Markets Daily
Surprising strength in a US July services sector survey and company earnings helped lift equities. AUD recovered to 0.6945. Today’s calendar features Australia June trade balance and the Bank of England policy decision.
Yesterday
Australia Q2 retail sales volumes surged 1.4%qtr after 1.0% in Q1, stronger than expected. The ABS said that much of the growth came from “cafes, restaurants, and takeaway foods services, which rose 8.6 per cent over the quarter and continued their post-lockdown resurgence.” However the final July S&P Global Australia services PMI was only 50.9, indicating a soft start to Q3. US House Speaker Pelosi’s visit to Taiwan dominated attention. China equities slumped but Japan, Taiwan and Korea rose. The ASX 200 closed down -0.3% after yesterday’s outperformance. AUD/USD slipped to 0.6886 amid Taiwan jitters but then recovered to 0.6930, little changed net.
Currencies/Macro
EUR/USD was choppy but ultimately little changed at 1.0160. GBP/USD slipped a net 25 pips to 1.2145. USD/JPY rose as high as 134.55 on the US ISM data, then steadied up a net 75 pips at 133.95. AUD/USD found support as US equities rallied, eventually up 30 pips over the day, around 0.6945. NZD/USD similarly recovered from yesterday’s (partly NZ jobs data inspired) low of 0.6213 to 0.6270. AUD/NZD gained a net 0.3% over the day at 1.1075.
The July US services ISM index rose to a robust 56.7 (est. 53.5, prior 55.3), with stronger than expected new orders and production. This contrasts with the recent declines in manufacturing surveys – not to mention the S&P Global services survey – although industry comments still indicate concern about slowing economic activity as rates rise and demand moderates.
US factory orders in June rose 2.0%m/m (est. +1.2%m/m, prior +1.8%m/m). Durable goods orders were finalised slightly higher at +2.0%m/m (from 1.9%m/m initial reading).
Fed’s Bullard and Daly repeated the Fed’s commitment to fight inflation, with more hikes likely. Bullard remained more hawkish and reiterated his views that the US economy as resilient and that he needed convincing evident of inflation easing in order to alter his views on the Fed’s stance. Daly restated that the Fed was data dependent and that 3.4% was a reasonable level for Fed Funds into year end.
St. Louis Fed president Bullard (hawk) said the funds rate may need to be higher for longer in order to bring down price pressures, and that the Fed is going to be "tough" and will get inflation back to 2%. He felt it will take a while for inflation to ease. Richmond Fed president Barkin said: “there is a path to getting inflation under control. But a recession could happen in the process. If one does, we need to keep it in perspective: No one cancelled the business cycle”. Minneapolis Fed president Kashkari said: “we are laser-focused on getting inflation down, and whether we are technically in a recession right now or not, doesn’t change my analysis. I’m focused on inflation”, also deeming rate cuts in 2023 “very unlikely”.
Eurozone services July PMIs were finalised slightly higher, with the pan-Eurozone reading edging up to 51.2 from the flash 50.6, the composite measure at 49.9 from the flash 49.4. Concerns over a cost-of-living related fall in demand more than offset reduced pricing pressures and worries about energy supply and prices. Retail sales in June reflected the weakness seen in German sales on Monday, falling 1.2%m/m (est. flat, prior revised to +0.4%m/m from +0.2%m/m), with y/y sales declining to -3.7%y/y (est. -1.7%y/y, prior +0.4%y/y). Eurozone PPI in June rose 1.1%m/m (est. +1.0%m/m), for a rise of 35.8%y/y (prior 36.2%y/y).
Interest rates
US treasury yields rose initially following strong US economic data and a risk on sentiment reaction to hawkish FedSpeak, however yields retraced to finish unchanged on the day following concerns on growth and geopolitical tensions with the US and China regarding US House Speaker Pelosi’s visit to Taiwan. 2yr government bond yields roundtripped from 3.08% to 3.20% and back, and 10yr government bond yields also roundtripped from 2.71% to 2.85% and back.
Australian bond yields took trend from US price action. 3yr government bond yields (futures) rose from 2.86% to 2.93% before retracing and finishing flat on the day, and 10yr government bond yields (futures) rose from 3.10% to 3.18% before falling back down to 3.11%. The AU-US 10yr bond spread widened slightly overnight, currently at 41bps.
The positive sentiment flowed through to credit spreads with indices closing tighter which saw Main in 4bp to 100.5 and CDX in 3bp to 81.5 with US cash spreads so tighter as primary markets added to what has already been a solid week for volumes as NICs stabilise. The US saw 4 issuers price USD5.4bn across mix of banks and corporates with KeyBank pricing the largest deal of the day (USD2bn across 3/10yr), Williams Co the largest corporate (USD1.75bn across 10/30yr and the 10yr coming at a NIC of just 5bp) and of interest for local investors, Westpac priced its USD1bn of 11nc10yr Tier 2 at T+268 (IPT +295, BBSW+308, BKBM+312, final books USD3.85bn, NIC ~10bp) and PACCAR priced a USD600M 3yr at T+52 (BBSW+73).
Commodities
Crude markets slumped to the lowest levels seen since March on the double whammy of a surprise increase in OPEC+ target production and a plunge in gasoline demand data from the EIA. The Sep WTI contract is down $3.76 at $90.66 while the October Brent contract is down $3.63 to $96.91. OPEC+ lifted supply targets by 100kbpd, citing concerns about potential recessions and the impact of lockdowns. The EIA reported a 4.5mb increase in US crude inventory and a measure of final gasoline demand is now more than 1mbpd below pre-Covid seasonal norm. The Sep RBOB gasoline contract fell 5% and is down 15% over the last week.
Metals continued reversing recent gains on US recession fears and rising geopolitical risks. Copper is down 1.2% at $7,710 while aluminium fell 1.2% to $2,385. MMG announced it would commence talks with community leaders in Peru.
Finally note that iron ore markets weakened on signs that steel demand and production has been dragged lower by the construction industry collapse. The Sep SGX contract is down $4.15 at $109.50 while the 62% Mysteel index is down $3.90 to $108.65. Recent CISA survey data suggests that July steel production activity has softened, clearly dropping below 5yr average levels over the last month. The China steel PMI dropped to its lowest level since 2008 in July and Goldman warned demand for steel will be down 5% this year.
Day ahead
At 11:30am Syd we see Australia’s June trade data. Another very large surplus is expected, though down from May’s record high $16.0bn. Westpac expects exports to have been roughly flat and imports up 3.2%mth for a surplus of $14.6bn.
There is some uncertainty over the Bank of England MPC decision. About two-thirds of economists expect the bank rate to be raised by 50bp to 1.75%, one-third for another 25bp increment to 1.50%. Market pricing is around +44bp. The MPC is also expected to provide some guidance on how it might approach reducing the size of its balance sheet.
US: The trade deficit is expected to remain wide in June (market f/c: -$80bn) and initial jobless claims are beginning to slowly lift from historic lows (market f/c: 260k). Cleveland Fed president Mester is also due to speak, having struck a hawkish tone earlier in the week.
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