Markets Daily
Equity sentiment remained weak, the S&P500 down 0.8%, and risk-sensitive currencies fell slightly further. Bond yields rose amid hawkish ECB and Fed comments.
Yesterday
Wall Street’s negative lead saw the Nikkei slip 1.4%, but the ASX and Shanghai bucked the trend, up 0.6% and 0.5% respectively. AUD/USD was among the underperformers, slipping around US1/2 cent to just beneath 0.69 in the wake of a softer than expected Dec labour force report. The jobless rate held steady at an upwardly revised 3.5% while employment dropped 14.6k, well below the 22.5k rise predicted by consensus. Part time employment fell 32.2k while full time employment rose 17.6k and hours worked declined 0.5%. A lift in illness could have been a drag on employment, with the number of people working reduced hours due to illness above seasonal averages, but regardless, rates markets trimmed RBA tightening expectations further still. NZ PM Jacinda Ardern made the shock announcement that she will step down in less than three weeks, saying she does not have "enough left in the tank". Ardern will finish up as PM on 7 Feb, but will stay on as an MP until the election, which she announced would be 14 Oct.
Currencies/Macro
Equity sentiment remained weak, the S&P500 down 0.8% and risk-sensitive currencies fell slightly further. Bond yields rose amid hawkish ECB and Fed comments.
The US dollar index is down 0.3% on the day. EUR rose from 1.0795 to 1.0838, helped by hawkish comments from ECB’s Lagarde. USD/JPY rose from 127.76 to 128.93. AUD extended its post-jobs data decline from 0.6913 to 0.6872, though recouped lost ground to start the day back above 0.69. NZD similarly fell from 0.6420 to 0.6365. AUD/NZD rose from 1.0750 to 1.0813.
The US Philadelphia Fed business survey rose to -8.9 from -13.7 (est. -11.0), prices paid and received falling and employment and orders rising. Weekly jobless claims were lower than anticipated. Initial claims at 190k (est. 214k) and continuing claims at 1.647m (est. 1.655m) indicating that the labour market remains tight. Housing starts/permits were solid (starts 1.383m, permits 1.330m).
Fed vice-chair Brainard reiterated they will need a "sufficiently restrictive" rate for "some time" in order to bring down inflation to the 2% target, and are determined to stay the course as inflation remains elevated, even though it has softened in recent months. She sees tentative signs that wage growth is moderating and little indication of a 1970's style wage-price spiral. She doubts that wages are driving much of the strength in core services prices excluding housing, and holds out hope for a soft landing. Collins expects additional rate hikes to "likely just above 5%", and expects to hold rates at restrictive levels for "some time" to ensure a steady path toward our target". However, she also said that a slower pace of increases is appropriate, adding "more measured hikes will help address competing risks," including the possibility the Fed's actions may be "insufficient to restore price stability" against the chances the Fed could cause "unnecessary losses in real activity and employment."
ECB president Lagarde said that "inflation by all accounts, whichever way you look at it, is way too high", adding "we shall stay the course until such time we have moved into restrictive territory for long enough so that we can return inflation to 2% in a timely manner". Lagarde noted that a "small contraction" in activity is now likelier than a recession and that "the news has become much more positive in the last few weeks". Council member Knot was typically hawkish, saying "our president has already announced that most of the ground that we have to cover we will cover at a constant pace of multiple 50 basis point hikes…it will not stop after a single 50 bp rate hike - that is for sure…core inflation has not yet turned the corner in the euro area".
Interest rates
US bond yields were higher, following FedSpeak from Brainard, re-iterating that rates need to stay elevated to further cool the still high inflation. 2yr government bond yields rose from 4.08% to 4.12%, and 10yr government bond yields rose from 3.37% to 3.39%.
Australian bond yields took its trend 3yr government bond yields (futures) rose from 2.97% to 3.03%, and 10yr government bond yields (futures) rose from 3.33% to 3.41%. Markets currently have 60% chance priced in for a 25bp hike at the February meeting. The AU-US 10yr bond spread narrowed further, currently at 1.6bps.
Credit spreads were weaker in line with broader sentiment, with Main 4bp wider at 81.5 but remaining significantly tighter this month and CDX is now off its session wides to be out a bp at 75 as the US firms. Primary volumes have slowed with Europe seeing 4 issuers price EUR4.2bn last night and the US just the 3 issuers as banks remain absent post the BAC/MS deals earlier this week. Euro activity was dominated by EDF’s four-part dual currency transaction that raised the equivalent of just over EUR3bn of long term debt across EUR (EUR1bn each of a 9yr and 20yr) and GBP (GBP450M 12yr and GBP500M 30yr).
Commodities
Crude oil clawed back some of yesterday’s losses triggered by fresh concerns over the outlook for US growth, the front month WTI contract lifting from intraday lows around $78.20/bbl to $80.45/bbl. Iron ore continues to trade with a firm tone, up 1.6% in the last 24 hours to $125.65/t, its highest levels since June 2022. Base metals are mostly lower overnight, aluminium slipping 1.9%, while copper fell 0.2%.
Event risk
NZ: The manufacturing PMI should continue to feature the recent weakness in production and new orders in the December survey. Meanwhile, the net migration balance is moving further into positive territory as travel flows continue to normalise.
Japan: Headline consumer inflation is expected to continue rising in December, remaining broadly-based across components (market f/c: 4.0%yr).
UK: The return of unrestricted holiday spending should result in a robust print for retail sales in December (market f/c: 0.5%). The gradual improvement in GfK consumer sentiment is expected to continue in January though inflation and interest rate pressures will remain firm (market f/c: -40).
US: The housing market remains under extensive pressure, likely resulting in another decline in existing home sales in December (market f/c: -3.4%). The FOMC’s Williams, Harker and Waller are also all due to speak at different events.
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