Markets Daily
Markets were mostly contained given the US holiday. The Eurostoxx 50 closed down -1.5% in response to Russia’s gas pipeline closure. Bond yields rebounded while AUD/USD held around 0.6800. Today’s focus is the RBA policy decision. Data includes Australia Q2 balance of payments and public finance plus US August services ISM.
Yesterday
Australia business inventory levels increased by only 0.3% in Q2, materially softer than anticipated. The outcome implies that inventories will have a large negative impact on GDP in the quarter – subtracting -1.1ppts, a larger drag than our forecast -0.5ppts. Company profits printed an increase of 7.6% for the June quarter, which was above expectations around 4.5%. Russia’s ongoing closure of the Nord Stream gas pipeline was the main topic of conversation, with EUR/USD sliding under 0.9900 to fresh 20-year lows. But regional equity sentiment was mixed, the ASX 200 closing up 0.3%. AUD/USD showed limited concern over risk appetite, slipping 30 pips early to 0.6790 but then trading very tight ranges.
Currencies/Macro
The US dollar was mixed on the day. EUR/USD was pressured for a few hours as markets focused on Russia’s extension of the closure of Nord Stream which was announced after the European close Friday, reaching 0.9878, a fresh 20-year low. But gas prices didn’t rise as much as expected and equities crept off their lows, helping the euro grind back to 0.9940. GBP/USD fell to 1.1444 but rallied back to 1.1550 by Tuesday morning. USD/JPY rose 30 pips to 140.50. AUD/USD was fairly quiet, eventually edging back to 0.6800 from a low of 0.6773. NZD/USD is also net unchanged on the day at 0.6105, leaving AUD/NZD at 1.1160.
Eurozone retail sales in July rose 0.3%m/m and fell -0.9%y/y (est. +0.4%m/m, -0.8%y/y). June’s reading was revised to -1.0%m/m from -1.2%m/m. Sentix investor confidence fell to -31.8 (est. -26.8, prior -25.2). S&P services and composite PMIs were revised lower, with the services PMI now in contraction territory at 49.8, versus 50.2 reported initially. The composite was revised down to 48.9 from 49.2. Recession risks are rising as concerns about energy shortages and cost pressures weigh on consumer confidence and real disposable income.
The PBoC reacted to CNY pressure with a reduction in banks’ required reserves to 6% from 8%. Earlier the PBoC had warned against speculation in CNY, stating that it had ample tools to affect markets. The yuan still closed weaker on the day.
OPEC+ members agreed to a modest reduction in production of 100k barrels per day, reversing the production increase agreed a month earlier.
The UK Conservative Party appointed current foreign secretary Liz Truss as party leader, the vote closer than expected (83k for Truss, 60k for Sunak). After meeting the Queen on Tuesday, Truss will officially become PM and will announce her cabinet and quickly put together plans to deal with the impending energy and cost-of-living crisis and an interim budget.
Interest rates
Australian bond yields rose ahead of today’s RBA board meeting, while the US markets was closed for a national holiday. 3yr government bond yields (futures) rose from 3.28% to 3.35%, and 10yr government bond yields (futures) rose from 3.64% to 3.70%. Markets are fully priced for a 50bp hike at the RBA board meeting today.
Credit saw a quiet session with the US out on holiday, however Main unwound its gains from Friday to be 6bp wider at 119.5 as it played catch up to the weak US close last week despite cash markets remaining relatively subdued. Primary activity was also limited with just the single covered deal being completed.
Commodities
Crude reversed the recent early September sell off and jumped on OPEC+ news of a 100kbpd reduction in supply. The October WTI contract rose $1.95 to $88.82 while the November Brent contract jumped $2.72 to $95.74. The OPEC+ move reverses the largely symbolic 100kbpd increase announced a month ago and the Saudi energy minister Prince Abdulaziz bin Salman said after the meeting that “we will use all of the tools in our kit” and “the simple tweak shows that we will be attentive, pre-emptive and pro-active in terms of supporting the stability and the efficient functioning of the market to the benefit of market participants and the industry”. The move suggests OPEC will move to support crude prices above $90, with both demand and supply remaining uncertain given the potent cocktail of Chinese demand slumping, the G7 Russian oil price cap, Russian shutdown of gas supplies to Europe and a possible Iran nuclear deal. Gas prices in Europe continued their wild ride with the October TTF contract up 14.5%, having been up 35% at one point while thermal coal prices in Europe closed in on fresh record highs with the October Rotterdam contract just below $400.
Metals managed a modest bounce Monday as the surge in energy prices proved to be somewhat underwhelming. Copper is up 0.5% at $7,674 while zinc rose 1.9% to $3,194 and tin jumped 2.2% to $21,625. The constitutional vote in Chile saw a resounding vote against with a much larger than expected 62% of voters opting to stick to the status quo though President Boric reiterated his commitment to changing the constitution. The vote should limit attempts to tax the mining industry which will be good news for the industry which has struggled with rising costs, falling ore quality, water restrictions and weather disruptions plus waning demand. Anglo American’s Sur copper unit in Chile reported production down 38%yy in July while Codelco saw a 6.5% drop.
Finally note that iron ore markets managed a small bounce with the October SGX contract up $2.55 to $97.05 while the 62% Mysteel index rose $2.90 to $97.55. September normally marks the beginning of peak construction in China and the hope is that recent policy announcements including yesterday’s FX reserve ratio increase will help support investment. Rio noted that CEO Stausholm had a “candid and friendly” meeting with the new China Mineral Resources Group Chairman Yao Lin last week. China will report August trade data Wednesday including iron ore imports while Australia will report July trade data Thursday including iron ore exports.
Day ahead
The RBA decision is due at 2:30pm Syd. In line with market pricing and consensus, we anticipate that the RBA will lift the cash rate by 50bps - the fourth consecutive move of 50bps. That will take the cash rate to 2.35%, to be in the “neutral zone”. Moves beyond this point are likely to be more measured. Globally and domestically, the inflation outlook is challenging, with risks that inflation expectations ratchet higher. In Australia, headline inflation is expected to climb to over 7% by year end, the labour market is the tightest in 50 years, and wages growth is accelerating, albeit from modest levels. It is in this environment that the RBA is removing ultra easy monetary conditions and will shift to a contractionary stance. Westpac anticipates that the cash rate will rise to 3.10% by year end and then peak at 3.35% in February 2023 - with moves of 25bps each meeting from October to February.
At 11:30am we see the remaining Q2 partial data to help shape forecasts for GDP tomorrow. A substantial lift in the current account surplus is anticipated in Q2, driven by a record trade surplus over the period (Westpac f/c: $19bn). The Q2 net exports contribution should therefore swing back to a significantly positive level (Westpac f/c: 1.0ppts). Meanwhile, public demand will likely take a step down from the very strong pace evident during Q1 (Westpac f/c: 1.0%).
Japan: The reopening rebound should show through more clearly in July’s household spending estimate (market f/c: 4.6%yr).
US: Though the August ISM services PMI is expected to remain in strong territory (market f/c: 55.4), the final estimate to the S&P Global services PMI will provide a more cautious reading, pointing at downside risks (market f/c: 44.2).
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