Markets Daily
US equities continued to rise on expectations that inflation may have peaked and Fed tightening may slow. Bond yields and currencies were mixed, AUD edging up to 0.7115. Today’s data includes China July retail sales and industrial production and the August NY Fed Empire State survey.
Friday
The data calendar was largely empty. Tokyo equity markets reopened from holiday with >2% gains but otherwise regional markets were quite mixed, the ASX 200’s -0.5% fall one of the softer performances. AUD/USD was a touch higher overall, within a tight range of 0.7089 to 0.7126.
Currencies/Macro
The US dollar rose against most of the G10 on Friday, with the Aussie and Kiwi outperforming. EUR/USD starts the week around 1.0260, down about 60 pips, GBP/USD -75 pips at 1.2130. USD/JPY rose 55 pips to 133.55. AUD/USD made a marginal net gain to 0.7115. NZD/USD rose 15 pips to 0.6450. 0.6468 was a two-month high. AUD/NZD ranged sideways around 1.1040.
US import prices in July fell -1.4%m/m and rose 8.8%y/y (est. 9.4%y/y, prior 10.7%y/y), while export prices fell -3.3%m/m and rose 13.1%y/y (prior 18.1%y/y). Notably, the ex-petroleum import index fell -0.7%m/m (consensus -0.2%m/m).
The advance August University of Michigan consumer sentiment survey saw a rebound in economic expectations and a mixed inflation profile. The headline index rose to 55.1 from 51.5 (est. 52.5), with expectations for the economy rising to 54.9 from 47.3 (est. 48.5). 1yr-ahread inflation expectations fell to 5.0% (prior 5.2%, est. 5.1%), while the 5-10yr-ahead measure rose to 3.0% (est. 2.8%, prior 2.9%). Confidence appeared to be supported by a slowdown in inflation and mortgage rates, as well as a partial stock market recovery. Against that, there remain ongoing headwinds from recession concerns and diminishing support from last year's fiscal stimulus.
The Philadelphia Fed’s survey of professional forecasters projected a 1.4% growth in the economy in Q3, down from 2.5% projected in the prior survey three months ago. Q4 is projected at a 1.2% rate versus 2.3% previously. For 2022 (annual average/annual average), the forecast is for a 1.6% rate falling to a 1.3% rate in 2023.
Richmond Fed president Barkin said the Fed won't declare victory on inflation yet. He needs to see price pressures falling and under control on a sustained basis, and getting inflation down to the 2% target should require short term rates to be in restrictive territory.
Eurozone industrial production in June rose 0.7%m/m (est. +0.2%m/m), with May revised higher and lifting the annual rate to +2.4%y/y (est. +1.0%y/y).
UK Q2 GDP fell -0.1% (est. -0.2%), with notable weakness in both private consumption (-0.2%q/q, est. flat) and especially public spending (-2.9%q/q, est. -0.2%q/q), offset by gains in investment and net trade data.
Interest rates
US bond yields were mixed on Friday, with the curve flattening after hawkish Fedspeak saw short end yields higher and recession fears saw long end yields lower. 2yr government bond yields rose from 3.20% to 3.25%, and 10yr government bond yields fell from 2.90% to 2.83%.
Australian bond yields range traded but closed at the lower end of the range, as domestic sentiment continues to be affected by global price action. 3yr government bond yields (futures) range traded between 3.16% and 3.23%, closing at 3.17%, and 10yr government bond yields (futures) ranged between 3.40% and 3.50%, closing at the lower end of the range. Cross market spreads widened; the AU-US 10yr bond spread is now at 56bps.
Credit indices recorded another strong session to close the week with Main 2bp tighter at 92 having opened the week at 100 while CDX was 4bp tighter at 73.5 to be 7bp tighter over the week and well off its peak above 100bp in June. US cash was tighter again as Lipper reported a second week of IG inflows following 18 weeks of outflows, and while there was no supply on Friday, bonds issued this week have joined the rally including Credit Suisse which saw some fairly elevated NICs (30-40bp) for its Hold Co deal on Monday, but has now seen ~40bp of tightening in its 26s and 28s to close out the week.
Commodities
Crude markets fell Friday but finished up on the week as traders balanced global recession risks and possible Iranian supply against warnings of strong liquids demand coming into the winter. The Sep WTI contract fell 2.4% or $2.25 to $92.09 Friday but rose 3.46% on the week while the Oct Brent contract fell $1.45 Friday to close at $98.15. The prospect of a possible Iran nuclear deal was a key catalyst for the weak close with Iranian TV stating EU proposals “are acceptable if they can reassure Iran on various issues including political claims related to safeguards, sanctions and guarantees”. The IEA raised its demand forecasts last week by 2% or 380kbpd for 2022 noting soaring gas prices and heatwaves with demand centred in the Middle East and Europe. Super low water levels on the Rhine are becoming more of a market focus too, with a key marker at Kaub falling below 40cm Friday, a level beyond which barge business on the upper and middle Rhine is no longer viable. At the same time though stockpiles are projected to swell 900kbpd for the rest of the year as Russia’s oil output proves more resilient and supplies are topped up by SPR releases. As a sign of easier supply, prompt time spreads hitting multi-month lows with the Brent 1st 2nd spread trading briefly at 99c last week while the WTI equivalent collapsed to 63c, a fresh 4 month low.
Metals gave back some of the gains as softer credit data in China crimped demand. Copper fell 0.75% Friday to $8,112, zinc fell 2% to $3,609, nickel fell 2.7% to $23,015 and aluminium fell 3.47% to $2,4433. Copper still managed to close up 3% on the week though while zinc jumped 3.5%. The combination of a heatwave and Covid restrictions in China is starting to hit operations at metals plants in China with reduced power impacting run rates at Tongling Nonferrous in the Anhui province. China will report industrial production data for July, with focus on steel and aluminium output.
Finally note that iron ore markets weakened into the end of the week. The Sep SGX contract is down $3.10 at $109.75 while the 62% Mysteel index fell $1.6 to $108.60. The continued rise in China’s port inventory weighed on sentiment Friday. China will report steel production for July Monday while BHP will report quarterly profits on Tuesday.
Day ahead
Japan: GDP growth is expected to begin a moderate recovery in Q2 after the omicron-related slowdown earlier this year (market f/c: 0.7%qtr). The final estimate of June’s industrial production is also due.
China’s July activity data is due at 12pm Syd. The rebound in services PMIs suggests a recovery in retail sales to 4.9%yr from 3.1%yr in June. Ongoing strength in fixed asset investment and industrial production have been key to the recovery so far (market f/c: 6.2%yr ytd and 4.3%yr respectively).
India and South Korea are closed for holidays.
UK: Rate hikes are beginning to slow momentum in Rightmove’s house prices.
The New York Fed’s Empire State manufacturing index is expected to weaken in August although new orders growth is providing some support (market f/c: 5 vs 11 in July). The August NAHB housing market index will continue to highlight the intense cost and supply pressures facing builders (market f/c: 55).
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