Markets Daily
The effects of Fed Chair Powell’s hawkish speech on Friday lingered. European and US equities fell further and bond yields are higher. AUD however recovered to 0.6900, net unchanged. Today’s data includes Australia July building approvals and US August consumer confidence.
Yesterday
The ABS preliminary estimates of Australia retail sales showed a much stronger than expected 1.3% gain in July. That compares to a subdued 0.2% rise in June and marks the strongest monthly gain since March. Consensus was +0.3%. The detail shows a broad-based lift with nothing to suggest the monthly gain is a ‘rogue’. That said, rising retail prices undoubtedly account for a sizeable part of the rise, with volumes likely to have been somewhat flatter. Given the steep fall in US equities Friday, regional shares fell as expected (ASX 200 -2%) but there was also fresh risk aversion as yields resumed their rise e.g. US 2-year Treasury yields gapping higher and US equity futures fell further. Little wonder then that the Aussie extended Friday’s selloff, from 0.6900 to 0.6850.
Currencies/Macro
The US dollar was mixed after its broad gains Friday. EUR/USD recovered from a low of 0.9914 to just above 1.0000. GBP/USD trimmed its losses to 35 pips, at 1.1705. USD/JPY followed US Treasury yields higher, steadying up just over 1 yen on the day at 138.70. AUD/USD fell as low as 0.6841 in the Sydney afternoon but then recovered to 0.6900, net flat. NZD/USD rose 15 pips to 0.6155. AUD/NZD edged down slightly, to 1.1215.
The Dallas Fed manufacturing survey rose as expected in August, to -12.9 (est. -12.7, prior -22.6). The components were mixed. New orders rose to -4.4 versus -9.2 but were negative for a third consecutive month. Hours worked increased to 14.4 from 9.5, with wages rising to 45.8 from 38.1. But employment fell to 15.6 from 17.9, and prices paid fell to 34.4 from 38.4.
Minneapolis Fed president Kashkari told Bloomberg he is "actually happy" the markets got the message from Chair Powell's Jackson Hole speech, adding "people now understand the seriousness of our commitment to getting inflation back own to 2%." He was "certainly not excited" when the stock market rose after the July FOMC meeting. The Fed should be willing to risk overtightening, but the best tactic to deal with the monetary policy lags should be to get to a place and "sit there until we're really convinced that we've got inflation licked."
Interest rates
Bond yields rose as markets continue to digest Powell’s hawkish comments last Friday. 2yr government bond yields rose to 3.40% before settling at 3.42%, 10yr government bond yields range traded between 3.08% and 3.12% before settling at 3.10%.
Australian bond yields continued to take trend from US price action before the RBA board meeting next week. 3yr government bond yields (futures) rose from 3.31% to 3.42%, and 10yr government bond yields (futures) rose from 3.63% to 3.69%. Markets are fully priced for a 25bp hike in September, and pricing in a 90% chance of a 50bp hike. Cross market spreads were little changed, with the AU-US 10yr bond spread at 58bps.
The London holiday put a halt to activity in Euro credit markets, but the US reflected the Powell driven risk off sentiment with CDX another 2bp wider at 88 and cash credit was also 2-3bp wider as the threat to growth mounts. Primary markets remained closed.
Commodities
Crude markets rose to almost 2-month highs as fighting continued in the Libyan capital Tripoli, Iranian nuclear negotiations look set to drag into September and Shell cautioned that Europe may face several winters of exorbitant power bills. The October WTI contract is up $3.78 at $96.84 while the October Brent contract is up $3.86 at $104.85. Gas markets in Europe fell though with the September TTF contract down a hefty 19.6% as the EU Commission President revealed at a summit in Slovenia that leaders are working on an emergency intervention and structural reform of the electricity market in Europe. Details are still being developed, but are likely to involve a series of tax cuts, price subsidies, public building heating and light controls and bans. The EU Energy Council will hold an extraordinary meeting Sep 9.
Metals were muted after the hawkish message from Fed Chair Powell at the weekend with copper unchanged at $8,128 after earlier weakness. Aluminium is up a hefty 2.3% though at $2.490 helped by the focus on transportation bottlenecks due to Covid lockdowns in parts of Henan Province in China while aluminium smelters were said to be almost totally shut down in the Sichuan province due to the ongoing power crisis.
Finally note that iron ore markets weakened as profits slumped at FMG and Mineral Resources. Chinese steel producer Angang Steel also reported net income down 70% with the outlook “subject to considerable uncertainties”. Retiring FMG CEO Elizabeth Gaines was more upbeat though stating Chinese demand is set to remain strong as “China will probably produce about a billion tons of crude steel again this calendar year, which is consistent with the previous year”. The September SGX contract is down $2.15 at $101.65 while the 62% Mysteel index is down $4.15 at $101.05.
Day ahead
Aust: Dwelling approvals are likely to show a clearer weakening in July (Westpac f/c: -5.0%).
Eur/UK: The highly uncertain outlook will continue to impact European economic confidence (market f/c: 98) and consumer confidence in August. In the UK, rising rates and a slowing economy should weigh further on net mortgage lending in July (market f/c: £5.0bn).
US: Momentum in the FHFA and S&P/CS home price indexes is set to slow further in June (market f/c: 0.8% and 0.9% respectively). Inflation remains the key headwind for August Conference Board consumer confidence, but job uncertainty is also a key developing risk (market f/c: 97.7). Indeed, JOLTS job openings are off their peak and are expected to continue softening in July (market f/c: 10475k). The FOMC’s Barkin and Williams are due to speak at different events.
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