Markets Daily
Risk sentiment soured, equities falling and the US dollar outperforming, AUD down to 0.7060. US bond yields rose. Today’s busy data calendar includes Australia December retail sales and private credit, China January PMIs, Eurozone Q4 GDP and US Q4 employment costs.
Yesterday
AUD/USD was quiet for some hours, trading mostly 0.7100-0.7120, before slipping below 0.7090 in apparent sympathy with a wobble in USD/JPY on some Bank of Japan-related headlines. Regional equities were more mixed than might have been expected given the mildly positive lead from Wall Street. While Taiwan reopened after a weeklong holiday with a 3.8% jump, Hong Kong’s Hang Seng slid -2.5%. The ASX 200 closed -0.2%.
Currencies/Macro
The US dollar rose against all G10 currencies amid poor risk appetite. EUR/USD was choppy at times but overall about 20 pips lower at 1.0850. GBP/USD fell 30 pips to 1.2350. USD/JPY followed Treasury yields up to 130.40, recovering from its Tokyo session fall. AUD/USD 40 pips or -0.6% to 0.7060. NZD is down -0.4% on the day at 0.6465, leaving AUD/NZD down a quarter cent at 1.0915.
The US Dallas Fed activity survey rebounded to -8.4 in January, beating consensus of -15.0, from a prior reading of -20.0. However, the negative reading still implies a further slowing of growth, new orders slowing for the eighth month in a row.
Eurozone economic confidence rebounded to 99.9 in January (est. 97.0) from a revised 97.1 (prev. 95.8). Industry rose from -0.6 to +1.3, services rose from +7.7 to +10.7, retail fell to -0.8 from -2.7, and consumer confidence rose to -20.9 (from -22.1).
German GDP in Q4 fell -0.2%qtr (est. flat) to be up 1.1%y/y (est. 1.3%y/y), maintaining the risk of a marginal technical recession in the region’s largest economy. European inflation data for January indicated inflation remained sticky.
Spanish CPI rose 5.8%y/y (est. 4.8%y/y, prior 5.5%y/y), with core rising to 7.5%y/y (prior 7.0%y/y). Italian PPI rose 3.8%m/m and 39.2%y/y (prior 35.7%y/y). Newswires reported that Germany is postponing (“for technical reasons”) its January CPI release for a week. Eurostat comments that there would be a re-weighting of the CPI basket raised concerns over potentially higher inflation readings.
Interest rates
US bond yields rose and the curve steepened on Monday, as markets await this week’s FOMC rate decision. 2yr government bond yields rose from 4.23% to 4.24%, and 10yr government bond yields rose from 3.50% to 3.54%.
Australian bond yields fell, taking a lead from the US and the short end underperformed their US counterparts. 3yr government bond yields (futures) rose from 3.20% to 3.24%, and 10yr government bond yields (futures) rose from 3.54% to 3.58%. Markets are fully priced in for a 25bp hike at the February RBA board meeting. The AU-US 10yr bond spread narrowed slightly, currently at 4bps.
Credit markets were mixed as indices moved in line with broader risk markets which has seen Main out 2.5bp to 79.5 and CDX1.5bp wider at 73, however cash spreads have remained firm and primary activity was solid to open the week as issuers look to move ahead of the data. Europe saw 6 issuers price ~EUR8.35bn, while the US saw 5 issuers price USD7.7b. Activity on both sides of the pond was led by IBM which opened in Europe with a dual currency, 5 tranche deal including EUR4.25bn across 4-20yr and GBP750M of 15yr (first foray into GBP by a US group since Pepsi in July) and followed with a USD3.25bn 4 tranche offering of 3-30yr. On the local front, ANZ became the first Australian bank to return to the Tier 2 callable market with its EUR1bn 10nc5yr sustainable transaction that priced at MS+215 (IPT MS+255, BBSW+280) with books above EUR3.5bn and BNZ completed its USD850M 5yr at T+118 (IPT +140).
Commodities
Crude markets fell despite optimism on rising Chinese demand and the recent attacks on Iranian military facilities. The March WTI contract is down $1.74 at $77.94 while the March Brent contract is down $1.71 at $84.95. With a number of key central bank meetings this week, traders appeared to be locking in profits from the recent gains. Losses in products were even more noticeable with the Feb New York heating oil contract down 4.6% and that’s despite concerns that New York and much of the US East Coast is at risk of shortages of gasoline this summer due to low inventory levels and the coming EU ban/ G7 price cap on products. US natural gas prices fell to fresh 21 month lows with weather forecasts indicating warmer than normal temperatures across the east coast over the next two weeks.
Metals also saw signs of profit taking with softer housing data in China weighing on sentiment. Copper is last down 0.7% at $9,196 while aluminium is down 2.3% at $2,566. Nickel bucked the trend up 3% after the Philippines said it is considering taxing nickel ore exports to try to push miners into processing more raw material exports. The weaker price action in copper was despite MMG warning Monday that it will halt its Las Bambas copper mine in Peru this week due to ongoing unrest and a “shortage of critical supplies”. Reuters reported that Glencore had delivered 40,000t of Russian aluminium into LME warehouses in South Korea.
Finally note that iron ore markets saw further gains in steel prices as China returned from the LNY holidays. The March SGX contract is unchanged from the same time yesterday at $126.60 but the 62% Mysteel index is up $2.60 at $129.45, a high back to mid-June last year. Spot rebar steel prices are up 3% so far this year and almost 12% since the beginning of December when China announced the end of its zero-Covid policy.
Day ahead
At 11:30am Syd, after a strong 1.4% gain in November, Australia nominal retail sales are expected to post a modest decline in December as interest rate pressures continue to build (Westpac f/c: -0.3%mth, median forecast -0.2%). Meanwhile, the gradual slowdown in private credit growth should continue to crystalise in December (Westpac f/c: 0.5%).
Japan: Weaker demand from Europe and the US likely weighed on industrial production in December (market f/c: -1.0%).
At 12:30pm Syd, we see China’s official January PMIs. The manufacturing and non-manufacturing PMIs should receive some support from the easing of COVID-zero restrictions, but virus and global demand risks remain (market f/c: 50.1 and 52.0 respectively, versus 47.0 and just 41.6 in December).
The Eurozone’s resilience is set to be tested with the Q4 GDP release, markets anticipating a modest decline in activity. Consensus is -0.1%qtr, 1.7%yr after +0.3%qtr, 2.3%yr in Q3).
Net mortgage lending in the UK should continue to cool as the housing correction ensues (market f/c: £3.9bn).
US: Crucial to the outlook for the FOMC, the Employment Cost Index is expected to exhibit signs of robust but moderating wage pressures in Q4 (market f/c: 1.1%). Further declines in the FHFA and S&P home price indexes are anticipated in November (market f/c: -0.5% and -0.65% respectively). Real income and interest rate pressures should continue to weigh on the January Chicago PMI (market f/c: 45) and limit the up-trend in consumer confidence (market f/c: 109).
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