Markets Daily
Sentiment weakened after strong UK inflation and solid US retail sales data but improved a little on the FOMC minutes. AUD/USD trimmed losses around 0.6935. The calendar highlight is Australia July employment, with US data second-tier.
Yesterday
Australia’s wage price index rose 0.7% in Q2, softer than Westpac’s 0.9% forecast and the market’s 0.8%. Including June the last five prints from the WPI index have been 0.7% for June, March, and December 2020, 0.6% for September 2020 and 0.4% in June 2020. So, there has been a steady gradual rise in the WPI Index and it is far from what you would describe as a wages breakout. The RBNZ increased the OCR by a further 50 basis points to 3%, as was widely expected. The RBNZ statement focused heavily on inflation pressures and capacity constraints, particularly in the labour market. The projected peak in the cash rate was lifted slightly to 4.1%, and the expected pace of rate increases was brought forward. This prompted a bounce in the Kiwi, AUD/NZD dropping from 1.1050 to lows under 1.1000 before grinding back to 1.1040. AUD/USD chopped down half a cent over the day to 0.6970 despite upbeat regional equities including a 0.3% gain for the ASX 200.
Currencies/Macro
The US dollar rose against most G10 currencies on the day. EUR/USD was choppy as it negotiated the US retail sales data and FOMC minutes, ultimately little changed at 1.0175. GBP/USD slipped 50 pips to 1.2050. USD/JPY followed Treasury yields up from 134.20 to around 135.50, then slipped a little on the minutes. AUD/USD extended its local session decline to 0.6911 before steadying around 0.6935, net -90 pips or -1.3%. NZD/USD similarly fell from 0.6345 to 0.6280 despite the hawkish RBNZ. AUD/NZD retraced around half of its post-RBNZ decline, steadying around 1.1045.
US retail sales in July were mixed, with the headline flat m/m (est. +0.1%/m) but ex-auto and gas sales up 0.7%m/m (est. +0.4%m/m) and the important core control group up 0.8%m/m (est. +0.6%m/m, prior to +0.7%m/m from +0.8%m/m). The drop in gasoline prices was cited as helping sales lifts in the control group. Business inventories in June were in line with consensus at +1.4%m/m.
The FOMC minutes provided little new information, but made it clear that policy is data dependent. Policymakers noted inflation remained "unacceptably high" and wanted to stress their commitment by noting were acting with "resolve" to lower inflation. It was also stated it would be appropriate to move to a restrictive stance near term, with a significant risk that inflation becomes entrenched. However, there were also dovish signs as it was indicated that some parts of the economy were slowing and that as policy tightened further, it would become appropriate at some point to slow the pace of increases. They also said that due to lags, the bulk of the tightening had yet to be felt. Some members worried that these lags could result in over-tightening.
UK inflation data in July was stronger than expected. CPI rose 0.6%m/m and an eye-catching 10.1%y/y (est. +0.4%m/m and 9.8%y/y, prior 9.4%y/y). Core CPI rose +6.2%y/y (estimate 5.9%y/y, prior 5.8%y/y). RPI, which is still used by parts of the public sector for price/contract indexing, rose 12.3%y/y (est. 12.0%y/y, prior 11.8%y/y).
Interest rates
US bond yields rose, taking trend from European price action following UK CPI data, but retraced some of the gains following Fed minutes. 2yr government bond yields rose from 3.16% to 3.37% before settling at 3.28%, and 10yr government bond yields rose from 2.81% to 2.92% before falling and settling at 2.87%.
Australian bond yields continue to be driven by global influences, and yields rose overnight. 3yr government bond yields (futures) rose from 3.03% to 3.16%, and 10yr government bond yields (futures) rose from 3.26% to 3.38%. Markets are fully priced for a 25bp hike at the RBA meeting next month, and 80% priced for a 50bp hike. Cross market spreads narrowed slightly on the back of AU outperformance, with the AU-US 10yr bond spread at 47bps.
Credit indices were weaker as inflation moved the market again with Main out 5bp to 99.5 and CDX was 2.5 wider at 78, but US cash credit was more positive as supply remains relatively light and last night extended that run with no USD supply. We did see a return to action for the Euro primary market with SSA’s heavy in the mix, but there were also saw 5 issuers in the corps/fins space price EUR5.25bn. RWE was the largest corporate deal of the day with its EUR1.25bn 3yr (MS+100), with banks of note including ING’s 11nc6yr green Tier 2 deal at MS+250 (BBSW+330) and Lloyds completed a EUR1bn 8nc7yr at MS+150 (BBSW+224).
Commodities
Crude recovered from 6-month lows with the weekly EIA inventory report supporting sentiment. The Sep WTI contract is up $1.43 at $87.96 while the Oct Brent contract is up $1.21 at $1.21. Crude inventory fell by a huge 7mb and gasoline by 4mb. Crude exports jumped by a massive 2.89mbpd to an all-time record 5mbpd. Bloomberg tracked the ‘second US SPR cargo headed for Rotterdam in a month’ with “about 45 million barrels of crude are expected to reach Europe in the month of August, which would be the highest since 2019 when Bloomberg started compiling data”. Meanwhile natural gas prices in the US hit fresh 14yr highs with the Sep Henry Hub contract trading as high as $9.677/mmbtu before closing at $9.24. The October Asian JKM hit fresh record highs at $56.82/mmbtu up 29% so far this month and 41% so far this quarter.
Metals were generally lower with copper down 0.7% at $7,920, nickel down 0.9% at $22,035 and zinc down 3.9% at $3,528. However, aluminium bucked the trend rising a modest 0.9% to $2,413 as Norsk Hydro announced it would shut its 175kt Slovalco smelter in September due to the power crisis in Europe. Traders were also watching developments in Sichuan province in China where electricity was being rationed due to soaring temperatures. Toyota and CATL were reported as closing battery plants due to the drought-induced power crisis in the Sichuan region.
Finally note that iron ore slipped towards $100 with concerns over weak demand and rising supply hitting prices. The Sep SGX contract is down $3.90 to $102.60 from the same time yesterday while the 62% Mysteel index is down $3.55 to $100.15.
Day ahead
At 11:30am Syd we see Australia’s July labour force survey. Given the solid demand for labour as evinced by job vacancies and consumer/business surveys, Westpac anticipates employment to lift at an around trend pace of 50k in June (market f/c: 25k). With only a small increase in participation, the unemployment rate should tick downwards from 3.5% to 3.4%.
Eur: The final estimate of July’s CPI will provide more colour around the breadth of inflation pressures facing the Euro Area. The preliminary estimate was 8.6%yr, core 4.0%yr.
US: The August Phily Fed index is set to mirror the weakness evident in other regional surveys (market f/c: -5). Existing home sales are expected to decline in July as worsening affordability locks prospective buyers out of the market (market f/c: -4.9%). The July leading index will point to a deteriorating growth outlook (market f/c: -0.5%) and initial jobless claims are expected to continue gradually lifting from historic lows (market f/c: 264k).
Kansas City Fed president Esther George is due to speak. She is historically hawkish but dissented in June against the FOMC’s late decision to opt for 75bp rather than the repeatedly flagged 50bp hike. Minneapolis Fed president Kashkari (dovish before this year) will also speak.
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