Markets Daily
A mixed US jobs report was taken by markets as soft, weighing on bond yields. The closure of a gas pipeline to Europe helped the US$ recover and hurt US equities after Europe had closed higher. AUD/USD returned to 0.6790. Today’s data includes Australia Q2 company profits and inventories. US markets are closed.
Friday
An empty data calendar ahead of the keenly awaited US payrolls report left markets lacking direction. The ASX 200 closed down -0.3%, fairly typical of the region. AUD/USD traded a very tight 0.6780 to 0.6801 range.
Currencies/Macro
The US dollar was volatile on Friday, ultimately lacking clear direction. EUR/USD initially rose from 0.9980 to 1.0034 following the US jobs data, but later fell to 0.9948 following the gas pipeline news and starts the week slipping towards 0.9900. Sterling underperformed, GBP/USD down about 75 pips at 1.1470, closing in on the March 2020 lows. USD/JPY ranged sideways between 139.87 and 140.79. AUD/USD roundtripped from 0.6790 to 0.6855 and back. NZD/USD is net unchanged at 0.6085. AUD/NZD thus returned to 1.1160.
US non-farm payrolls in August rose 315k (est. 298k, prior slipped just below 300k, prior 526k), but the prior two months were revised down by 107k. A rise in the participation rate to 62.4% (est. 62.2%, prior 62.1%) saw unemployment rise to 3.7% (est. unch. at 3.5%) and underemployment rise to 7.0% (from 6.7%). Average hourly earnings rose 0.3%m/m and 5.2%y/y (est. +0.4%m/m and 5.3%y/y, prior 5.2%y/y). Average weekly hours fell to 34.5 (est. unchanged at 34.6). Overall, the report was not as strong as the market had expected.
US factory orders in July disappointed, falling 1.0%m/m with ex transport -1.1%m/m (est. +0.2%m/m and +0.4%m/m).
Eurozone PPI in July rose 4.0%m/m and +37.9%y/y (est. +3.7%m/m and +37.3%y/y). The key driver remained energy (+97.2%y/y), but more broadly durable consumer goods rose 9.8%y/y and non-durable consumer goods +13.8% (excluding energy and construction, broader prices rose +15.1%y/y).
Russian energy company Gazprom announced its Nord Stream gas pipeline to Europe will remain shut, supposedly due to technical issues. Markets responded by pricing a higher chance of recession in Europe.
Interest rates
US bond yields fell and the curve continued to steepen following mixed outcomes from the US payrolls report on Friday 2yr government bond yields (futures) fell from 3.50% to 3.39%, and 10yr government bond yields fell from 3.26% to 3.18%.
Australian bond yields rose, continuing to take trend from US price action ahead of tomorrow’s RBA board meeting. 3yr government bond yields (futures) fell from 3.38% to 3.28%, and 10yr government bond yields (futures) fell from 3.72% to 3.63%. Markets are fully priced for a 25bp hike at the September RBA meeting next week, and pricing in a 95% chance of a 50bp hike. Cross market spreads narrowed on the back of slight AU outperformance, with the AU-US 10yr bond spread at 45bps.
Credit indices reflected the shifting sentiment on Friday with strong gains early that saw Main close 6.5bp tighter at 113, however CDX gave up a positive open that saw it trade as low as 88 to ultimately be 1.5bp wider at 92 by the close as it matched moves in US equity. Cash markets were also weaker and primary was absent again, however that is not surprising on a payrolls Friday heading into the Labor Day weekend. That also means a quiet start this week.
Commodities
Crude fell last week as the prospect of global recession rose and the supply situation remained uncertain. The October WTI contract rose 26c Friday to close at $86.87 though it fell a hefty $6.2 or 6.6% on the week while the November Brent contract rose 66c Friday but fell 6% on the week. Traders largely shrugged off an announcement from G7 leaders of plans to cap the price of Russian crude though prices did pop on a US State Department statement that noted Iran’s response to nuclear deal proposals was “not constructive”. Over the weekend, Gazprom announced that it would indefinitely suspend natural gas flow through the Nord Stream 1 pipeline due to a technical fault. Siemens Energy, who maintains the turbines on the pipeline, stated that “such leakages do not usually affect the operation of a turbine and can be sealed on site”. European natural gas prices continued their aggressive slump Friday with the October TTF contract down 12% Friday to be down 37% on the week. Over the weekend Sweden and Finland were forced to intervene in their power markets with emergency liquidity measures while Germany said it would impose a windfall tax on electricity generators to help fund a household support package. Goldmans noted that the G7 plan could backfire if Russia shuts in production and halts shipments to Europe and NATO buyers which would be a “bullish shock” to the market. OPEC+ meets Monday.
Metals were mixed Friday in pre-US holiday trade with copper down 0.6% at $7,552 while zinc slumped 3.8% to $3,137. However, aluminium did manage to gain 0.4% to $2,305 while nickel jumped 2% to $20,715. Gold also bounced from below $1,700. That mixed price action masked significant losses on the week with nickel down 4.4%, aluminium down 5.3%, copper down 7%, zinc down 11.5% and tin down 13% while the LMEX slumped 7.5% on the week. The surging US$, global recession risks and Chinese lockdowns all played a part in the weakness. Wood Mackenzie estimated that Europe has already lost 1mt of annual aluminium production capacity due to rampaging power prices with 25% of that to be curtailed permanently while another 500kt is “highly vulnerable” to closure. Europe’s aluminium output has dropped to the lowest level since 1973.
Finally note that iron ore slumped through the week on the Chengdu lockdowns, rising inventory and global steel production cuts. The October SGX contract fell 55c to $94.50 while the 62% Mysteel index fell 80c to $94.65. That’s a fresh 10 month low for the Mysteel index, down 10% on the week. ArcelorMittal announced it would idle three massive steel plants in Europe due to “exorbitant rise in energy prices” plus “weak market demand and a negative economic outlook”. Blast furnaces in Bremen and Hamburg will be partly shut at the end of the month while the Asturias plant in Spain will also be idled.
Day ahead
At 11:30am Syd we see further data to help shape forecasts for Australia’s Q2 GDP report on Wednesday. Another strong print for company profits is anticipated in Q2, led by a surge in commodity prices supporting the mining sector (Westpac f/c: 4.5%). The burst in activity and fewer disruptions over Q2 should facilitate a strong lift in inventories (Westpac f/c: 1.6%).
At 11am Syd, the August Melbourne Institute Australia inflation gauge should remain well above the RBA’s target band and ANZ job ads will hold at a high level.
Japan: The final estimate to August’s Nikkei services PMI is due.
China: Virus risks will likely see the Caixin/S&P Global services PMI weaken in August but remain in strong expansionary territory (market f/c: 54.0).
Eur/UK: Sentix investor confidence will remain at a weak level in August given immense uncertainty (market f/c: -26.8). European retail sales will continue to reflect the pressure on household’s spending capacity in July (market f/c: 0.4%). The final estimate to August’s S&P Global services PMI is due for both Europe and the UK.
The United Kingdom’s new prime minister will be announced at 12:30pm local time, with polls of Conservative Party members suggesting Liz Truss defeats Rishi Sunak.
US markets are closed for the Labor Day public holiday.
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