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US bond yields rose with support from data, while currencies were mixed, AUD/USD returning to 0.7020. US equities closed at a high since April. Today’s important calendar includes Australia Q2 wages, the RBNZ policy decision, UK July CPI, US July retail sales and FOMC minutes.

Yesterday

The minutes from the RBA Board’s August meeting largely followed the previously released quarterly statement, though there seemed to be a little more concern over domestically generated inflation. At the same time the ABS released an information paper on a monthly CPI. It said that “The annual rise in the monthly CPI indicator increased from 5.5 per cent in April to 6.2 per cent in May and 6.8 per cent in June.” Given that headline Q2 CPI was 6.1%, the 6.8%yr reading may have been behind a flicker higher in AUD/USD from 0.7010 to 0.7035. By late trade however the Aussie was back around 0.7005, with risk appetite a little shaky. The ASX 200’s 0.6% gain was a regional outperformance.  

 

Currencies/Macro

The US dollar was quite mixed against the G10 on the day. EUR/USD initially fell from 1.0165 to 1.0123 before bouncing to 1.0195 then returning to 1.0170. GBP/USD rose a net 40 pips to 1.2095. USD/JPY found support from a squeeze in Treasury yields, eventually steadying at 134.20, up about 90 pips. AUD/USD is net flat on the day at 0.7020, with a daily range of 0.6991 to 0.7040. NZD/USD underperformed, down 20 pips to 0.6345, leaving AUD/NZD up 0.3% at 1.1065.

 

US industrial production in July was stronger than expected, up 0.6%m/m, with manufacturing rising 0.7%m/m (est. +0.3% for both). Capacity utilisation rose to 80.3% (est. 8.2%, prior revised to 79.9% from 80.0%). Housing starts in July stuttered at an annual pace of 1.446m (est. 1.528m, prior revised to 1.599m from 1.559m). Building permits remained elevated at 1.674m (est. 1.640m, prior 1.696m revised from 1.685m). 

 

The Atlanta Fed's GDP prediction model lowered Q3 to 1.81% from 2.45% last week (A Bloomberg survey of economists indicates 1.5%).

 

Canada’s CPI in July was as expected at +0.1%m/m and 7.6%y/y (prior 8.1%y/y), with oil prices receding but core measures rising.

 

Germany’s August ZEW investor/analyst survey showed the Current Situation at -47.6 vs prior -45.9, Expectations -55.2 vs prior -53.8, Eurozone Current Situation -42.0 vs prior -44.4, and Eurozone Expectations -54.9vs prior -51.1.

 

UK labour data was solid and in line with expectations, with unemployment (3mths to June) at 3.8%. Although employment slipped slightly, jobless claims continued to decline and ex-bonus average earnings rose +4.7%y/y (est. +4.5%y/y).

 

Interest rates

US bond yields rose, taking trend from European price action, as the yield curve bear flattened. . 2yr government bond yields rose from 3.17% to 3.26%, and 10yr government bond yields rose from 2.77% to 2.87% before falling back down to 2.81%. 

 

Australian bond yields rose, taking trend from global price action. 3yr government bond yields (futures) fell to 3.02% before rebounding to 3.08%, and 10yr government bond yields (futures) fell to 3.24% before rising to 3.32%. Markets are fully priced for a 25bp hike next month at the RBA meeting, and pricing an 80% chance for a 50bp hike. The AU-US 10yr bond spread narrowed slightly overnight, currently at 48bps.

 

Credit indices were moved around by the shifts in sentiment last night with Main closing 2bp wider at 94.5, but off its lows late in the day, while CDX out 1.5 to 76, closing near its wides on a whip-saw session. Cash was also a touch weaker as we supply on both sides of the pond.  Europe saw 6 issuers price EUR4.2bn with the list dominated by financials including a EUR750M 10nc5yr Tier deal from SWEDA at MS+215. In the US, 6 issuers priced USD7.8bn with Eaton Corp the largest corporate issuer, pricing USD2bn across 10/30yr in its first return to market since 2017, and GS was the standout on the fins side, pricing USD2.5bn of a 6nc5yr at T+152 (BBSW+181).

 

Commodities

Crude hit six-month lows as the prospect of an imminent Iran deal hit sentiment. The Sep WTI contract is down $2.36 at $87.05 while the Oct Brent contract is down $2.41 at $92.69. Comments from European officials confirmed all parties were studying Iran’s response to the “final” proposal circulated last week which was received Tuesday and “are consulting with the other JCPOA participants and the US on the way ahead”. According to ING, any agreement could unleash 1.3mbpd on the market, with unknown volumes in storage. Crude time spreads continued slumping with the prompt Brent spread closing at 58c versus trade above $5 in July. Meanwhile US Henry Hub natural gas hit 14yr highs on growing concerns over inventory which remains well below seasonal averages while the European TTF equivalent approached record levels on hot weather and Russian supply restrictions. The Japan Korea marker swap hit all-time highs on expectations of increased demand from China to build reserves ahead of the winter.

 

Metals rose with zinc driving the gains as the Budel smelter owned by Trafigura in the Netherlands said it would halt production “until further notice” due to soaring energy costs. Zinc jumped as much as 7.2% though is last up 2.3% at $3,645 while nickel also jumped 2.7% to $22,600. Copper is up 0.3% at $8,005 while aluminium is also up 0.3% at $2,396. The LME will suspend deliveries of Russian nickel with immediate effect, though as a result of the 35% post invasion duty on imports of Russian nickel there is no metal that would be impacted in UK listed warehouses. 

 

Finally note that iron ore markets were mixed with the Sep SGX contract up 20c at $106.50 but the 62% Mysteel index down 60c at $103.70. Weak Chinese steel production and the collapse in the construction industry remains a negative for the market though BHP CEO Mike Henry said that a rebound in China’s infrastructure and automotive activity is underway, however a property market recovery will take “somewhat longer”.

 

Day ahead

Australia’s Q2 wage price index is due at 11:30am Syd. This is the RBA’s preferred wages measure, though it tends to be slow-moving. On this measure, wages growth was a sluggish 2.1%yr pre-pandemic, slumped to 1.4%yr in H2 2020 amid wages freezes and was only up to 2.4%yr by Q1 2022, despite the unemployment rate slipping under 4.0%. Westpac looks for 0.9%qtr, 2.8%yr in Q2, but with downside risks. The median forecast is 0.8%qtr.

 

The Westpac-MI Australia Leading Index will include a mixed batch of component updates but, on balance, looks likely to weaken again.

 

At 12pm Syd, the RBNZ is widely expected to lift the Official Cash Rate by 50bp from 2.5% to 3.0% and to continue signalling further tightening ahead. There will be plenty to absorb in the quarterly statement, followed by Governor Orr’s press conference an hour later.

 

Japan: June’s core machinery orders should point towards a positive level of capital investment in Q2 (market f/c: 1.0%).

 

The second estimate of Eurozone’s Q2 GDP will provide more colour around the upside surprise to output growth (0.7%qtr, 4.0%yr). 

 

Annual inflation in the UK is expected to rise again in July as energy inflation pressures remain. Consensus is 0.4%mth; 9.8%yr, with core inflation ticking up to 5.9%yr. With another wave of retail energy prices looming in Q4, the Bank of England forecasts headline CPI to reach a staggering 13%yr before year-end.

 

US: Pressure on consumer spending from inflation and rising rates are expected to weigh heavily on retail sales in July (Westpac f/c: 0.0%; market f/c: 0.1%). Solid growth in business inventories is reflecting a robust pace of inventory recovery (market f/c: 1.4%). The FOMC’s July meeting minutes will provide more detail around the path for policy through 2022/23.

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