Markets Daily
The US dollar rose, helped by hawkish Fed comments, but bond yields fell slightly and equities closed higher. AUD steadied around 0.6915. Today’s data includes Japan July CPI and UK July retail sales.
Yesterday
Australia July total employment: -40.9k from 88.4k in June, a long way short of the +25k consensus. But the unemployment rate slipped to 3.4% from 3.5% as the participation rate unexpectedly dropped to 66.4% from a record high 66.8%. The ABS cited impact from the likes of winter school holidays, worker absences associated with COVID and other illnesses, and further flooding events in NSW. However, this doesn’t explain the huge -87k slide in full-time employment. AUD/USD dropped from 0.6950 to 0.6930, later probing 0.6900, but overall the reaction was muted. Regional equity sentiment was poor, the ASX 200’s -0.2% decline a little better than most.
Currencies/Macro
The US dollar index is up against all G10 FX on the day. EUR/USD fell from 1.0180 to 1.0080 – a one-month low. GBP/USD slumped more than 1 cent to 1.1930. USD/JPY rose about 80 pips to 135.85 despite not much support from US yields. AUD/USD ranged between 0.6899 and 0.6970, overall 15 pips lower at 0.6915. NZD/USD steadied down 25 pips on the day at 0.6255, leaving AUD/NZD up 0.25% at 1.1055.
US existing home sales in July fell for a sixth consecutive month to a 4.81m annualised rate (est. 4.85m, prior 5.11m). The Leading Index in July fell 0.4%m/m (est. -0.5%m/m, prior revised to -0.7%m/m from -0.8%m/m). Weekly initial jobless claims and continuous claims were lower, suggesting that weakness has yet to appear in the labour market. Initial claims of 250k beat estimates of 264k, with continuing claims of 1.437m (est. 1.455m).
In stark contrast to the dismal NY Empire State survey earlier this week, the August Philadelphia Fed business survey rebounded to 6.2 (prior -12.3, est. -5). Although the survey cited steady activity, the majority of indicators improved and price indicators eased from elevated levels. Employment rose to 24.1 from 19.4, new orders -5.1 from -24.9, prices pad to 43.6 from 52.2, and prices received to 23.3 from 30.3. The future expectations index rose from -18.6 to -10.6.
St. Louis Fed president Bullard (hawk) said he is leaning toward another 75bp increase, and a year-end rate of 3.75% to 4%. He added that it is premature to start thinking about easings. Kansas City Fed president George said she has yet to determine the size of a hike (typically hawkish, she dissented in favour of 50bp rather than 75bp in June). Minneapolis Fed president Kashkari (dove) said the Fed still has a long way to go, and is not sure the FOMC can avoid pushing the economy into recession. San Francisco Fed president Daly (centrist) maintained the Fed’s mantra of maintaining rates at higher levels next year (“raise and hold strategy”), but remains open on a 50bp or 75bp hike in September. She advocates a rate of “a little bit above 3.0% this year and a little bit more above 3% next year”.
Eurozone CPI in July was in line with the initial release of +0.1%m/m and 8.9%y/y and a core rate of 4.0%y/y.
Norway’s central bank raised its policy rate 50bp to 1.75%, as widely expected, accompanied by a hawkish statement. It signalled further hikes, as it fights persistently high inflation, needing to dampen the economy to bring inflation back towards target.
Interest rates
US bond yields were slightly lower on the day, and the curve steepened following mixed risk sentiment from US data outcomes as well as hawkish Fed comments. 2yr government bond yields fell from 3.30% to 3.23%, and 10yr government bond yields fell from 2.85% to 2.82%.
Australian bonds took trend from US price action, but slightly outperformed their US counterparts. 3yr government bond yields (futures) fell from 3.12% to 3.10%, and 10yr government bond yields (futures) fell from 3.36% to 3.33%. Markets are fully priced for a 25bp hike at the RBA meeting next month, and 80% priced for a 50bp hike. Cross market spreads continued to narrow, with the AU-US 10yr bond spread at 46bps.
Credit markets saw indices unwind some of yesterday’s weakness as Main closed 2.5bp tighter at 97.5 and CDX was in a bp to 77.5. Supply in EUR saw some weakness in fins cash, however the US has remained more constructive despite a solid night of supply in that market. Europe saw 7 issuers price EUR5.5bn with fins dominating again including Credit Ag with a EUR1bn 7yr Sen Preferred deal at MS+77 (BBSW+146) and Santander UK with its EUR750M 6nc5yr at MS185 (BBSW+251). The US also saw 7 issuers in the market pricing USD7.6bn led by Credit Suisse AG, NY which priced USD2.5bn split evenly across a 2yr at T+155 (BBSW+139) and a 5yr at T+205 (BBSW+232) and Metlife with a USD1.25bn deal including USD750M of 3yr at T+83 and USD500 7yr at T+135.
Commodities
Crude built on the previous day’s gains which were inspired by the EIA significant inventory draws, with record US exports to Europe and geopolitical factors adding to the bounce off 6-month lows. The Sep WTI contract is up $2.42 to $90.53 while the Oct Brent contract is up $2.94 to $96.59. However, liquidity remains light and prices volatile given global recession risks and the potential for an imminent Iran deal. European refineries have been announcing production cuts due to low Rhine water levels with Shell cutting capacity at Germany’s biggest refinery, though rain is expected to lift water levels in the days ahead. Time spreads remained soft with the 1st 2nd WTI spread closing at just 39c after almost hitting $4 just a month ago.
Metals were mixed with hits to both demand and supply confusing the macro picture. Copper is up 1.3% to $8,030 but zinc fell 0.9% to $3,482 with other metals ranging between gains and losses on the day. Scorching weather in China has seen power rationing cull nearly 400kt of annual aluminium capacity according to SMM while Norsk Hydro announced it would shut its 175kt Slovalco aluminium smelter in Slovakia in September due to the power crisis in Europe. Trafigura announced it would halt production at the Budel zinc smelter in the Netherlands “until further notice” due to soaring energy costs.
Finally note that iron ore markets probed the $100 mark with the Sep SGX contract down $1.40 to $101.20 while the 62% Mysteel index fell $1 to $100.15. Bloomberg reported that Chinese excavator sales fell 25% in July though satellite imaging is showing that road construction projects in 13 provinces analysed by Four Squares Technology expanded by 6.3%yy in July after contracting earlier in the year suggesting that infrastructure projects may support the steel sector going forward.
Day ahead
Japan: Ongoing weakness in underlying consumer price pressures is anticipated in July. Consensus is 2.6%yr overall but just 1.1%yr ex-fresh food and energy.
UK: Inflation and pessimism around the growth outlook will continue to weigh heavily on GfK consumer sentiment in August (market f/c: -42). Ongoing pressure on households’ spending capacity should result in another negative print for July’s retail sales volumes (market f/c: -0.2%mth, -3.3%yr).
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