Markets Daily
Reports that the ECB could hike by 50bp this week sparked a sharp US$ selloff, AUD bouncing to 0.6900. Equities were also upbeat. Today’s calendar includes a speech by RBA Governor Lowe and UK June CPI.
Yesterday
The RBA Board lifted the intensity of its rhetoric in the July minutes. The option of a 25 basis point increase was quickly dismissed, economic prospects are seen as upbeat, while the need to contain inflationary expectations is paramount. We also heard from RBA Deputy Governor Bullock who said that Australian households were in a “fairly good position” to cope with higher interest rates. Bond yields rose and AUD/USD picked up steam, from just above 0.6800 to 0.6870. Regional equities were mixed, the ASX 200 a clear underperformer, -0.6%.
Currencies/Macro
The US dollar fell against all G10 currencies except JPY (flat) over the day. EUR/USD rose from 1.0130 to 1.0230 with a high of 1.0269, the rally sparked by a Reuters sources story claiming that the ECB this week would consider a 50bp rate rise, versus consistent recent guidance that they would commence the cycle with +25bp. The benchmark deposit rate is a record low -0.5%. GBP/USD rose a net half cent to 1.2000.
USD/JPY bounced off 137.38 to 138.15, the defensive yen underperforming all the majors. AUD/USD extended local session gains to around 0.6900, about +90 pips. NZD/USD rose 70 pips to 0.6225, leaving AUD/NZD a touch higher at 1.1080.
US housing starts fell 2.0% (est. +2.0%, prior -11.9%). Building permits fell 0.6% (est. -2.7%, prior -7.0%). Soaring mortgage rates are clearly affecting starts and permits, with completions still tracking below the path implied by permits and starts likely due to material shortages.
Eurozone CPI inflation in June was finalised at 0.8%m/m and 8.6%y/y, unchanged from the initial readings. The acceleration from 8.1% y/y in May was largely due to sharp price increases for food and energy. Core inflation did decelerate to 3.7% y/y from 3.8% y/y, but inflation excluding energy and unprocessed food came in at 4.6% y/y, up from 4.4% y/y, highlighting that price increases are increasingly widespread.
Interest rates
US 2yr treasury yields rose from 3.14% to 3.22%, while the 10yr yield rose from 2.95% to 3.02% via 3.05%. Markets currently price the Fed funds rate to be 80bp higher at the next meeting on 27 July, and 200bp higher by year end. Australian 3yr government bond yields (futures) rose from 3.28% to 3.37%, while the 10yr yield rose from 3.53% to 3.62%. Markets currently price the RBA cash rate to be 57bp higher at the next meeting in August, and 210bp higher by year end.
Credit indices saw a strong move tighter with Main in 9bp to 111.5 and CDX 5.5bp tighter at 86, with HY also over 30bp tighter, all levels we have not seen since June. US IG cash was also 1-2bp tighter as the US saw bank supply continue in primary markets. While Euro primary activity remained lacklustre, the US saw 5 IG issuers price USD16.5bn with BAC’s jumbo USD10bn deal the standout, supported by large deals from regional bank players BNY Mellon (USD1.75bn across 3 and 7yr calls) and US Bancorp (USD3bn across 5 and 10yr calls). The BAC deal takes supply from the big 6 US banks to USD23.5bn in the last 2 days (USD114bn ytd) as it priced USD2bn of 4nc3yr at T+160 (BBSW+180), USD3bn of 6nc5yr at T+180 (BBSW+217) and USD5bn of 11nc10yr at T+200 (BBSW+240), with NIC of just 3-5bp in the longer tranches providing support for current pricing.
Commodities
Crude markets extended gains as positive risk sentiment and headline earnings beats added to the positive tone. The August WTI contract is up $1.63 at $104.23 while the Sep Brent contract is up $1.17 at $107.44. TC Energy declared force majeure on some crude flows through the Keystone pipeline due to a power outage at a pump station in South Dakota as a result of the heatwave. The Cold Lake crude is favoured by some Gulf refiners which use it for gasoline, diesel and other refined products. Libya restarted its El-feel in the west of the country after Prime Minister Abdul Hamid Dbeibah replaced the leadership of the National Oil Corp late last week.
However, metals weren’t really convinced by the risk on moves elsewhere with copper and aluminium, down 1.7% at $7,298 and $2,385 respectively and zinc down 1.6% at $2,957. BHP warned of an “overall slowing of global growth” due to the war in Ukraine plus Europe’s rolling energy crises, China’s zero-Covid policy, aggressive central bank tightening/ QT plus fiscal cliffs. This followed similar remarks from Rio last week. Alcoa will report later today.
Finally note that iron ore softened in the face of renewed attempts on the part of the Chinese authorities to stabilise the plunging constriction sector. The August SGX contract is down $3.95 at $98.45 while the 62% Mysteel index is down $4.80 at $96.05. BHP’s shipments of iron ore in Q2 dropped to 72.7mt versus a median estimate of 73.1mt. Vale will report later today. Blast furnace utilisation rates in Tangshan dropped to 4-month lows due to rising stockpiles and slumping profit margins.
Day ahead
Australia: The Westpac-MI Leading Index will likely see a further moderation in June although the measure is still tracking above trend. Meanwhile, RBA Governor Lowe will speak on inflation, productivity and the future of money at the Australian Strategic Business Forum, 9:10am AEST.
Eur/UK: European consumer confidence will continue to be hampered by inflation and energy concerns in July (market f/c: -24.9). Meanwhile, the UK’s July CPI report should see energy inflation continue to make a strong contribution (market f/c: 0.7%).
US: Existing home sales are expected to fall again in June as affordability issues continue to lock many out of the market (market f/c: -0.9%).
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