Markets Daily
US bond yields rose sharply as oil prices reached 10-month highs, in turn lifting the US dollar. AUD/USD slumped to fresh 2023 lows at 0.6331. The S&P500 clawed back losses to be largely unchanged.
Yesterday
Bloomberg’s gauge of China property developer stocks dropped 2.5%, to its lowest levels since 2011. The move comes amid the ongoing drama at China’s Evergrande Group, with its restructuring process grinding to a halt earlier this week and its chairman placed under police control. Curiously though, broader China equity gauges held up, with Shanghai rising 0.2% and the Hang Seng up 0.8%. Japan’s Nikkei was little changed (+0.1%), as was the ASX (-0.1%).
Australia’s monthly CPI Indicator rose 5.2% in the year to August, up from 4.9%yr in July, but still a moderation from the peak of 8.4%yr in December 2022. This was in line with Westpac and the market median forecast of 5.2%yr. The monthly trimmed mean indicator printed 5.6%yr, flat with the July print. In annual terms, the most significant contributors to the August increase were housing (6.6%), transport (7.4%), food & non-alcoholic beverages (4.4%) and insurance & financial services (8.8%). The ABS noted that the rate of inflation for housing, at 6.6%yr, was lower than it was in July (7.3%). New dwelling prices are up 4.8%yr, the lowest annual pace since August 2021, as price increases for building materials continued to ease, reflecting improved supply conditions. Rents are up 7.8%yr, slightly higher than July’s 7.6%yr print, as the rental market continues to tighten.
AUD/USD mostly ignored the on-consensus higher August monthly CPI print, drifting lower in local dealings yesterday, from around 0.6400 to 0.6375.
Currencies/Macro
The US dollar index is up 0.5% on the day, a fresh 10-month high, lifted by the surge in US long term yields through 4.6% as oil prices rose further and amid firmer US data and hawkish Fedspeak. EUR fell from 1.0574 to 1.0488 - a nine-month low. USD/JPY rose from 149.00 to 149.71 – a fresh 11-month high.
Oil prices rose to a fresh highs for the year as crude stockpiles in the largest US storage hub dropped to a low since July 2022. Inventories at Cushing, Oklahoma, dropped just below 22 million barrels, close to operational minimums.
AUD was the weakest G10 currency overnight, falling from 0.6380 to 0.6331 – an 11-month low. NZD fell from 0.5940 to 0.5900. AUD/NZD fell from 1.0770 to 1.0729 – a two-month low.
US durable goods orders in August rose 0.2%m/m (est. -0.5%), with ex-transport up 0.4%m/m (est. +0.1%m/m), although prior readings were revised lower.
FOMC member Kashkari (a 2023 voter) said a US government shutdown or prolonged strike by automotive workers could slow the economy, and help the Fed’s fight against high inflation: “I’m not hoping for that, but there’s an interaction there.” He also outlined two scenarios: one with a 60% chance, where the Fed brings inflation down to its 2% target without causing severe damage, and another where price growth would be more entrenched and require further rate increases to bring price growth under control. “If our interest-rate increases are not slowing the economy the way that we expect, then there is that risk that we might have to go higher”.
Interest rates
US 2yr treasury yields rose from 5.04 to 5.15%, while 10yr yields accelerated from 4.50% to 4.64% - a fresh high since 2007. Markets price the Fed funds rate, currently 5.375% (mid), to be 7bp higher at the next meeting in November, with a 60% chance of a hike in February.
Australian 3yr government bond yields (futures) rose from 4.03% to 4.11%, while the 10yr yield rose from 4.38% to 4.50% - a fresh high since 2011. Markets price the RBA cash rate, currently at 4.10%, to be 3bp higher in October, with a 90% chance of a hike by May 2024. New Zealand rates markets price the OCR, currently at 5.50%, to be 5bp higher in October, with a 95% chance of a hike by April 2024.
Credit reflected the shift in sentiment through equity markets with Main a bp wider at 82, while CDX recovered to close half a bp tighter at 74. US cash was flat to a bp wider and despite the move seen over the last week, remains firmly in the range established from early July. Primary activity remained in place with Europe seeing 9 issuers price EUR6.65bn (ex-SSA) with the auto sector represented by BMW with its EUR1bn deal split evenly across 5/10yr and ALD SA priced EUR2bn across 5/10yr. The US saw 5 issuers price USD5.25bn with Glencore pricing USD2.5bn across 5/7/10yr to be the largest issuer on the day, while on the local front we saw NBN complete its USD1.25bn deal including USD750M of 5yr at T+108 (IPT +135, BBSW+133) and USD500M of 10yr at T+143 (IPY 165, BBSW+181).
Commodities
Crude markets surged to fresh highs for the year with the focus very much on Cushing tank levels which hit lows back to July 2022. The November WTI contract is up $3.29 to $93.68 while the November Brent contract is up $2.56 to $96.52. The EIA reported a hefty 2.17mb drop in US crude inventory though gasoline rose by 1mb, jet kerosene by 659kb and distillates by 398kb. US crude production remained unchanged at 12.9mb while imports rose by 711kbpd, and exports fell by 1mbpd to 4mbpd. Cushing was key though, with the 7th consecutive weekly draw at just under 1mb, taking levels close to record seasonal lows seen in 2014. Cushing stocks have more than halved in the last 3 months. The WTI prompt timespread surged to $2.36, the highest level since July 2022. However, the 4-week average of implied gasoline demand slipped further with pump prices at their highest level ever for this time of year suggesting that consumers are reacting to super high prices. Saudi Arabia is forecast to increase Arab Light differentials again next week with a Bloomberg survey pointing to a further 20c increase for November, taking the spread to the highest level for the year and prices above $100. The UK gave the go ahead to the Rosebank North Sea oil and gas field situated about 80 miles off the coast of Shetland. Norway’s state backed Equinor estimates the field will produce 300m boe over the project lifetime with first production expected in 2026. The controversial decision follows last week’s moves by UK PM Sunak to roll back the ban on new ICE automobiles from 2030 to 2035.
Metals pushed to fresh multi month lows with copper trading below $8,100 for the first time since May of this year and nickel trading below $19,000 for the first time since July of last year. Glencore announced it will stop funding a lossmaking nickel mine in New Caledonia as growing Indonesian production pressures prices. Indonesia generated about half of global nickel supply last year, with the supply chain largely controlled by Chinese companies. Nickel has fallen 37% so far this year. And Codelco’s chairman Maximo Pacheco noted that 2023 will be the low point for its copper production, with output forecast to rise to 1.7mt per year by 2030.
Finally note that iron ore markets saw a modest bounce helped by a jump in Chinese industrial profits. The October SGX contract is up $2 from the same time yesterday to $116.00 while the 62% Mysteel index is up $1.65 to $118.65. Infrastructure work is expected to ramp up in Q4 as local governments commence major projects according to the Securities Journal, helping to offset continued weakness in residential construction.
Day ahead
Australia: Westpac anticipates a relatively strong gain in nominal retail sales in August, led by hospitality spending during the FIFA Women’s World Cup (Westpac f/c: 1.0%). There is scope for a larger fall in job vacancies in Q3, having only gradually moderated from a historically elevate level thus far.
NZ: The monthly employment indicator is expected to point to slowing in jobs growth in August (Westpac f/c: 0.1%). ANZ business confidence has started to pick-up, but a broadly downbeat mood will likely persist for now.
Eurozone: The emerging downtrend in consumer confidence will begin to weigh more heavily on broader economic confidence in September (market f/c: 92.4).
US: Another decline in pending home sales is anticipated in August given rising mortgage rates (market f/c: –1.0%). The Kansas City Fed index will continue to point to subdued demand conditions (market f/c: –2). Meanwhile, an up-tick in initial jobless claims is expected (market f/c: 215k) and a small upward revision is anticipated in the final estimate of Q2 GDP (market f/c: 2.2% annualised). FOMC Chair Powell will host a town hall event. The FOMC’s Goolsbee, Cook and Barkin are also due to speak at different events.
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