Markets Daily
The ECB hiked by 50bp but the euro rose only modestly as Italy’s government collapsed. US bond yields tumbled on a poor business survey. AUD rose to 0.6930. Today’s calendar is dominated by flash July PMIs in various countries.
Yesterday
Regional equities were quite mixed, China and Hong Kong notably weaker but most others firmer, including the ASX 200, up 0.5%. AUD/USD was choppy but overall a touch lower at 0.6880.
Currencies/Macro
The US dollar is down against all G10 currencies on the day. EUR/USD initially jumped from 1.0196 to 1.0278 following the ECB rate hike, but eventually steadied up about 0.5% at 1.0225. GBP/USD was volatile, trading 1.1890 to 1.2004 then steadying at 1.1995. USD/JPY initially rose to 138.88 before falling to 137.40 as US bond yields tumbled. AUD/USD dipped as low as 0.6859 then rallied to 0.6935. NZD/USD is only a touch higher on the day at 0.6250, leaving AUD/NZD up almost 50 pips at 1.1090.
The ECB hiked its policy rates by 50bp (to 0.50% refinancing rate and 0.00% deposit rate), against expectations of a 25bp hike. It said the larger than initially expected rate hike was "based on the Governing Council's updated assessment of inflation risks and the reinforced support provided by the TPI for the effective transmission of monetary policy". The statement noted that additional rate hikes at the upcoming meetings are likely, with the decision taken on a meeting by meeting basis. Also announced was a new bond purchasing tool (TPI) to counter price fragmentation among countries’ bonds. The new program is potentially unlimited and can be activated to "counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area". In the ensuing press conference, President Lagarde hinted at further ECB surprises: “We are much more flexible, in that we are not offering forward guidance of any kind,” Lagarde said.
US weekly initial jobless claims rose to 251k (est. 240k, prior 244k). Continuing claims also rose, to 1384k (est. 1340k, prior 1333k).
The Philadelphia Fed business survey fell sharply in July to -12.3 (est. +0.8, prior -3.3) – a 26-month low. Many of the sub-indexes declined, including pricing indicators. The six-month ahead business outlook index fell to the lowest since 1979.
Interest rates
US 2yr treasury yields initially rose 4bp following the ECB hike, but then fell from 3.27% to 3.09%, while the 10yr yield fell from 3.05% to 2.90% via 3.08%. In addition to recession concerns, market inflation expectations receded, the 10yr BEI falling from 2.39% to 2.30%. Markets currently price the Fed funds rate to be 78bp higher at the next meeting on 27 July, and 180bp higher by year end.
Germany’s 2yr government bond yield jumped from 0.63% to 0.78% following the ECB rate hike, but later completely retraced. It currently sits at 0.68%. The 10yr yield rose from 1.29% to 1.38% before falling to 1.20%, likely reflecting recession concerns.
Australian 3yr government bond yields (futures) fell from 3.34% to 3.27% via 3.39%, while the 10yr yield fell from 3.58% to 3.49% via 3.64%. Markets currently price the RBA cash rate to be 56bp higher at the next meeting in August, and 220bp higher by year end.
Credit indices moved tighter in Europe and the US despite some volatility across the day, with Main at 108 (-2) and CDX IG at 84 (-1), while primary issuance was muted given the ECB release. Europe recorded no primary transactions on the day and the US saw one issuer come to market to price USD2.0b (CSX Corp).
Commodities
Crude markets slumped as the ECB raised rates by 50bps and stalling gasoline demand and rising Covid cases in the US hit sentiment. The Sep WTI contract is down $3.44 at $96.44 while the Sep Brent contract is down $2.93 at $103.99. Libyan production also rose above 700kbpd with output expected to rise further to 1.2mbpd within a week to 10 days. The August RBOB gasoline contract fell 3.9% to hit a 3-month low. However, natural gas prices rose in Europe as the Nord Stream pipeline restarted albeit with flows at about 40% of capacity. The August TTF contract initially fell to a 2-week low on news of the restart before rising 6% on constrained flows. The August UK NBP equivalent contract rose 11% after a UK to Belgium interlink restarted.
Metals were mixed with copper down 1.7% to $7,299 and zinc down 1.6% to $2,958 while aluminium rose a modest 0.4% to $2,439 and nickel rose 2% to $21,600. The copper focus remains on the property market collapse in China with China South City Holdings yesterday seeking to extend maturities on its bonds and pay principal in instalments. Romania’s Alro Property Group said it will suspend aluminium production in August due to the surge in power prices.
Finally note that iron ore markets remained below $100 as Baowu Steel warned of ‘crisis conditions’ due to the “complex macro economy” and severe Covid situation in China presenting “great challenges” for the steel industry. The Sep SGX contract is last at $99.25, down 25c while the 62% Mysteel index is down $2.60 at $95.75.
Day ahead
A number of flash July PMIs from S&P Global (Markit) are released today, including the low-profile Australian surveys. The June readings were 56.2 on manufacturing, 52.6 on services.
Japan: Weakness in underlying consumer price pressures is anticipated in May (market f/c: 2.4%yr headline, 0.9%yr ex-fresh food and energy). The easing of health restrictions is providing support to the Nikkei services PMI although supply issues pose near-term risks to the manufacturing PMI in July.
Eur/UK: Both in Europe and the UK, supply and cost pressures will continue to weigh on the S&P Global manufacturing PMIs (market f/c: 51 and 52) as inflation pressures pull momentum out of the services PMIs (market f/c: 52 and 53). These price pressures will continue to be the chief culprit behind weakness in GfK consumer sentiment (market f/c: -42) and UK retail sales (market f/c: -0.2%).
US: Another fall in the S&P Global manufacturing and services PMIs is anticipated in July (market f/c: 52.0 and 52.7).
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