Markets Daily
A small downward revision to US Q2 GDP and slower August private payrolls growth weighed on the US dollar and bond yields. Equities rose again but the AUD bounce was unwound, back to 0.6475. Today’s busy data calendar includes Australia Q2 capex, China August PMIs, Eurozone August CPI and US July PCE.
Yesterday
Australia’s monthly CPI Indicator printed 0.3%mth, 4.9%yr. Electricity prices rose 6.0%mth, gas & other fuels 2.3%mth, clothing & footwear 2.5%mth and dwelling purchases 0.7%mth. Offsetting was falling prices for food –0.2% and, recreation –1.5%mth. The inflation rate was close to Westpac’s 4.8% forecast but below the 5.2% median forecast so had some market impact. Released at the same time, Australia total dwelling approvals declined -8.1% in July following a -7.9% drop in June, both months unwinding a big 20% jump in May, the profile largely reflecting a volatile monthly profile for ‘high- rise’ unit approvals. Private house approvals ticked up 0.1%mth after -1.0% in June. Q2 construction work rose 0.4%qtr after jumping a revised 3.8% in Q1. AUD/USD fell from 0.6470 to 0.6450, then trimmed losses. Given the strong lead from Wall Street, the ASX 200 was already up 0.9% before the data which gave it a boost enroute to a 1.2% closing gain.
Currencies/Macro
The US dollar was mixed against major currencies on the day, dipping in response to the US data but fully recovering against some currencies. EUR/USD rose 0.4% to 1.0925, helped also by above-expectation German inflation data. GBP/USD rose 0.6% to 1.2720. USD/JPY fell from about 146.25 to a low of 145.56 but then recovered to 146.15, net +0.2% on the day. AUD/USD bounced to 0.6522 after the US data but then rolled over to 0.6475 despite US equity gains, net flat on the day. NZD/USD spiked to 0.6007 then slid back to 0.5950, net 20 pips lower. This left AUD/NZD up 0.3% at 1.0880.
US Q2 GDP, in its second estimate, was lowered to a 2.1% annualised pace (est. and initial 2.4%). Personal consumption for Q2 was revised higher to 1.7% (est. 1.8%, initial 1.6%). The core PCE deflator for Q2 was revised lower to 3.7% (est. and initial 3.8%).
US ADP private sector payrolls in August rose 177k (est. 195k, prior 371k). The report indicated the pace of job creation has returned to pre-pandemic rates after two years of exceptional gains, and wage indicators had slowed to the slowest pace since October 2021.
German CPI in August rose 0.3%m/m and 6.1%y/y (est. 6.0%y/y, prior 6.2%y/y), with ex-food and energy remaining at 5.5%y/y.
Interest rates
US 2yr treasury yields fell from 4.93% to 4.83% post-data then edged back to 4.89%, while the 10yr yield fell from 4.15% to 4.09% then back to 4.11%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 4bp higher at the next meeting on 20 September, with a 55% chance of a hike in November.
Australian 3yr government bond yields (futures) fell from 3.80% to 3.73% while the 10yr yield fell from 4.08% to 4.04%. Markets are pricing the RBA cash rate, currently at 4.10%, to be unchanged in September, with a 45% chance of a hike in February.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be 1bp higher at the next meeting on 4 October, with a 40% chance of a hike in February.
Credit indices held on their recent gains with Main half a bp tighter to be back below 70bp (69.5) and CDX unchanged at 62.5 leaving it locked at ytd low levels. US IG cash was flat to a bp weaker, and has been little changed over the last week, with US primary activity also remaining largely absent. Europe has been a little busier with another 12 issuers pricing ~EUR10.5bn (ex-SSA) making it EUR25.6bn in the last 2 days. Corporates were again notable in the mix with 8 issuers coming to market (BT, Telefonica, Philips all up) as Engie priced the largest deal of the day with its EUR3bn 4-part offering (4-19yr).
Commodities
Crude markets were only modestly higher despite a massive drop in EIA crude inventory, a coup in Gabon and chatter that Russia was in talks about extending supply cuts into October. The October WTI contract is up just 47c at $81.63 while the October Brent contract is up 46c at $85.95. The EIA reported a 10.58mb drop in crude inventory, taking stocks to the lowest since December last year. Crude production was unchanged at a post Covid record of 12.8mb while crude exports rose to a hefty 4.528mb and crude imports dropped to 6.6mb. Analysts will be watching for a pickup in inventory for this week due to the Garyville fire and Hurricane Idalia impact. Refineries are also approaching maintenance season when output is switched to winter fuels. Soldiers seized power in OPEC member Gabon, cancelling Saturday’s election and dissolving the country’s constitution. The military takeover follows a coup in Niger. Gabon averages around 200kbpd of crude production. Interfax reported that Russia is discussing extending oil export curbs into October though a decision will be made on the market situation. Russia is committed to cutting exports by 300kbpd from the June level having cut by circa 574kbpd in July according to industry sources. Rosneft CEO noted that intermittent oil output cuts are curbing the developments of the nation’s crude production capabilities.
Gas prices rose modestly in Europe ahead of the beginning of strike action which is due to start September 7. Gorgon and Wheatstone account for about 6% of global supply with Japan likely to suffer the most as the country accounts for circa 65% of the 75% of output that is contracted.
Metals were modestly higher with copper up 0.2% to $8,468 and aluminium above $2,200 for the first time in 3 weeks, up 1.5% to $2,201. Morgan Stanley recently flagged long term supply issues that could drive the aluminium market into deficit, with the risk-on mood helping too. Eramet confirmed it will restart its manganese mine in Gabon on Thursday after a brief halt in the wake of the military coup in the country. Gabon is the number two world supplier of manganese which is widely used in stainless steel production.
Iron ore prices again eked out reasonable gains with the September SGX contract up $3.50 from the same time yesterday to $114.50 while the 62% Mysteel index is up $2.30 to $116.30. Capital Economics argued that Chinese steel prices are likely to drop through 2024 as demand growth weakens and excess capacity weighs on the market. Real estate accounts for circa 37% of China’s steel output while broader building and construction consumes around 60%. ANZ expects steel demand to drop 22% this year to 275mt though growth in infrastructure will offset a significant part of this with overall steel demand dropping 5% to 910mt. Baoshan Steel reported earnings largely in line with expectations with weaker than expected gross profit numbers being offset by higher-than-expected sales volumes. Baosteel produced 25.9mt in H1 2023, up 3%yy while export orders rose 27%yy to 3mmt. China will report PMIs Thursday and Friday including the monthly steel PMI.
Day ahead
At 11:30am Syd we see Australia’s Q2 real business investment data and nominal investment plans. The expiration of tax breaks end-June should have contributed to another solid lift in private new capex in Q2 (Westpac f/c: 2.0%, market 1.0%). Estimate 3 for 2023/24 capex plans should continue to reflect a diverging outlook, featuring a moderating trend in equipment investment.
Australia private credit growth is expected to have picked up slightly in July but to remain subdued overall (Westpac and market f/c: 0.3%).
NZ: Lower dairy prices may put pressure on the recent uptrend in ANZ business confidence.
At 11:30am Syd, the China August official manufacturing and non-manufacturing PMIs will provide a timely gauge of employment trends across key sectors. Consensus is for little change versus July, manufacturing at 49.2 and services at 51.2.
Eurozone: Momentum in services inflation will remain the chief focus of the August CPI report, an important release ahead of the ECB’s September decision. Consensus is 5.1%yr versus 5.3%yr in July, with the core rate edging down to 5.3%yr from 5.5%. The unemployment rate should meanwhile hold at a record low (market f/c: 6.4%).
US: Growth in personal income has sustained despite slowing jobs growth, allowing personal spending to continue ticking higher (Westpac f/c: 0.3% and 0.6% respectively). That said, initial jobless claims are still yet to signal a material increase in job shedding (market f/c: 235k). The August Chicago PMI should meanwhile reflect a subdued manufacturing outlook (market f/c: 44.2) and the July PCE deflator is expected to broadly match the CPI outcome (Westpac f/c: 0.2%). Atlanta Fed president Bostic is also due to speak.
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