Markets Daily
Markets remain defensive ahead of tonight’s FOMC. Sweden’s Riksbank raised rates 100bps (est. 75bps) with warnings of further hikes, whilst Germany’s Aug.
Yesterday
Regional markets took a breather ahead of key central bank meetings this week (Fed, BoE, BoJ), the ASX lifting 1.3%, Nikkei +0.4% and Shanghai +0.2%.
Reports that Hong Kong is lifting Covid quarantine rules lifted the regional mood. BoJ jawboning pushed USD/JPY down the low 143s, while AUD slipped from 0.6730 to 0.6700 and NZD fell from around 0.5960 to 0.5920. The minutes from the RBA meeting underscored recent messaging, that rates are approaching more “normal settings,” that rates are not on a pre-set path given uncertainties surrounding the outlook for inflation and growth and that future moves will be based on jobs and CPI data.
Currencies/Macro
Markets remain defensive ahead of tonight’s FOMC. Sweden’s Riksbank raised rates 100bps (est. 75bps) with warnings of further hikes, whilst Germany’s Aug. PPI posted a surge of 7.9%m/m. US yields also rose +8bps after more solid than expected housing data. Equity markets were on the defensive, slipping around -1%, whilst the USD firmed, with notable weakness in NZD. CAD also softened after a surprise easing in Canada’s Aug. CPI.
The US Dollar index gained some +0.4%. NZD notably underperformed, slipping -1.05% to 0.5895, dragging AUD -0.5% to -0.6690. CAD also underperformed (-0.75% to 1.3350) after Canada’s CPI came in on the weaker side. The general USD lift pulled EUR -0.5% to 0.9975, GBP -0.45% to 1.1380 and JPY -0.35% to 143.70. Recent gains in AUD/NZD continued with a push above 1.1350 to 1.1360.
US August Housing Starts surprised rising to 1.575k annualised homes (est. 1.450mn, prior 1.404mn). The weakness in other housing data was more evident in August Permits which slipped to an annualised 1.517mn (est. 1.604mn) from the prior 1.685mn.
Canada’s August headline CPI eased -0.3%m/m to 7.0%y/y (est. -0.1%m/m and 7.3%y/y, prior 7.6%y/y). The key core measures were overall mildly softer than expected.
Eurozone (ECB) July Current Account was in line with recent releases and showed a deficit of -EUR19.9bn.
Germany’s August PPI spiked up +7.9%m/m to 45.8%y/y. Energy prices rose over 20%m/m.
The Global Dairy Trade Auction saw a slightly lower than expected rise of +2.0% and whole milk powder rose of +3.7%.
Sweden’s Riksbank raised its benchmark yield 100bps (est. 75bps) to 1.75% citing rising inflation pressures. It also signalled further increases towards 2.5% into 2023.
Interest rates
US bond yields rose and the curve bear steepened ahead of tomorrow’s FOMC meeting. 2yr government bond yields rose 3bps to 3.97%, and 10yr government bond yields rose 8bps to 3.57%.
Australian bond yields followed the trend in global bonds price action, with the curve bear steepening ahead of tomorrow’s FOMC meeting. 3yr government bond yields (futures) rose 6bps to 3.51%, and 10yr government bond yields rose 8bps to 3.75%. Markets are fully priced for a 25bp hike at the October meeting next month, and pricing a 92% chance of a 50bp hike. The AU-US 10yr bond spread narrowed on the back, of AU outperformance, now at 20bps.
It was roll day for indices last night with CDX seeing the roll from IG38 to IG39 closing at ~8bp and the new index ~3bp wider on the day, while Main saw the roll at ~6.4bp and another 1.5bp of weakness for the new series. Primary activity picked up in Europe last night with 12 issuers (ex-SSA which were also active) pricing ~EUR12bn across a mix of banks and corporates with Santander the largest issuer on the day with its EUR1.5bn 4nc3yr at MS+105, while in the US was more subdued with just the single issuer
Commodities
With the FOMC looming, crude markets weakened and the November WTI contract is down $1.12 at $84.24 while the November Brent contract also down $1.12 at $90.88. The US DOE on Monday announced an additional 10mb of crude to be released from the SPR in November after releasing 155mb so far under the current program since the start of May. The additional SPR release comes at a time when OPEC+ is beginning to reduce additional supply with a $100kbpd cut in output announced earlier this month. Shipping costs for wet tankers are surging as Europe scrambles for fuel ahead of winter, and China looks to increase exports. The cost of shipping US oil to China is at the highest since 2020 while the cost of shipping fuel from China to Asia is at record highs on Baltic Exchange data back to 2010. Despite German gas in storage hitting the 90% mark for the second day running, gas prices rose in Europe with the UK October NBP contract up 11% from a 3 month low. Germany announced a levy on gas consumers from October 1 to help large gas importers with the additional costs of replacing Russian gas. New Hope Chief Executive Rob Bishop stated that “coming into winter for the Northern Hemisphere, you could argue that [thermal coal] pricing will probably increase”. Prices have remained close to record levels at circa $440 records for the last 4 weeks.
Metals were surprisingly unmoved by the prospect of another large Fed hike with copper down a modest 0.38% at $7,724 and aluminium up 0.2% at $2,255. Nickel rose a larger 1.08% to $24,860. Rusal was said to be working on a plan to deliver some aluminium directly into LME warehouses in Asia given it is not under sanctions though is being hit be so called ‘self-sanctioning’. If a pilot program goes ahead, aluminium would be shipped from the far eastern port of Vladivostok. IAI data for August showed global aluminium production up 3.49%yy but Western European production down 10.4%yy. Estimated Chinese production rose 6.4%yy.
Finally note that iron ore slipped modestly lower despite recent policy initiatives in China to address the construction industry crisis. The October SGX contract is down $4.65 at $95.35 while the 62% Mysteel index is down 85c at $96.40. Steel output is showing signs of picking up as we move into the ‘peak production’ period. Fortescue announced it would spend $6.2bn over the next decade to decarbonise its iron ore operations. It will spend $3.2 billion building 2 to 3 gigawatts of renewables, battery storage and transmission lines, and onsite charging infrastructure the Pilbara region.
Day ahead
Aust: The Westpac-MI Leading Index is set to weaken further in August given the turnaround in dwelling approvals and the RBA’s ongoing rate hikes.
RBA Deputy Governor Bullock is also due to discuss a “Review of the Bond Purchase Program” at Bloomberg at 12pm AEST.
US: After the upside surprise on core inflation, both Westpac and the market expect the FOMC to deliver a 75bp rate hike at their September policy meeting, bringing the fed funds rate to 3.125%. With further tightening ahead, weakness in existing home sales is set to persist (market f/c: -2.5%).
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