Markets Daily
US bond yields rose with help from a robust services ISM survey. That helped boost the USD, especially against JPY. AUD/USD slipped to 0.6735. Today’s calendar features Australia Q2 GDP, China August trade balance and the Bank of Canada policy decision.
Yesterday
The Aussie dollar approached the RBA window just above 0.6800 and while a little choppy initially, was effectively flat after 15 minutes to absorb the statement. The 50bp hike to 2.35% was almost fully priced and changes to the statement were limited, though arguably there was a hint at slowing down the pace of hikes in the new reference to “the full effects of higher interest rates yet to be felt in mortgage payments” and the removal of the description of rate rises as “normalisation.” Earlier we saw the final Q2 releases to help shape GDP forecasts – public demand which was softer than expected and net exports, which matched forecasts, set to contribute 1ppt to GDP. Australia’s current account surplus jumped to a sizeable $18.3bn (3.0% of GDP) in Q2. Key to this improvement was a record trade surplus, which jumped to $43.1bn in the June quarter, representing 7.2% of GDP. Regional equities were mostly higher as US equity futures rallied about 0.7%, hence the ASX 200’s -0.4% slip was an underperformance.
Currencies/Macro
The US dollar was strong against most G10 currencies, especially the Japanese yen, Aussie and Kiwi. EUR/USD fell from 0.9930 to 0.9864 (20-year low) then consolidated at 0.9905. GBP/USD rallied about 1 cent to just over 1.1600, then slid back to 1.1520, net unchanged. USD/JPY surged from 140.50 to 143.07 – highest since 1998. AUD/USD fell from 0.6800 to 0.6728 – a two-month low. NZD/USD fell from 0.6100 to 0.6035 – a two-year low. AUD/NZD returned to 1.1155.
US ISM services activity in August was stronger than expected, in similar vein to the manufacturing ISM. The ISM services index rose to 56.9 (prior 56.7, est. 55.4). The report cited strong demand with new orders of 61.8 (from 59.9 in July) and production of 60.9 (also 59.9 in July), together with employment rising to 50.2 (prior 49.1). In contrast, the final S&P services PMI was weaker at 43.7 (flash 44.1, prior 47.3). These surveys are supposed to be measuring the same thing, so the massive divergence is not helpful in judging the health of the US economy in Q3.
After accepting the Queen’s invitation to form a government, Liz Truss is officially the UK’s fourth prime minister in six years, with details of her new cabinet keenly awaited as well as plans to deal with the energy and cost of living crises.
Interest rates
US bond yields rose sharply following the long weekend, and the curve bear steepened. 2yr government bond yields rose from 3.43% to 3.51%, and 10yr government bond yields rose from 322% to 3.35%, a three-month high.
Australian bond yields rose overnight, outperforming their US counterparts after the RBA hiked another 50bp at yesterday’s policy meeting. 3yr government bond yields (futures) rose from 3.32%, and 10yr bond yields (futures) rose from 3.66% to 3.73%. Markets are fully priced for a 25bp hike at the October meeting next month, and pricing a 65% chance of a 50bp hike. Cross market spreads narrowed on the back of AU outperformance, with the AU-US 10yr bond spread at 38bps.
Credit markets were mixed on a busy day for primary supply. Indices closed tighter with Main 2.5bp tighter at 117 and CDX was in a bp to 91, however cash lagged as the new supply was in focus. Europe saw 13 issuers price EUR13.1bn (excluding EUR11bn of France/Italy supply) with banks active across the capital structure and corporates including Henkel (EUR650M 5yr), Enel (EUR1bn 6yr) and Orsted (dual currency EUR/GBP deal) all notable in the corporate space. The US saw USD33.5bn priced by 19 borrowers including 13 non-financial issuers with Walmart, Lowe’s and Nestle all pricing over USD4bn, and we also saw John Deere price USD2.25bn across 3yr (T+50, BBSW+63), 5yr (T+75, BBSW+98) and 10yr (T+105, BBSW+134) and McDonalds with USD1.5bn split evenly across 10yr (T+133, BBSW+157) and 30yr (T+168).
Commodities
Crude markets reversed course and tested the lower end of the recent 2-month trading range as additional lockdowns in China added to concerns about demand destruction from global recession. The October WTI contract is last down $1.92 at $86.90 while the November Brent contract is down $2.84 to $92.90. Adding to the weaker tone, Saudi Arabia cut prices for customers in Asia from a record high. The benchmark Arab Light differential will be cut by $4 for Asian buyers and by $2 for European refineries for October deliveries. The move was expected by the market but comes days after OPEC+ announced the first token production cut in more than a year with a stated aim of “supporting the stability and the efficient functioning of the market”. However, the main action in energy markets was again in the gas sector with the October Henry Hub natural gas contract down a whopping 7.3% on rising US production and milder weather while European counterparts also fell. Financial press zeroed in on the potential for a Lehman style crash as massive margin calls add to the pressure on energy traders. A senior VP at Norway’s Equinor said the company’s estimate of an US$1.5tn of extra collateral needed by the industry was “conservative”.
Metals were again mixed as copper attempts to find a base above $7,500 though aluminium made fresh 17-month lows. Copper is up 0.2% at $7,666, nickel up 0.6% at $21,580 while aluminium fell 1% to $2,260 and tin dropped 2% to $21,206. The drop in aluminium comes even as more plants across Europe announced shutdowns due to soaring energy costs. Europe’s largest aluminium smelter, the 290kt per year Aluminium Dunkerque Industries France plant, will cut production by 22% starting Monday next week. Vale Indonesia and China’s Xinhai Technology announced a US$2.1bn investment in a nickel smelter.
Finally note that iron ore markets were stable just below $100 with falling steel stockpiles supporting sentiment. The October SGX contract is down 60c at $96.95 while the 62% Mysteel index is down 55c at $97.00. CISA noted that stockpiles had dropped to the lowest level since January as China moves towards its seasonal peak for construction activity. However, the extension of lockdowns in Chengdu plus partial restrictions in Guiyang added to the overall bearish trend.
Day ahead
At 11:30am Syd we see Australia Q2 GDP. The reopening from COVID-19 lockdowns and fewer instances weather/virus disruptions should support activity. Consumer spending will be the key addition to growth; business investment should lift too, though weakness in housing and public demand will be evident. Westpac’s revised forecast of 1.1%qtr, 3.6%yr is slightly higher than the market median of 0.9%qtr.
China: Foreign reserves are anticipated to remain fairly stable in August (market f/c: US$3065bn). China’s July trade surplus of $101bn was a record high. Softer global demand and virus-related disruptions likely trimmed the trade surplus in August to around $93bn).
Eurozone: The component detail with the final estimate to Q2 GDP will provide more colour on the key areas of support in the Euro Area economy.
The Bank of Canada surprised markets in July with a 100bp rate hike and is expected to continue swift tightening today with a further 75bp move, to 3.25%, the highest among major advanced economies. Pricing is around 70bp.
US: The trade deficit is expected to narrow in July as weaker domestic demand weighed on imports (market f/c: -$70.3bn). The Federal Reserve’s Beige Book will provide an update on the increasingly mixed conditions across the Fed districts. The FOMC’s Barkin, Mester, Brainard and Barr are all due to speak at different events.
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