Markets Daily
Asia’s positive risk mood cooled in US trade. US manufacturing sentiment was steady in July and price pressures fell sharply. AUD rose to 0.7025. Today we see the RBA policy decision and Australia June housing finance and building approvals data.
Yesterday
Regional equity sentiment was upbeat, most key indices posting sharp gains. The ASX 200 closed up 0.7% though it was a bank holiday in NSW. AUD/USD edged up 20 pips to 0.6990 before starting to rally as London markets came online.
Currencies/Macro
The US dollar was mostly softer. EUR/USD rose from 1.0220 to 1.0260, GBP/USD up 80 pips to 1.2255. USD/JPY slipped from 132.60 to 131.65, printing one-month lows. AUD/USD rose from 0.7000 to 0.7047 – a six-week high – then steadied at 0.7025. NZD/USD rose from 0.6280 to 0.6330, with 0.6353 a one-month high. AUD/NZD slipped a net 10 pips to 1.1095.
The July US ISM manufacturing survey at 52.8 was above estimates of 52.0 (prior 53.0). The details showed a sharp pullback in both prices paid and new orders, and some slippage in employment, while inventories reached their highest level since 1984. Prices paid tumbled from 78.5 to 60.0, versus consensus around 74.
Eurozone July manufacturing PMI was finalised higher at 49.8 (from a flash reading of 49.6), despite softer Spanish and Italian outturns. German retail sales in June fell 1.6%m/m (and -9.8%y/y - largest fall since 1980), against estimates of +0.3%m/m, as inflation, cost of living and growth concerns sapped consumer activity. Eurozone unemployment in June was in line with expectations at 6.6%.
Interest rates
US bond yields fell for the first time in 4 trading sessions, as markets put last week’s dovish comments from the Fed as well as weakening manufacturing data into consideration for a risk off move. 2yr government bond yields fell to 2.87%, and 10yr bond yields fell from 2.69% to 2.58%.
Australian bonds took trend from US price action, and yields fell as a result. The market consensus is a 50bp hike for the RBA board meeting today, however the main focus will be on their comments, which markets will find clues on what they may do next. 3yr government bond yields (futures) fell from 2.86% to 2.81%, and 10yr government bond yields fell from 3.15% to 3.06%. Cross market spreads widened overnight, with the AU-US 10yr bond spread now at 49bps.
Credit indices were marginally weaker but that follows a strong end to July on Friday with Main out a bp to 101 last night, but well inside the July wides of ~126, and CDX was 2bp wider at 82.5, again well off the July wide of 102. US cash credit is also well of its wides of early July (~15bp) despite being flat to a bp wider last night. Primary activity was mixed with no activity in Europe, but the US saw a strong open to the week with USD15.4bn priced across 8 issuers including jumbo deals from Apple and UBS. Apple priced USD5.5bn in 4 parts (7-40yr) including a USD1bn 7yr at T+63 and a USD1.5bn 10yr at T+78, while UBS priced USD5bn including a USD1.75bn 3nc2yr at T+160, a USD1.75bn 5nc4yr at T+205 and a USD1.5bn 10nc11yr at T+240.
Commodities
Crude markets remain caught between two opposing forces. On the one hand the rolling thermal energy crises in Europe adds to concerns about higher prices if inventory cannot be rebuilt and we have another cold winter. On the other hand, moves to ration energy will just add to risks of slower growth, and the recent run of PMIs certainly added to concerns about slower growth. The drop in the official NBS China PMI reported over the weekend, plus the Caixin version reported yesterday added more focus on the weaker growth story with the Sep WTI contract down a hefty $4.68 to 93.94 while the October Brent contract fell $3.94 to $100.03. Adding to the weaker crude prices, Libyan crude production rose to a 3-month high of 1.2mbpd while the EU sought to water down Russian crude sanctions if they are deemed essential to shipments of food, agricultural goods and are destined to third countries outside of the EU. LNG prices in Asia surged with talk of Australia utilising the Australian Domestic Gas Supply Mechanism to limit exports due to rising risk of a shortage of gas on the east coast.
Metals gave back some of the month end gains with copper down 1.5% at $7,800 and aluminium down 1.6% at $2,450. Weak PMI data in China and signs that the plunge in real estate activity continued weighed on sentiment though aluminium inventories continue falling at an alarming rate and are down 61% so far this year. Protests at the Las Bambas copper mine in Peru were again noted.
Finally note that iron ore markets softened after weaker than expected China Caixin PMI data and lack of additional policy from the Politburo meeting late last week. Thursday’s meeting talked about measures to “stabilise the property market” without mentioning any fresh initiatives. The Sep SGX contract is down $3.05 to $113.00 while the 62% Mysteel index fell another $2.50 to $112.00.
Day ahead
The RBA is quickly moving the cash rate back to “neutral” - and then beyond, in more measured steps. At the August meeting (2:30pm Syd/12:30pm Sing), we anticipate that the Board will lift rates by 50bps - the third consecutive move of 50bps - to 1.85%. Australia’s headline inflation is expected to climb to over 7% by year end, well above the RBA’s 2–3% target band. The labour market is the tightest in 50 years and wages growth is accelerating, albeit from modest levels. It is in this environment that the RBA is removing ultra-easy monetary conditions and will shift to a contractionary stance. Westpac anticipates that the cash rate will rise to 3.10% by year end and then peak at 3.35% in February 2023. The expected path is another 50bps in September, and then 25bps moves at each meeting thereafter (with no meeting in January).
At 11:30am Syd/9:30am Sing we see updates on Australian housing. With rates rising rapidly and building costs surging, dwelling approvals should see renewed weakness in June (Westpac f/c: -5.0%). The downturn in housing finance is expected to show through more clearly in June (Westpac f/c: -5.0%); affordability constraints are set to impact owner-occupiers more strongly than investor financing for the month (Westpac f/c: -5.5% and -4.5% respectively).
UK: Nationwide house price growth should begin to show some slowing in July as rate hikes begin to take effect (market f/c: 0.2%).
US: JOLTS job openings will continue to indicate an extraordinary demand for labour in June (market f/c: 11000k). Meanwhile, the FOMC’s Evans and Mester are due to speak at different events and the New York Fed will release its Q2 household debt and credit report.
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