Markets Daily
The US dollar and bond yields jumped as the FOMC raised the funds rate 50bp and raised its rates projections for 2023, but markets later retraced somewhat. AUD steadied around 0.6860. Today’s crowded calendar includes Australia employment, China retail sales and policy decisions by the ECB and Bank of England.
Yesterday
RBA Governor Lowe spoke on payments systems. He did not discuss monetary policy though said he would not resign and hoped he would be reappointed to a second term next year. Regional equities took their cue from the overnight US rally on the CPI report, including the ASX 200 +0.7%. AUD/USD kept most of its post-CPI gains, slipping for a few hours then pushing back to 0.6845, little changed net.
Currencies/Macro
The US dollar is mixed on the day against G10 currencies, jumping on the initial Fed headlines but then losing steam once again. EUR/USD rose a net 0.5% to 1.0685, about where it was pre-FOMC. GBP/USD followed a similar pattern, net up 0.5% at 1.2430. USD/JPY trimmed its losses to -0.2% at 135.35. AUD/USD was 0.6875 pre-FOMC, slid as low as 0.6811, then recovered to 0.6860. NZD/USD steadied around 0.6450, net -0.2%. AUD/NZD rose 30 pips to 1.0640.
The FOMC increased its Fed funds rate by 50bp to a 4.25%-4.50% range, as was widely expected, in a unanimous decision. There was almost no change to the wording of the statement, which reiterated "The Committee anticipates that ongoing increases in the target range will be appropriate." The dot plot of median rate projections for end-2023 was raised from 4.63% to 5.13%. Fed Chair Powell in the press conference was asked about market pricing for rate cuts by late 2023 and pointed to the 5+% end-2023 funds rate projection by 17 of the 19 FOMC members. He also said that the FOMC saw inflation risks to the upside. The equity response was volatile, the S&P 500 sliding from +0.7% to negative territory, attempting recovery, then closing -0.6%.
US international trade prices in November showed an encouraging slide in import prices. Import prices slowed to 2.7%y/y (est. 3.2%, prior 4.1%, and vs the high of 13% in March). Export prices also slowed to 6.3%y/y (est. 5.7%, prior 7.4%, and vs the high of 18.6% in June).
UK CPI in November rose less than expected, up 0.4%m/m (est. +0.6%) and 10.7%y/y (est. 10.9%, prior 11.1%), with core at 6.3%y/y (est. unchanged at 6.5%).
Interest rates
US bond yields rose following the FOMC meeting, which saw the Fed slow down the rate hike pace to 50bp but hawkish rhetoric continues to speak to further rate hikes to ensure inflation is returned to target. 2yr government bond yields rose from 4.16% to 4.29% following the FOMC, but fell to finish at 4.21% at the end of the session. 10yr government bond yields rose from 3.46% to 3.56%, but fell to finish at 3.47%.
Australian bond yields rose as well, taking a lead from the US following the FOMC meeting. 3yr government bond yields (futures) rose from 3.07% to 3.12%, and 10yr government bond yields (futures) rose from 3.36% to 3.45%. Markets currently have 55% priced in for a 25bp hike at the February meeting. The AU-US 10yr bond spread narrowed sharply on the back of AU underperformance, currently at -3bps.
Commodities
Crude markets continued the rally seen over the last couple of days, hitting 1-week highs with the January WTI contract up $1.86 at $77.25 while the February Brent contract is up $1.95 at $82.63. The move higher was helped by IEA warnings that “as we move through the winter months and toward a tighter oil balance in the second quarter, another price rally cannot be ruled out”. The move higher came despite EIA data which showed crude inventory jumping a whopping 10.23mb and gasoline rising by 4.5mb. US crude production dropped back to 12.1mb and both imports and exports rose circa 850kbpd. The surge in inventory comes after the Keystone pipeline shutdown though TC Energy is planning a full restart December 20. Diesel prices continued surging on winter storms hitting the US and a surge in European buying ahead of the upcoming Russian products ban. Bloomberg reported Europe is bringing in diesel cargoes from around the world at the fastest pace since at least 2016, with Russia remaining the single largest shipper. The January NY Harbour diesel contract is up 17.6% over the last week. Gas prices dropped on forecasts that weather in the US South and East Coast will not be as severe over the next two weeks.
Metals were stuck in a range into the FOMC with copper last up 0.3% at $8,524 and aluminium down 0.4% at $2,452. Zinc fell another 1.8% to $3,258. Political unrest in Peru intensified after the interim government declared a 30-day national state of emergency, though impact on copper production so far appears limited. Spot to 3-month contangoes continued deepening across metals with aluminium at the steepest discount since 2015 and nickel at the steepest discount since 2008. Yearend liquidity/ funding pressure could be a factor driving spreads to multi year lows.
Finally note that iron ore markets were mixed at 4-month highs as concerns about the rapid rise in Covid cases in China weighed on sentiment. The January SGX contract is up 50c at $108.55 but the 62% Mysteel index is down 80c at $109.25. China will report November steel production today which may give a sense on whether recent policy announcements to support construction are starting to impact activity data.
Day ahead
At 11:30am Syd we see Australia’s November labour force survey. Leading indicators suggest there will be another robust print for employment growth in November (Westpac f/c: 27k, median +19k, previous +32k). With participation expected to hold steady, another modest decline in the unemployment rate is anticipated (Westpac f/c: 3.3%, median 3.4%).
Falling petrol prices should help ease Melbourne Institute inflation expectations in December.
China releases November activity data at 1pm Syd. Growth in consumption, as proxied by retail sales, is becoming increasingly important to the outlook for 2023 (market f/c: -4.0%yr versus October -0.5%yr. Indeed, the cooling global backdrop is presenting a tough challenge for industrial production moving forward (market f/c: 3.5%yr), though it is promising to see policy support for fixed asset investment in the interim (market f/c: 5.6%yr ytd).
A moderation in the pace of tightening is widely anticipated at the ECB’s upcoming policy meeting, with a 50bp rate hike set to lift the refi rate to 2.5% (some risk of another 75bp). President Lagarde should also provide some guidance on quantitative tightening, perhaps from March 2023. Similarly for the Bank of England, a step-down to 50bp is also expected, taking the policy rate to 3.5%, but their tightening cycle will likely extend further into 2023. The BoE MPC is unlikely to be unanimous.
US: The pressure from elevated inflation and rising interest rates on retail sales is expected to emerge more clearly in November (market f/c: -0.2%). Like other regional surveys of late, the Fed Empire state index and Philly Fed index should continue to reflect broadly weak conditions in December (market f/c: -1 and -10 respectively). The cooling domestic and global backdrop should continue to weigh on industrial production (market f/c: 0.2%) and business inventory accrual (market f/c: 0.4%). Initial jobless claims will likely remain at relatively low levels for now (market f/c: 232k).
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