Markets Daily
Markets were mostly subdued again though the euro underperformed on ECB headlines. AUD/USD rallied in NY trade to 0.6990. Today’s calendar is dominated by the Bank of Japan decision. Data includes UK December CPI and US December retail sales.
Yesterday
The Westpac-Melbourne Institute index of Australian consumer sentiment increased by 5%, from 80.3 in December to 84.3 in January. This is the largest increase in the Index since April 2021, and prior to that, since October 2020 when consumers were responding to positive news around the pandemic. China data beat consensus, Q4 GDP up 2.9%yr, December industrial production +1.3%yr, retail sales -1.8%yr (versus -5.9% in November) and fixed asset investment up 5.1%yr. AUD/USD failed to draw inspiration from data, trading a narrow 0.6950-78 range. It wobbled a little as US equity futures softened, though regional bourses were very mixed. The ASX 200 was around the middle of the pack, closing virtually flat.
Currencies/Macro
The euro was weakest in the G10, reversing from above 1.0860 to 1.0790, beginning its descent around the time of a Bloomberg story claiming that the ECB is planning to slow the pace of its rate increases to 25bp, probably from March. GBP/USD rallied 90 pips or 0.75% to 1.2285. USD/JPY edged down 40 pips to 128.15 as the BoJ decision loomed. AUD/USD probed down to 0.6930, then rebounded to 0.6990, up a net 0.5% on the day. Outperformer NZD rose half a cent to 0.6438 (a one-month high). AUD/NZD fell from 1.0900 to 1.0865.
The Eurozone’s January ZEW investor surveys revealed a marked lift in the expectations components for both Germany (+16.9, est. -15.0, prior -23.3) and Eurozone (+16.7 prior -23.6). However, current conditions remained weak (Germany -58.6, prior -61.4). German final Dec CPI was unchanged (8.6%y/y) from its preliminary reading.
UK labour data for Nov/Dec was solid, with unemployment in line (unchanged at 3.7%), employment rising (+27k, est. flat) and average hourly earnings +6.4%y/y (est. +6.2%y/y).
Canada’s CPI in December fell -0.6%m/m (est. -0.5%m/m) and rose 6.3%y/y (est. 6.4%, prior 6.8%y/y). However, core CPI was more resilient at 5.0%y/y (est. 4.9%y/y, prior 5.1% revised from 5.0%y/y).
In the US, the New York Fed’s Empire State manufacturing survey surprised with a sharp fall to -32.9 in January (est. -8.6, prior -11.2), with falling input prices and prices received, as well as lower production and employment.
Interest rates
Price action in US bonds was relatively muted after returning from a public holiday, the curve was flatter as markets await today’s BOJ policy decision. 2yr government bond yields fell from 4.23% to 4.20%, and 10yr government bond yields rose from 3.53% to 3.55%.
Australian bond yields were slightly higher overnight, as domestic markets also await the BOJ’s decision today and tomorrow’s labour report. 3yr government bond yields (futures) rose from 3.23% to 3.26%, and 10yr government bond yields (futures) rose from 3.60% to 3.66%. Markets currently have 80% chance priced in for a 25bp hike at the February meeting. The AU-US 10yr bond spread narrowed slightly, currently at 10bps.
Credit spreads were little changed as primary activity remains the focus with indices mixed (Main in a bp to 78.5 and CDX half a bp wider at 71) and US cash unchanged. Primary was active in Europe where 14 issuers (ex-SSA) priced ~EUR9bn across a mix of corporates and financials, however the US was a key focus post bank reporting. The US saw 4 issuers price USD12.25bn including Bank of America with a USD3bn 4nc3yr at T+120 (BBSW+134), while MS completed a 3 part deal including 2 senior prints of USD1.5bn of 4nc3yr at T+120 (BBSW+133) and USD2.5bn of 6nc5yr at T+153 (BSW+181) together with a USD2bn 15nc10yr Tier 2 deal at T+243 (BBSW+290).
Commodities
Oil posted sizeable gains, Brent crude up 2.7% to $86.70/bbl, WTI up 1.5% to $81. Goldman Sachs analysts reiterated their bullish oil outlook, arguing that commodity markets are pricing in a US recession that they believe will not occur.
After the correction on Monday in response to Chinese officials’ warnings over speculation, spot iron ore rose 1.0% to $121.60 per tonne, Singapore futures also up 1%, to $120.60.
Base metals were mostly a little weaker on the day, with copper the notable exception, the benchmark Comex contract rising for the eighth straight session, +0.5%. Analysts attributed copper’s outperformance mostly to a squeeze on bearish speculators.
The twice-monthly GDT dairy auction resulted in an overall price fall of 0.1%, with whole milk powder up 0.1%.
Event risk
After the Bank of Japan’s shock decision in December to widen the 10-year government bond yield target range from -0.25% to +0.25% to -0.5% to +0.5%, there is keen anticipation of the outcome of the meeting which concludes today. As always, there is no fixed time for the decision, though it should be expected any time from about 11:30am Tokyo, or 1:30pm Sydney. The announcement for the meeting a year ago was made at 1:46pm Sydney. Governor Kuroda’s press conference is expected to start at 5:30pm Sydney.
Local media report that the BoJ will raise its inflation forecasts again in the quarterly update. But the intense market focus is on whether any policy adjustments will also be revealed. Options include further widening the 10yr yield target range (it has been trading around or above 0.50% in recent days), shifting the yield target to the 5yr JGB, dumping yield curve control entirely and raising the benchmark policy rate which has been -0.1% since 2016. The Japanese yen is up 2.2% this month, second only to the Aussie, suggesting that USD/JPY is pricing a notable policy change today.
Eurozone/UK: The final estimate to the Euro Area’s December CPI will give more detail around the still elevated pace of underlying inflation. Meanwhile, the UK’s December CPI report should continue to reflect a gradual slowdown in price pressures (market f/c: 10.5%yr).
US: The rapid rise in interest rates will continue to weigh on retail sales and industrial production in December (market f/c: -0.9% and -0.1% respectively). The deceleration in producer inflation should remain evident in December (market f/c: -0.1%). Business inventory accrual will likely remain subdued (market f/c: 0.4%) and the NAHB housing market index near pandemic-era lows (market f/c: 31). As the Fed’s Beige Book is released, the FOMC’s Williams, Bostic and Harker will all speak at different events.
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