Markets Daily
Markets started the week quietly ahead of the Fed decision and US GDP data due later this week. AUD recovered to 0.6950. Today’s calendar includes US July consumer confidence.
Yesterday
The local calendar was empty ahead of the key Australia CPI data on Wednesday. AUD/USD was unchanged net at 0.6920, but only after touching 0.6879 amid regional equity weakness. Almost all major markets took their cue from Wall Street’s selloff Friday, so the ASX 200’s roughly flat close was a clear outperformance, materials and utilities offsetting losses in services companies.
Currencies/Macro
The US dollar was mixed on the day. EUR/USD ranged between 1.0179 and 1.0258. GBP/USD rose half a cent to 1.2045. USD/JPY nudged up 0.4% to 136.65. AUD/USD rose a net 25-30 pips over the day to 0.6955. NZD/USD recovered to flat on the day, leaving AUD/NZD up half a cent at 1.1110.
The Chicago Fed national activity index for June disappointed at -0.19 (est. 0.00, prior -0.19), much of the weakness in the production related components. The Dallas Fed manufacturing survey for July also disappointed at -22.6 (est. -18.5), prior -17.7) – lowest since May 2020, although pricing components did recede.
Germany’s IFO business survey disappointed at 88.6 in July (est. 90.1, prior 92.2). The expectations component fell sharply, from 85.5 to 80.3. The threat of a cut in energy supply and downward revisions to the global growth outlook are weighing on confidence, and recession risks appear to be rising.
The ECB's Visco (Italy) said that it will follow a data dependent approach to policy normalisation, but stressed that "moving step by step" doesn't mean "being very slow". Kazaks (Latvia) rejected the notion "that this was the only front-loading", adding that "the rate increase in September also needs to be quite significant".
Interest rates
US bond yields were slightly higher overnight, as markets await the FOMC decision later this week to establish a medium term outlook. 2yr government bond yields rose from 2.98% to 3.04%, and 10yr government bond yields rose from 2.77% to 2.81% via 2.84%.
Australian bond yields took trend from US price action, yields were higher on the day. 3yr government bond yields (futures) rose from 3.15% to 3.17%, and 10yr government bond yields rose from 3.36% to 3.38% via 3.42%. Markets are currently fully priced for a 50bp hike at the next RBA meeting. Cross market spreads widened slightly on the back of AU underperformance, with the AU-US 10yr bond spread now at 58bps.
Credit indices were a fraction tighter Main and CDX both half a bp tighter at 104.5 and 85.5 respectively, while cash was little changed. Europe saw a fairly quiet session in primary again with TD’s EUR2.5bn 2 tranche deal the most notable on the day including EUR1bn 5yr at MS+105 (BBSW+184) and EUR1.25bn of 10yr at MS+130 (BBSW+220), however the US was more active. The US saw 6 issuers price USD13.5bn with post earnings deals from financials remaining a key theme (Amex USD3.5bn across 3/10yr and CAF USD2.25bn of 3/7yr included) in addition to RBC pricing USD2.75bn across a USD1.5bn 2yr at T+95 (BBSW+98) and USD1.25bn of 5yr at T+135 (BBSW+172), while Kinder Morgan was the sole corporate with its USD1.5bn deal across 10yr and 30yr.
Commodities
Crude markets rallied as super tight physical markets were compounded by signs that Russia is set to significantly restrict gas flows to Europe through the end of July. The Sep WTI contract is up $1.99 to $96.69 while the Sep Brent contract is up $1.84 to $105.04. Gazprom said it would cut gas supplies through the Nord Stream 1 pipeline to 33mcm/d from Wednesday, 25% of average capacity for this time of year, because it was halting another turbine for maintenance. Natural gas prices spiked on the news with the August European TTF contract up 10% and the UK equivalent up 3% to a fresh 4 month closing high. The US August Henry Hub gas contract also rose 6% to a 1 month high due to forecasts of hot weather continuing through end July and into August. However, Libyan crude production hit an important milestone of 1mbpd following a recent agreement that saw the leadership of the National Oil Corp recently replaced. Libyan production dropped to around 50% of normal from mid-April. The Keystone pipeline also returned to normal operations following a power disruption last week that saw TC Energy declare force majeure on some crude flows due to an outage caused by extreme heat.
Metals were mixed with copper up a modest 0.4% to $7,482 while nickel fell 0.4% to $22,025. However, aluminium fell a more noticeable 2.7% to $2,408 despite the spot to 3m price rising into positive territory for the first time in 4 months on coming European production cuts and on-warrant LME inventory hitting fresh all-time lows. There was little fresh news across the energy complex though concerns about European recession rose on news Russia cut gas deliveries to Germany.
Finally note that iron ore markets stabilised above $100, helped by news late last week that China’s State Council approved a plan to set up a 50bn yuan fund to provide backing to distressed developers. The fund can be increased to as much as 300bn yuan if required. The Sep SGX contract is up $3.25 to $107.25 while the 62% Mysteel index is up $2.55 to $102.90.
Day ahead
US: New home sales are expected to decline in June given ongoing construction headwinds and affordability concerns (market f/c: -5.0%). Consequently, the gradual slowing in price momentum should be evident in May’s FHFA and S&P/CS home price indices (market f/c: 1.5% for both). Inflation concerns are still weighing heavily on consumer confidence (market f/c: 96.9) and the July Richmond Fed index will continue to show a deteriorating outlook for manufacturing (market f/c: -22).
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