Markets Daily
Equities tumbled after the ECB and BoE delivered 50bp rate hikes with hawkish commentary. The defensive US dollar rose against all G10 FX, AUD notably weak as it slid under 0.6700. Today’s calendar features various December PMIs and UK November retail sales.
Yesterday
Australia total employment jumped 64k in November from 43.1k in October (revised from 32.2k). The unemployment rate remained at 3.4% as the participation rate rose to 66.8% from 66.6% in October (revised from 66.5%). This was a strong update not just because of the larger than expected gain in employment, and a robust lift in participation to a new record high, but also the upward revisions to both employment and participation. China’s November activity data was weaker than expected, underlining the economic motivation behind the government’s recent backflip on Covid policy, Industrial production growth slipped to 2.2%yr from 5.0%yr in October while retail sales slumped to -5.9%yr from -0.5%. New Zealand Q3 GDP jumped 2.0%qtr versus 0.9% expected. AUD/USD was quiet through the data, around 0.6860, later slipping to 0.6825/30, matching soft regional equity sentiment, including the ASX 200 which closed down -0.6%.
Currencies/Macro
The US dollar outperformed all the majors. EUR/USD is -0.6% over the day at 1.0625, albeit via a post-ECB spike to 1.0735. GBP/USD fell steadily throughout the day, ultimately down 2.5 cents or -2% at 1.2175, with limited volatility around the BoE headlines. USD/JPY rose 2.3 yen or 1.7% to 137.80. The Aussie was weakest in the G10, barely pausing in a 1.6 cent (-2.4%) slide to 0.6700, with a low of 0.6677. NZD/USD fell -1.7% to 0.6340, leaving AUD/NZD down 70 pips at 1.0560.
The European Central Bank increased its main refinancing rate by 50bp to 2.50%, as was widely expected, and signalled more to come. President Lagarde said that the rise in its inflation projections meant that the ECB had a lot more work to do to meet their inflation goal. She also said that the ECB saw the terminal rate higher than market pricing (which was at 2.85%). On bond purchases, the ECB announced that reinvestment of maturities would end in February 2023, and holdings would be reduced at an average pace of EUR15bn per month until H2 2023 when they would reassess.
The Bank of England increased its main bank rate by 50bp to 3.50%, as was widely expected. There were three dissenters (Tenreyro and Dhingra voted for no change, Mann for 75bp). For guidance: "the majority of the Committee judges that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target".
The Swiss National Bank hiked by 50bp to 1.00%, as was expected, saying that it was prepared to continue hiking, without a pre-set path, in order to quell inflation.
Norges Bank hiked by 25bp to 2.75%, as expected, and indicated that it was prepared to continue in order to counter inflationary pressures.
US retail sales in November fell -0.5% m/m (est. -0.2% m/m), with ex-auto and gas sales down -0.2% m/m (est. flat). The core control group also fell -0.2% m/m (est. +0.1% m/m). Industrial production in November fell -0.2%m/m (est. flat), with manufacturing -0.6%m/m (est. -0.2%m/m). Capacity utilisation slipped to 79.7 from 79.8. Business inventories in October rose 0.3%m/m (est. +0.4% m/m, prior +0.2% m/m). The NY Fed manufacturing activity index fell to -11.2 in December (est. -1.0m prior +4.5). The Philadelphia Fed’s December business outlook index rose to -13.8 (est. -10.0), prior -19.4).
Interest rates
US bonds were mixed as markets absorbed the ECB and BoE’s slowdown in tightening pace to 50bp rate hikes but warned of more hikes to come. 2yr government bond yields range traded from 4.19% and 4.27%, and 10yr government bond yields fell from 3.50% to 3.43%.
Australian bond yields rose overnight and continued to underperform their US counterparts. 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 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 1bps.
Commodities
Oil prices snapped a 3-day winning streak, Brent crude -1.6% to $81/bbl, West Texas Intermediate -1.4% to $76. Along with the broad risk-off mood, a section of the Keystone pipeline from Canada to the US Midwest was restarted.
Base metals joined the wave of risk aversion, zinc, aluminium, nickel, tin and lead all sliding on LME while Comex copper slumped -2.6%. Gold succumbed to the US dollar rally, -1.6% to $1778/oz. Unease over the speed of China’s Covid policy reversal chipped away at iron ore, falling for a third consecutive day, -0.7% to $109.25/tonne.
Day ahead
Japan: The Nikkei manufacturing and services PMIs are at risk of further weakness in December as support from the relaxation of health restrictions fades.
Weakening demand and elevated cost pressures are expected to continue weighing on the flash December S&P Global manufacturing and services PMIs in both Europe (market f/c: 47.1 and 48.5) and the UK (market f/c: 46.5 and 48.5). Meanwhile, the European trade deficit will likely remain wide in October and the final estimate to November’s CPI will provide more colour around the easing in consumer price pressures.
In the UK, high inflation and rising interests will likely keep GfK consumer sentiment near historic lows in December (market f/c: -43), hence limiting the support to retail sales heading into year-end (market f/c: 0.3%).
US: Similar pressures around softening demand and elevated input costs are also present in the US, likely resulting in continued weakness in the S&P Global manufacturing and services PMIs for December (market f/c: 47.8 and 46.5. Note however that the ISM services survey has been running much stronger than the S&P Global (Markit) version.
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