Markets Daily
US inflation softened more than expected in July, boosting equities and weighing on bond yields and especially the US dollar. AUD/USD bounced to 0.7080. Today’s data calendar is low key and it is a holiday in Japan.
Yesterday
Markets were predictably muted ahead of US CPI. AUD/USD traded a tight 0.6947-0.6972 range. Regional equities were mostly weaker, in line with Wall Street’s lead, including the ASX 200, -0.5%. China’s July consumer and producer price inflation came in below expectations, CPI a modest 2.7%yr, PPI 4.2%yr (from 6.1% in June, aided by lower commodity prices).
Currencies/Macro
The US dollar fell sharply against all G10 currencies in response to CPI. EUR/USD rose from 1.0215 to 1.0368 – a one-month high – then steadied at 1.0300. GBP/USD rose a net 1.35 cents to 1.2215, with a high of 1.2276. USD/JPY fell from 135.00 to 132.90. AUD/USD jumped from 0.6975 pre-data to 0.7109 – a two-month high – then steadied around 0.7080. NZD/USD rose 1.1 cents to 0.6400. AUD/NZD is about 20 pips lower over the day at 1.1060.
US CPI inflation in July was not as strong as expected - flat m/m and +8.5%y/y (est. +0.2%m/m, +8.7%y/y, prior +9.1%y/y), while the core measure (ex-food and energy) rose 0.3%m/m and 5.9%y/y (est. +0.5%m/m and 6.1%y/y). Among the detail, there were declines in 10 of the 38 primary components – a turnaround from June which saw gains in all but three components in June and in all 38 components in May, suggesting that the breadth of price increases is diminishing.
The Cleveland Fed's own CPI measure for July rose 0.5% (+0.7% in June), with the annual pace yet to form a peak, at 6.3% (6.0% in June).
Chicago Fed president Evans (dove) said the CPI report was "positive," but warned inflation is still "unacceptably high," in a discussion on the economy and monetary policy. He acknowledged the CPI report was better than prior months but he expects the Fed will be "increasing rates the rest of this year and into next year to make sure inflation gets back to our 2% objective." He expects the funds rate to be around 3.25% to 3.5% by year end, and 3.75% to 4.0% by the end of 2023.
German HICP inflation for July was confirmed at 8.5%y/y in the final reading, up from 8.2% in June.
Interest rates
US bond yields fell and the curve bull steepened following US CPI data, which showed a slowing of inflation from last month, with markets suspecting that inflation could have peaked already. 2yr government bond yields fell from 3.29% to 3.07%, but finished at 3.22%. 10yr government bond yields fell from 2.81% to 2.67% before retracing to 2.80%.
Australian bond yields followed US price action after the US CPI release. 3yr government bond yields (futures0 fell from 3.11% to 3.05% via 2.97%, while 10yr government bond yields (futures) fell from 3.28% to 3.27% via 3.18%. Markets are fully priced for a 25bp hike at the RBA meeting next month. Cross market spreads widened on the back of AU underperformance, with the AU-US 10yr bond spread now at 47bps.
Credit markets followed the equity lead with indices sharply tighter as Main closed in 6.5bp at 96.5 and CDX was in by a similar amount (6.5bp to 76.5) and now down to levels we haven’t seen since April. US cash credit was also sharply tighter with a full session to trade the news and a limited slate for primary. Just the 3 issuers came to market (not bad given uncertainty ahead of the data) to price USD1.75bn with Texas Instruments issuer the largest issuer on the day, however it downsized the WNG deal from USD1bn to USD700M across 10/30yr.
Commodities
The slower than expected pace of inflation in the US helped crude prices push back to a one week high, with the slide in the US$ a clear support factor. The Sep WTI contract is up $1.09 at $91.59 while the Oct Brent contract is up 77c at $97.08. Constraining the move higher was news that Transneft, the operator of the Druzhba pipeline announced that flows will resume after Hungary’s national refiner Mol Nyrt resolved a payment issue. Flows to Hungary, and Slovakia will resume Thursday though the Czech Republic was not included in the payment agreement. Crude inventory rose by a larger than expected 5.4mb though and distillate by 2.1mb. Gasoline inventory fell 4.9mb. US crude production rose another 100kbpd to 12.2mbpd. The Sep RBOB gasoline contract rose 3.7% on stronger demand data from the EIA. The Sep NBP UK natural gas contract rose 9.1% to a 2-week high.
Metals rose on the lower-than-expected US CPI data, with copper up 1.2% at $8,077, zinc up 2% at $3,609 and nickel up 4% at $22,415. Aluminium continues lagging heavily though, up just 0.2% at $2,496. Despite the jump in copper and decline in the US$, bets that copper will head lower into the end of year have picked up with a large buyer of Comex copper puts struck at US$2.5/lb was noted. China imposed lockdowns on the city of Guixi, known as China’s copper city due to the massive smelting facilities. Residents are not allowed to leave compounds and buses and taxis have been suspended.
Finally note that iron ore markets saw modest gains with the Sep SGX iron ore contract up $2.85 to $111.50 though the 62% Mysteel index slipped 15c to $108. Russian steelmaker Evraz has put its North American business up for sale.
Day ahead
Australia: Melbourne Institute consumer inflation expectations for August should continue to mirror the lifts in actual inflation, the previous survey at 6.3%yr.
Japanese markets are closed for the Mountain Day holiday.
US: Producer inflation is expected to cool further in July as businesses continue to work through supply issues (market f/c: 0.2%mth; 10.4%yr). Initial jobless claims are gradually lifting from their historic lows (market f/c: 264k).
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