Markets Daily
US equity markets adopted a more risk averse posture, Walmart’s guidance reinforcing the mood. AUD/USD limited its decline to 0.6945. Today’s key calendar features Australia Q2 CPI and the FOMC policy decision.
Yesterday
The US dollar remained on the back foot, AUD/USD popping as high as 0.6983 before consolidating at 0.6965, up slightly on the day. Regional equities were mixed, lacking direction ahead of the FOMC meeting later in the week. There were no data releases.
Currencies/Macro
The US dollar and Swiss franc were strongest on the day as risk aversion picked up. EUR/USD fell from 1.0230 to 1.0130. GBP/USD recovered to 1.2040, net flat. USD/JPY drifted slightly higher, to 136.85. AUD/USD chopped slightly lower, to 0.6945. NZD/USD fell 25 pips to 0.6235. AUD/NZD rose from 1.1110 to 1.1143 – a one-month high.
US July consumer confidence (Conference Board) disappointed at 95.7 (est. 97.0, prior 98.4). Among components, the job strength index fell to a 14-month low, while 1-year ahead inflation expectations slipped to 7.6% from June’s all-time high of 7.9%. The July Richmond Fed manufacturing survey beat expectations, at 0 (est. -14, prior -9). New home sales in June fell 8.1% (est. -5.9%, prior +6.3%) to a 26-month low. The median price fell 9.5% from May (April the all-time high). House prices (CoreLogic) rose 1.3% in May (est. 1.5%, prior 1.7%), for an annual pace of 19.8% (prior 20.6%).
The IMF again downgraded its world growth outlook and warned of a global recession. It forecasts growth of 3.2% this year (was 3.6%), and 2.9% in 2023. Notable risks included the Ukraine war, Russian sanctions, growth in China, fresh pandemics, and price pressures and rate hikes. It forecasts global consumer prices will rise by 8.3% this year (was 7.4%).
Interest rates
US bond yields were mixed, with front end yields increasing slightly while the long end fell initially but closed flat on the day. Markets are awaiting for this week’s FOMC, to establish near term price action from here. 2yr government bond yields rose from 3.00% to 3.06%, and 10yr government bond yields fell to 2.80% to 2.71% before rebounding and closing flat on the day.
Australian bonds took trend from their US counterparts, as domestic markets await for today’s all-important CPI data. 3yr government bond yields (futures) fell from 3.19% to 3.15%, and 10yr government bond yields (futures) fell from 3.38% to 3.29% before rebounding and closing 1bp lower on the day. Markets are fully priced for a 50bp hike at the next RBA meeting. The AU-US 10yr bond spread narrowed following AU outperformance, currently at 56bps.
Credit was split with Europe weaker on the ongoing energy threat that saw Main out 10bp (to 114.5) and XO 46bp wider, while US moves were more contained as CDX closed out 2bp to 87.5. US cash was little changed, however we also saw a quiet session for primary markets with this likely to continue this evening ahead of the Fed.
Commodities
Crude markets fell in line with the broader market moves ahead of an expected jumbo Fed rate hike and IB price downgrades. The Sep WTI contract is down $1.51 at $95.19 while the Sep Brent contract is down $0.8 at $104.35. Morgan Stanley downgraded its crude forecast by $10/$20 through to mid-2023 with Brent seen at $110 in Q3 and $100 in Q4. However, industry consultant FGE noted that with limited new refining capacity set to come online in 2022 and 3mb/d of capacity shut in 2020/21, global refining capacity outside of China will only return to pre-2019 levels by 2024. The White House is beginning to outline plans to refill the SPR with the approach designed to provide support for the oil and energy industry through more stable long-term pricing. Purchases are likely to begin after fiscal 2023 and could be made via fixed-price tenders. Natural gas markets exploded on news that Gazprom was cutting deliveries to Germany via the Nord Stream pipeline. The August European TTF contract jumped 13% after being up 21% at the highs, closing at a 4-month high. The UK equivalent jumped 9% while the US August Henry Hub contract was at one point up 11% to a fresh record high.
Metals saw improved price action as longer-term demand drivers started to kick in. The likes of GM and Ford announced deals to source EV metals to facilitate increased production. Agreements with suppliers of Argentinian lithium and Indonesian nickel will help drive the sharp increase in production at US battery cell plants. Copper is up 0.9% at $7,545 while aluminium rose 0.6% to $2,422. Zinc rose 1.7% to $3,036. Premiums for prompt metal have been picking up with the spread between spot and three-month aluminium rising to $9.25, a high back to early March while the equivalent for zinc is at a high back to June, suggesting physical demand is rising.
Finally note that iron ore markets remained better bid with Sep SGX contract up $3 at $110.25 while the 62% Mysteel index rose $8.10 to $111. Recent policy announcements in China have clearly helped stabilise iron ore markets after sharp falls in Q2 with the announcement of a bailout fund to support distressed construction companies helping to drive a circa $10 jump in prices in the last week. That’s despite warnings from the likes of Goldman that the property crisis in China will see the iron ore market swing into a significant 67mt surplus end 2022 versus a deficit of 56mt in the first half. Goldman cut its 3- and 6-month iron ore price targets to $70 and $85 from $90 and $110.
Day ahead
At 11:30am Syd/9:30am Sing we see Australia’s Q2 CPI. In terms of key drivers, ongoing construction input inflation should see a solid lift in dwelling prices, while food and auto fuel components are also primed for a strong contribution. Westpac’s forecast of a 1.7%qtr (6.1%yr) lift in the headline CPI are slightly lower than the market’s (1.9%qtr; 6.3%yr). Widespread pressures from both domestic and international sources will support a solid 1.4%qtr (4.6%yr) gain in the trimmed mean measure.
China: Industrial profits will rebound as the recovery from COVID-19 ensues.
Economists and markets firmly expect the US Federal Reserve’s FOMC to raise the funds rate by 75bp to 2.25-2.50% (4am Thu AEST). With no new quarterly forecasts, the focus will be on any tweaks to the statement and particularly Chair Powell’s press conference.
US wholesale inventories should post another robust gain in June (market f/c: 1.5%); however, economy-wide performance is varied, as evinced by businesses’ struggles against supply issues with durable goods orders (market f/c: -0.4%). Meanwhile, pending home sales are expected to decline in June as higher mortgage rates weigh on housing demand (market f/c: -1.0%).
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