Markets Daily
The Fed hiked by 75bp as expected but signalled a slowdown in tightening pace, boosting equities and weighing on the US dollar and bond yields. AUD bounced to 0.7000. Today’s data includes Australia June retail sales and US Q2 GDP.
Yesterday
Australia’s CPI rose 1.8% in Q2. This increase was the second highest since the introduction of the GST, topped only by Q1’s 2.1%qtr. The annual pace lifted from 5.1% to 6.1% the fastest pace since the introduction of the GST (6.1%yr June 2001) and significantly faster than the mining boom peak in Q3 2008 of 5.0%yr. This broad spread inflationary pulse was captured by 1.5% gain in the trimmed mean. The ABS reports that annual goods inflation was the highest since 1987, as the impacts of supply disruptions, rising shipping costs and other global and domestic inflationary factors flowed through the economy. Markets seemed to have been braced for an upside surprise, as yields tumbled and AUD/USD fell from near 0.6950 to a low of 0.6913, later steadying around 0.6935. The ASX 200’s 0.2% gain was fairly typical of the region.
Currencies/Macro
The US dollar fell against all G10 currencies on the day, especially after the FOMC decision. EUR/USD rose 0.8% to 1.0200, with about 60 pips of the gains coming during Fed Chair Powell’s press conference. GBP/USD rose a net 1.3 cents to 1.2160. USD/JPY followed Treasury yields lower, though net only 30 pips to 136.60. AUD/USD rose from 0 6930 pre-FOMC to a high of 0.7012, its first trade above 0.7000 since 17 June, then steadied just under the figure. NZD/USD recovered from 0.6200 to 0.6265. AUD/NZD retraced its earlier CPI-led loss, from a low of 1.1094 to 1.1165. Its high of 1.1178 was a high since October 2017.
The US Federal Reserve’s FOMC announced a 75bp rate hike to a band of 2.25% to 2.50%, as was widely expected, and signalled further tightening: the Committee "anticipates that ongoing increases in the target range will be appropriate." The vote was unanimous: 12-0. It also confirmed that the balance sheet will continue to be reduced. There was reiteration that it is "strongly committed to returning inflation to its 2% objective" and it is "highly attentive to inflation." On the economy, it said "recent indicators of spending and production have softened," in contrast to June which said "overall economic activity appears to have picked up.". In his press conference, Chair Powell said it was appropriate for the Fed to move expeditiously and to front load rate hikes, but at some point it will be "appropriate to slow down." He said there is some evidence that labour demand may be slowing, albeit from very high levels.
Interest rates
US bond yields fell, despite the FOMC raising 75bps overnight, as Fed Chair Powell was dovish in his commentary, and emphasised that they will go back to a meeting-by-meeting basis for future rate hike decisions. 2yr government bond yields fell from 3.08% to 2.96%, and 10yr government bond yields fell from 2.78% to 2.72% before rebounding to finish flat on the day.
Australian bond yields fell, taking trend from US price action overnight. Yesterday’s CPI came in slightly under expectations, which saw markets rally and took all possibility of a 75bp hike out of pricing for the RBA meeting next week. 3yr government bond yields (futures) fell from 3.05% to 2.93%, and 10yr government bond yields (futures) fell from 3.30% to 3.17%. Cross market spreads narrowed on the back of AU outperformance, with the AU-US 10yr bond spread now at 44bps.
Credit spreads were firmer last night with Main taking back some of the losses of the previous evening to be 4.5bp tighter at 110, CDX was in 4bp to 83.5 with most of the gains realised before the Fed, and US cash was also stronger from the open. Primary markets were effectively closed ahead of the Fed, but the remainder of the week becomes more interesting as we close in positive territory with sentiment intact.
Commodities
Crude took the Fed’s 75bps hike in its stride, and the sharp fall in EIA inventory added to the gains into the end of the session. The Sep WTI contract is up $3.20 at $98.18 while the Sep Brent contract is up $2.99 at $107.39. The scramble for thermal energy in Europe has seen the Brent WTI spread hit the widest since mid-2019, in turn driving increased US exports of crude. US crude inventory dropped by a hefty 4.5mb last week while US crude exports rose 21% to a record 789kbpd. Gasoline inventory also dropped 3.3mb. Adding to concerns about a tight physical market, a power outage in Kazakhstan saw reduced power to pumping stations on the CPC pipeline and the Atyrau Refinery halt production. The power outage was due to bad weather conditions. And finally note that Saudi Arabia is expected to announce a further hike in its Arab Light crude differential to Asia to a record $10.80 for September loadings.
Copper jumped 1.6% to a 2-week closing high of $7,654 on Fed chair Powell’s comments that future hikes would be ‘data-dependent’ though other metals were less convinced with aluminium up just 0.2% to $2,426. That’s despite the 32% rise in European natural gas prices so far this week and news that smelters would cut production due to high electricity prices in August. Volkswagen announced a €20bn investment into its new battery company, PowerCo. The company will employ 20,000 workers across 6 factories in Europe, with a planned capacity of 240GWh of lithium-ion battery production.
Finally note that iron ore markets held onto recent gains with the Sep SGX contract up $2.40 to $113.15 though the 62% Mysteel index fell 80c to $110.20. 12 blast furnaces have resumed production according to a report by Shanghai Metals Market as China has rolled out wave after wave of policy to support the plunging property market. Spot rebar prices remain weak however, trading close to a 2 year low of ¥4,000/ mt. Hot rolled steel prices plunged below that level for the first time since November 2020 and are down 12% so far this month pointing to soft demand.
Day ahead
Australia’s official data is due at 11:30am Syd/9:30amm Sing. Australian credit and debit card data suggests retail sales should post a solid gain in June, concealing the backdrop of weakening confidence (Westpac f/c 0.6%). A strong lift in export prices is anticipated in Q2 given the strength of commodity prices (Westpac f/c: 8.0%), while a higher AUD likely tempered the lift in import prices from global energy inflation (Westpac f/c: 2.0%).
Australia’s federal treasurer Jim Chalmers will also deliver a Ministerial Economic Statement to Parliament, which he has been busy previewing in very gloomy terms. The new government’s first actual budget is due in October.
NZ: ANZ business confidence is set to remain low in July as price pressures remain elevated.
Eur: Inflation and energy concerns will continue to weigh heavily on economic confidence (market f/c: 102) and business confidence.
US: The broad-based slowdown in activity growth will produce another lacklustre GDP print in Q2, driven primarily by weakness in consumption (Westpac f/c: -0.5% annualised; market f/c: 0.4% annualised). Given Q1’s -1.6% reading, a negative of any size in Q2 will stoke another round of debate about recession.
US initial jobless claims are slowly starting to lift from historic lows (market f/c: 250k) and the Kansas City Fed index should highlight an increasingly fragile manufacturing outlook in July
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