Markets Daily
Bond yields fell with help from less hawkish Fed commentary and a slump in oil prices. This undermined US$, AUD/USD bouncing to 0.6770. Today’s calendar includes Australia July trade balance, speeches by RBA Governor Lowe and Fed Chair Powell and the ECB policy decision.
Yesterday
Australia Q2 GDP expanded by 0.9%qtr, 3.6%yr, close to market expectations. The level of activity is 5.5% above levels prior to the pandemic, at the end of 2019. Consumer spending was a bright spot, up 2.2%. Exports also performed well. However, elsewhere conditions were mixed - construction work was down, public demand was flat (representing a consolidation) and inventories were a sizeable drag. AUD/USD was little moved in response and indeed quite muted over the day, trading 0.6699 (new low since July) to 0.6738. Regional equities were mostly under water, the ASX 200 on the weaker end of the scale, -1.3%.
Currencies/Macro
The US dollar fell against all G10 currencies except the yen. EUR/USD rose from 0.9880 to 1.0010. GBP/USD fell to 1.1406 then rebounded to 1.1535, up about 20 pips net. USD/JPY extended higher, from 142.80 to 144.99 – highest since 1998 – before retracing to 143.80. AUD/USD rebounded from 0.6699 (two-month low) to 0.6770, net +0.5% on the day. NZD/USD similarly rebounded from 0.5997 (two-year low) to 0.6075. AUD/NZD steadied down fractionally at 1.1140. CAD rose a net 0.2% to 1.3120 in the wake of the Bank of Canada’s expected rate hike.
In the US, the Fed’s Beige Book of regional economic conditions noted that economic growth prospects were weak and set to slump further over the next year, while price growth showed signs of decelerating. Price levels “remained highly elevated,” but nine districts reported some degree of moderation in their rate of increase.
Fed Vice Chair Brainard reiterated that the Fed will need to hike rates to restrictive levels and keep them there for “some time,” but cautioned the risks would become more two-sided in the future: “The rapidity of the tightening cycle and its global nature, as well as the uncertainty around the pace at which the effects of tighter financial conditions are working their way through aggregate demand, create risks associated with over-tightening.” She also saw the scope for lower retail margins to ease price pressures. Mester warned against declaring early victory on inflation, while Collins said it’s too soon to indicate what policy makers should do at this month’s meeting.
Bank of Canada maintained a hawkish tone in its statement as it hiked by 75bp to 3.25%, as was widely expected. It said that it would continue to tighten, and that even though some data had eased, inflation was still rising and the economy still had excess demand and a tight labour market.
Eurozone Q2 GDP was finalised at +0.8%q/q and +4.1%y/y (from flash readings of +0.6%q/q and +3.9%y/y), with household consumption revised higher.
BoE MPC members Bailey (governor), Pill (chief economist) and Tenreryo struck a less hawkish tone in appearances before Parliament’s Treasury Select Committee.
Interest rates
US bond yields fell, taking back some of the gains in the previous session, following risk off sentiment prevailing in global markets, and the curve steepened. 2yr government bond yields fell from 3.50% to 3.43%, and 10yr government bond yields fell from 3.35% to 3.25%.
Australian bond yields took trend from global price action, as domestic markets look to Governor Lowe’s speech today for clues on the RBA’s next move. 3yr government bond yields (futures) fell from 3.34% to 3.25%, and 10yr government bond yields (futures) fell from 3.75% to 3.63%. Markets are full 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 37bps.
Credit markets remain all about primary which has seen subdued activity in secondary credit as we wait for the dust to settle. Indices reflected a more positive risk session, particularly in the US, with Main 3bp tighter at 114 and CDX in 5.5bp to 85.5. We didn’t quite get a repeat of Tuesday’s primary volumes, but Europe saw 10 issuers (ex-SSA) price ~EUR7.1bn including John Deere which followed its USD last night with a EUR600M 4yr (MS+30) and Macquarie Bank priced its EUR600M 5yr covered at MS+30 (BBSW+102), and in the US, 6 issuers priced USD10.25bn. Banks featured heavily last night with deals from JPM pricing a USD3.5bn 11nc10yr Tier 2 deal at T+245 (BBSW+280), BMO completed a USD2.5bn 2 part deal including USD1.5bn 2yr (T+85) and USD1bn of 5yr (T+135) and Mizuho priced USD1.75bn across 6nc5yr (T+205) and a 11nc10yr (T+240).
Commodities
The news of fresh lockdowns in China sent crude markets into a tailspin with the October WTI contract down $4.94 to $81.94 and the November Brent contract down $5.04 to $87.79. The rampaging US$ added to the negative sentiment pushing crude markets towards pre-Russian invasion levels. On the gas front, Russian President Putin attempted to divert the blame for the Nord Stream pipeline shut down saying “give us turbines and we’ll turn on Nord Stream tomorrow” at the Eastern Economic Forum in Vladivostok. The October TTF natural gas contract fell 10.8%. Data from Destatis showed Germany generating a rising share of power from coal versus natural gas. Coal fired electricity rose 23% in the 3 months to June while natural gas fired power fell 19%.
Metals are modestly lower with copper down 0.8% at $7,622 and zinc down 1.5% to $3,120. Aluminium fell to fresh 18-month lows despite news of further aggressive production cuts. Speira GmbH will immediately cut aluminium production by 50% at its German smelter following the announcement of a 22% cut in Europe’s largest aluminium smelter production, Aluminium Dunkerque, on Tuesday. Aluminium production in Europe has dropped to the lowest since the 1970s with European politicians warning that we may see a “permanent deindustrialisation”. Copper exports from Chile also hit the lowest level since January last year with the value of exports down 26% in August. Eurometaux, the nonferrous metals trade body, warned the industry was “on the brink ahead of a life-or-death winter”.
Finally note that iron ore markets marked time below $100 with the October SGX contract down 25c at $96.75 and the 62% Mysteel index down 45c at $96.55. China imported 96.2mt of iron ore in August, down 3.1%ytdyy.
Day ahead
At 11:30am Syd, Australia’s trade surplus is expected to remain at an elevated level in July, having reached a record high $17.7bn in June. Westpac looks for exports to slip back -7.5%, imports -1.2%, trimming the surplus to $13.5bn. Massive trade surpluses have driven 13 consecutive quarters of current account surpluses, a record since records beginning in 1959.
RBA Governor Lowe is due to speak on “Inflation and the Monetary Policy Framework” at the Anika Foundation lunch in Sydney, 1:05pm Syd.
Japan: A modest upward revision is anticipated in the final estimate to Q2 GDP (market f/c: 0.7%) and the current account balance should move into surplus in July (market f/c: ¥759bn).
The ECB is expected to deliver a 75bp rate hike (although a significant minority are expecting a 50bp hike) at their upcoming policy meeting, lifting the main refinancing rate to 1.25% and deposit rate to 0.75% to combat an intense and broad inflation threat. We will also see quarterly forecasts as well as President Lagarde’s keenly watched press conference.
US: Initial jobless claims will likely remain at low levels for the time being (market f/c: 235k) and consumer credit should be impacted by rising rates in July (market f/c: $32bn). Fed Chair Powell is due to speak at a policy conference in Washington; the FOMC’s Evans and Kashkari will also speak at separate events.
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