, factory and durable goods orders should continue to build over this year as inventories are brought back to pre-pandemic levels (market f/c: 0.7% and 0.4% respectively). Cleveland Fed president Loretta Mester speaks on the economic outlook.
Tim Riddell, Macro Strategist, (44 207) 6217129, tim.riddell@westpac.com.au
Jessica Ren, Rates Strategist, 6128253 4214, jessica.ren@westpac.com.au
Imre Speizer, Head of NZ Strategy, (64 9) 336 9929 , imre.speizer@westpac.co.nz
Sean Callow, Senior Currency Strategist, Sydney, (61 2) 8253 4432 , scallow@westpac.com.au
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