Markets Daily
Bond yields and the US dollar plunged after US CPI inflation data was not as strong as expected, though the moves partially retraced later. AUD outperformed, consolidating its gains at 0.6855. Today we hear from RBA Governor Lowe and see UK November CPI, ahead of the FOMC decision.
Yesterday
The December Westpac-MI Australia consumer sentiment index rose 3% to 80.3. Despite this welcome rise, the level of the Index remains comparable with the lows seen during the COVID pandemic and the Global Financial Crisis. In the NAB survey, the Australia business conditions index fell by 2pts in October and then fell by a further 2pts in November, to be at a still elevated +20. By industry, over the past two months, conditions have reportedly eased across the consumer segments (both retail and recreation & personal), as well as wholesale and the finance, business & property group. The business confidence index slipped from -0.2 to -4.4, the weakest reading since December 2021. AUD/USD was a little skittish within tight ranges ahead of the key US CPI data, trading 0.6740-0.6775. The ASX 200 closed up 0.3% but regional equity sentiment overall was somewhat mixed despite the strong lead from Wall Street.
Currencies/Macro
The US dollar tumbled against all G10 currencies after the CPI data, later trimming losses somewhat. EUR/USD rose 1 cent net to 1.0635, with a high of 1.0673 – a six-month high. GBP/USD jumped as high as 1.2444 (high since June) before easing back to 1.2360, up 0.8% net. USD/JPY fell from 137.35 pre-CPI to 134.66 then trimmed its decline to 135.55 as Treasury yields edged back up. AUD/USD was around 0.6785 pre-CPI, jumping to a three-month high of 0.6893, then consolidating its rally around 0.6855, net +1.6% on the day. NZD/USD rose to 0.6514 – a six-month high – then steadied around 0.6460, net +1.2%. AUD/NZD thus rose 35 pips 1.0605.
US CPI in November rose only 0.1%m/m (est. +0.3%m/m) and 7.1%y/y (est. +7.3%y/y, prior 7.7%y/y), with core also rising less than expected at +0.2%m/m (est. +0.3%m/m) and 6.0%y/y (est. 6.1%y/y, prior 6.3%y/y). While the shelter component rose sharply, by 0.6%m/m, offsetting declines in energy prices, the goods components fell an eye-catching -0.5%m/m.
US November NFIB small business confidence rose to 91.9 (est. 90.5, prior 91.3).
ZEW surveys for Germany and the Eurozone improved further in December. German expectations rose to -23.3 (est. -26.4, prior -36.7), current conditions to -61.4 (est. -57.0, prior -64.5). Eurozone expectations rose to -23.6 from -38.7, current conditions to -57.4 from -65.1.
UK unemployment in October rose to 3.7% (as expected, prior 3.6%), while employment rose 27k (est. -17k). Weekly earnings were solid, rising 6.1%y/y (est. 6.1%y/y, prior 6.0%y/y).
Interest rates
US bond yields fell sharply following weaker than expected US CPI outcomes, cementing markets’ confidence that the FOMC will slow down to a 50bp hike at the meeting this week. 2yr government bond yields fell from 4.38% to 4.13%, but recovered to 4.23%, 10yr government bond yields fell from 3.59% to 3.41% before recovering to 3.51%.
Australian bond yields fell similarly, following a lead from the US, but underperformed their US counterparts. 3yr government bond yields (futures) fell from 3.14% to 3.02% before recovering to 3.08%, and 10yr government bond yields (futures) fell from 3.42% to 3.30%, before recovering to 3.38%. Markets currently have 65% priced in for a 25bp hike at the February meeting. The AU-US 10yr bond spread widened on the back of AU underperformance, currently at -13bps.
Credit rallied post the CPI release with Main 5bp tighter at 84.5 and EUR cash also tighter, while in the US, CDX gave up much of its early gains (was 74 at one point) to be 1.5bp tighter at 76.5 as we write, with cash spreads also marginally tighter and primary markets remaining shuttered. We now wait for the Fed this evening with the CPI release adding to expectations of a further 50bp hike.
Commodities
Crude markets extended the last couple of days’ gains helped by the weaker than expected CPI plus the blast of cold weather bringing snow and ice to Texas, Louisiana and Mississippi. The January WTI contract is up $2.38 at $75.55 while the February Brent contract is up $2.8 at $80.79. The January NY Harbour diesel contract is up 4.3% and 6.2% over the last five days while the European equivalent is up 8.4% over the last week. OPEC revised down its forecast for global oil demand by 380kbpd. TC Energy has yet to submit a restart plan to resume full operations at the Keystone pipeline which has now leaked the most crude on land in 12 years. Russian press reported that a draft decree will ban sales of Russian oil through any contract that specifies the recipient as a nation that joined the price cap or contains a condition or reference to prices being equal to a certain threshold. The draft decree won’t affect any contract signed before December 5 and will be in force until July 1, with the possibility of extension.
Natural gas prices rose in the US in choppy trade, as the wave of severe snowstorms are forecast to move across the central and southern plains in the US. The January Henry Hub contract rose 5.6%. EU states again failed to reach agreement on a gas price cap. The 8-hour meeting did however appear to bring participants closer to a deal homing in on a TTF cap of €200 to €220 and a spread to global average price of €35. The hope is that an agreement may be reached at the next meeting Monday next week though there may be discussion at this week’s EU Summit on Thursday.
Metals were mostly higher with copper up 1.06% to $8,462, zinc up 1.2% to $3,309 and aluminium up 1.7% to $2,454 but nickel fell 4.5% to $28,200. Rising protests against the removal of President Castillo are starting to impact shipments of copper in Peru according to Freeport-McMoRan. Meanwhile the prices of spot to 3-month contracts for aluminium fell to fresh lows back to 2015 and for nickel back to 2008. Year-end liquidity and pre-Fed volatility is probably not helping, but the collapse in spreads also points to limited physical demand. Indonesia appealed a WTO ruling on its nickel ore ban. The EU agreed to introduce the world’s first carbon border tax (CBAM) despite concerns that it could breach WTO rules. The CBSM will initially focus on iron, steel, cement, aluminium, fertilisers, hydrogen and electricity imports. Cars may also be included following a trail period in Q4 2023.
Finally note that iron ore markets didn’t really respond to news that the Central Economic Work Conference which had been scheduled to start December 15 has been postponed with no set timetable after a surge in Covid cases in Beijing. The January SGX contract is down just 65c to $108.05 while the 62% Mysteel index fell 5c to $110.05. China will report November industrial production Thursday, including steel production which may give a sense on whether recent policy announcements to support construction and therefore steel output are starting to impact activity data.
Day ahead
RBA Governor Lowe will deliver the keynote address at the annual AusNetPay Summit in Sydney at 9:30am.
In New Zealand, given the high inflation environment, the government’s Half-Year Economic and Fiscal Update will provide important detail on spending intentions around key public services.
Japan: The Tankan large manufacturers index is expected to weaken further in Q4 as the softening in demand continues to broaden across industries (market f/c: 7). Machinery orders have been volatile but are generally pointing to downside risk to capex spending (market f/c: 1.8%). The final estimate to October’s industrial production is also due.
Eurozone/UK: European industrial production has received support from easing supply issues but the outlook remains gloomy (market f/c: -1.5%). The November CPI report should reflect an easing in headline inflation pressures (market f/c: 10.9%yr) but core inflation will likely remain elevated (market f/c: 6.5%yr).
The FOMC is expected to throttle back the pace of rate hikes from 75bps to 50bps at their December policy meeting, leaving the Fed funds rate at 4.375%, but a hawkish tilt in Chair Powell’s rhetoric will likely remain given the inflation challenge at hand. Along with the statement (6am Thu Syd) we will see the quarterly forecasts by FOMC members, with a focus on the median projection of the funds rate for end-2023, set to rise from the 4.63% reported in September.
US import prices in November are expected to continue declining from elevated levels (market f/c: -0.5%).
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