Markets Daily
Bond yields and the US dollar rose following a very strong November US services survey. AUD/USD sank to 0.6695. Today’s focus is the RBA policy decision. We will also see Australia Q3 balance of payments and public demand data, ahead of the GDP report tomorrow.
Yesterday
Australia Q3 headline profits plunged by -12.4%. Mining profits retreated by -19%, after jumping 52% over the previous year, and non-mining profits ex finance declined by -4%. Mining profits eased from the highs of June as commodity prices fell on global recession fears. Westpac estimates that in terms of GDP implications, adjusted profits declined by a still sizeable -4.3%, weaker than the -1.5% we anticipated on this measure. Nominal wage incomes grew by 2.9% in Q3, following a 3.4% increase in Q2, a material upside surprise. Inventories rose by 1.7%qtr vs Westpac f/c 1.4% and market median 1.0%. Fresh indications of China loosening Covid restrictions helped drive a 3.4% jump in Hong Kong shares, +1.5% on the Shanghai Composite. The ASX 200 rose a wary 0.3%. AUD/USD rose a net 40 pips to 0.6830, with a high of 0.6851, a marginal new high since 13 September.
Currencies/Macro
The US dollar rose against all G10 currencies on the day, its gains accelerating after the strong services ISM survey. EUR/USD fell from a five-month high of 1.0595 to 1.0490, net -0.4%. GBP/USD also tried the upside for a while before sliding about 1 cent or -0.8% to 1.2185. USD/JPY followed the rise in Treasury yields from 134.30 to 136.80, +1.9%. AUD/USD fell from 0.6810 early NY to 0.6695. NZD/USD touched a four-month high of 0.6443 but later slid to 0.6310, net -1.4%. AUD/NZD edged down 15 pips to 1.0600.
The November US ISM services index rose to 56.5 (est. 53.3, prior 54.4). Prices paid remained high at 70.0 (prior 70.7), but the main surprises were increases in activity to 64.7 (prior 55.7) and employment to 51.5 (prior 49.1). New orders were solid at 56.0 (prior 56.5), while new export orders fell to 38.4 (prior 47.7).
US factory orders in October were stronger than expected, rising 1.0%m/m (est. +0.7%), with durable goods orders finalised at +1.1%m/m (from initial reading +1.0%). S&P services PMI was finalised at 46.2 (flash 46.1).
The Eurozone Sentix investor confidence survey continued to recover in December, rising to -21.0 (est. -27.5, prior -30.9). November Eurozone S&P services PMI was finalised lower to 48.5 (from flash 48.6) as softness in Germany offset slightly firmer outcomes in other national reports.
The ECB's Makhlouf (Ireland) said a 50bp hike in December is likely but a 75bp move cannot be ruled out. Villeroy (France) also favoured a 50bp move, adding it’s too early to discuss the terminal rate.
Interest rates
US bond yields rose following the release of a service index that surprised markets on the upside, as well as talks on the possibility of the Fed slowing down but hiking rates higher for longer. 2yr government bond yields rose from 4.29% to 4.36%, and 10yr government bond yields rose from 3.50% to 3.61%.
Australian bond yields rose overnight, taking its trend from US price action. 3yr government bond yields (futures) rose from 3.00% to 3.06%, and 10yr government bond yields rose from 3.32% to 3.38%. Markets are pricing an 75% chance of a 25bp hike at the RBA meeting tomorrow. The AU-US 10yr bond spread narrowed overnight on the back of AU outperformance, the spread currently at -21bps.
Credit spreads were mixed as indices followed the broader market wider with Main out 2.5bp to 80 and CDX 3bp wider at 81, however cash spreads were more resilient to be unchanged to a bp tighter. Primary activity was sluggish to open the week with iliad SA the sole issuer in Europe, while 3 issuers priced USD3.5bn in the US consisting of 2 utilities and a USD1.25bn 3yr covered deal from RBC at SOFR+85 (BBSW+82).
Commodities
Fed rate concerns driven by stronger than expected services data hit the commodity complex, slamming WTI back below $80. The January WTI contract is down $2.74 as we write at $$77.27 while the February Brent contract is down $2.64 at $82.93. That’s after WTI had been up 3.4% earlier in the session on China Covid easing optimism. UBS said that the EU Russian crude ban would weigh “moderately” on Russian exports, maintaining its forecast for $100 plus for Brent over coming months. The bigger impact will come when the products ban comes into effect in February. Republicans on the House Committee on Oversight and Reform announced they are investigating a NY Times article suggesting officials at the State Department and National Security Council sought a secret deal with Saudi Arabia ahead of the mid-terms to increase production.
Gasoline prices have continued plummeting with the US national average at $3.40 per gallon on Monday and the NY January RBOB gasoline contract approaching lows back to January. The January NY Harbour diesel contract fell 5% testing lows back to early April. The January Henry Hub natural gas contract fell 10.4% to lows back to mid-March on milder weather forecasts, the rail strike being quashed, further delays on Freeport LNG and a smaller decline in inventories all taking their toll.
Metals were hit by rising US rate expectations, with copper last down 1% at $8,360 and aluminium down 1.5% at $2,507. Spot to 3-month spreads for copper, aluminium and nickel on the LME all remained in negative territory, pointing to limited physical demand. Citi reported it “expects further physical weakness, as well as seasonal weakness, to limit metals upside” due to waning demand and a surplus of supply. Chile’s government raised its copper tax estimates from a current 34.8% of profit based on a price of $3.74/pound with the burden increasing to 43.2% under a proposal to congress. Those calculations are up from 33.4% and 39.8% respectively.
Finally note that iron ore markets remained a bright spot with speculation on further Chinese easing lifting markets up to 5-month highs in the case of the Dalian contract. The January SGX contract traded as high as $109.15 though is last down 5c at $106.50 while the 62% Mysteel index rose $2.75 to $109.60.
Day ahead
At the December Board meeting (2:30pm Syd), Westpac anticipates that the RBA will lift the cash rate by 25bps, to 3.10%. The RBA, in responding to a significant inflation challenge and the tightest labour market in 50 years, has quickly raised interest rates. Rates have lifted from a record low of 0.1% at the start of May, with moves at each monthly Board meeting, including 50bps hikes for the four meetings July to September. The RBA slowed the pace of tightening at the October meeting, back to 25bp increments, with that policy arguably moving into the contractionary zone. Inflation is still too high and more work needs to be done in our view. Annual headline inflation is expected to hit the 8% mark in the December quarter and to still be above the 2–3 target band at the end of 2023 (at about 4%, we expect).
At Australia’s official data window at 11:30am Syd, the pullback in global commodity prices and surge in import volumes likely saw the current account surplus fall in Q3 (Westpac f/c: $6.0bn). Hence, net exports are expected to be a material negative in the quarter, subtracting from GDP growth (Westpac f/c: -0.5ppts). Meanwhile, a return to growth in public demand is anticipated in Q3 after a rare stalling last quarter (Westpac f/c: 0.8%).
Japan: Real household spending capacity is going to remain under pressure into year-end (market f/c: 0.9%yr).
The balance of power in the US Senate is in play as voters in Georgia head to the polls. The Democrats have 50 seats so if incumbent Raphael Warnock is able to defeat Republican Herschel Walker, the 51-49 split will provide breathing room on e.g. judicial appointments. Vote tallies will come through Wednesday AEDT.
The US trade deficit is expected to widen in October given the recent softening in exports and strengthening of import volumes (market f/c: -$80bn).
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