Markets Daily
The US Federal Reserve raised its policy rate by 25bp to 4.625%, as was expected, and signalled “a couple more rate hikes” before pausing. Markets chose to read Powell’s press conference as dovish, weighing on yields and US$. AUD jumped to 0.7135. Today’s calendar features Australia December building approvals and policy decisions by the ECB and BoE.
Yesterday
AUD/USD traded slightly higher over the day, up to 0.7070, recovering from a dip to 0.7036. Most regional equity markets took their cue from the previous day’s Wall Street bounce, with the ASX 200’s 0.3% gain one of the more muted performances. New Zealand’s Q4 labour market update was a little softer than expected, the unemployment rate edging up to 3.4% and jobs up just 0.2%. Wages grew 4.3% over the year. NZD/USD dropped about 30 pips in response and AUD/NZD jumped from under 1.0920 to 1.0980.
Currencies/Macro
The US dollar was under broad pressure even before the FOMC decision, losses accelerating during Powell’s press conference. EUR/USD rose from 1.0920 pre-FOMC to 1.0985, with a high of 1.1000. GBP/USD bounced from 1.2300 to 1.2380. USD/JPY was undermined by soft US data, sitting around 129.35 pre-FOMC, later falling to below 129.00, down about 1.2 yen over the day. AUD/USD rose from 0.7065/70 to 0.7135. NZD/USD rose 55 pips to 0.6500. AUD/NZD extended the bullish reaction to the NZ labour data, from 1.0960 to 1.0994 – highest since mid-November.
The FOMC raised the Fed funds rate by 25bp to a range of 4.50%-4.75%, as was universally expected, and continued to indicate “ongoing” increases. In his press conference, Fed Chair Powell said further tightening will be required and rates will need to remain restrictive for some time: “a lot of work left to do”. The disinflationary process is at an early stage, but the labour market remains strong. Pausing now would not be appropriate: “So, we raised rates 4.5% points and we are talking about a couple more rate hikes to get to the level we think is appropriately restrictive. Why do we think that is appropriately necessary? Because inflation is running hot.” However, markets have been leaning against Fed rhetoric in recent months and found enough in his comments to knock yields lower.
The US ISM manufacturing survey for January fell to 47.4 (est. 48.0, prior 48.4), with new orders falling to 42.5 (prior 45.1) but prices paid rising from 39.4 to 44.5 (est. 40.4). January ADP private sector employment disappointed with a 106k gain (est. 180k, prior 253k). JOLTS job openings in December were strong at 11.0m (est. 10.3m, prior 10.4m), with a solid 4.0% rise in the hiring rate (up from 3.9%). Construction spending in December fell 0.4%m/m (est. flat), prior revised to +0.5% from +0.2%m/m.
Eurozone CPI inflation in January surprised with a fall to 8.5%y/y (est. 8.9%y/y, prior 9.2%y/y), with a larger fall in energy prices than anticipated. However, the delay of Germany’s CPI until next week means that Eurostat had to use an internal estimate for Germany and puts the data at risk of revision. Core CPI was unchanged from its recent peak of 5.2%y/y (est. 5.1%y/y).
Interest rates
US bond yields rose immediately following the FOMC’s 25bp rate hike decision, but moves were pared and yields fell sharply after Chair Powell’s comments at the press conference was not as hawkish as the markets had expected. 2yr government bond yields fell 10bps to 4.1%, and 10yr government bond yields fell 10bps from 3.50% to 3.40%.
Australian bond yields fell, taking a lead from US price action but underperformed their US counterparts. 3yr government bond yields (futures) fell from 3.21% to 3.15%, and 10yr government bond yields (futures) fell from 3.58% to 3.50%. Markets are pricing in a 95% chance of a 25bp hike at the February RBA board meeting. The AU-US 10yr bond spread widened following AU underperformance, currently at 8bps.
Credit had been firm leading into the Fed with Main in a bp to 78, US cash 1-2bp tighter and CDX little changed with no primary activity for IG issuers on either side of the pond, however CDX has reacted post to now be 3bp tighter at 68.5.
Commodities
Crude markets slumped on a sharp rise in US inventory levels with the March WTI contract down $2.05 to $76.82 and the April WTI contract down $2.31 to $83.15. Crude inventory jumped by 4.1mb while gasoline rose 2.5mb and distillates by 2.3mb. The sharp jump in distillate and gasoline inventory added to the weakness in the product sector with the March RBOB gasoline dropping 4% and the March New York diesel contract down 5.7%. Bloomberg cited data suggesting that Russian diesel from the Baltic Sea was being priced at $90/ barrel, 25% below the value of non-Russian supply delivered into northwest Europe suggesting the coming product price cap is already being priced by the market. Meanwhile US natural gas prices fell to fresh 22-month lows and in the coal sector, the March Newcastle swap price hit fresh one-year lows weighed down by mild weather across Asia and slumping LNG prices in the region.
Metals reversed the previous day’s gains with aluminium down 1.5% to $2,605, copper down 1.8% to $9,054, zinc down 2% to $3,320 and nickel down 4.4% at $29,000. The losses across the complex were despite the massive Las Bambas copper mine in Peru being shuttered due to civil unrest. MMG’s Las Bambas closure joins Glencore’s Antapaccay mine closure late last month. Peru accounts for about 10% of global production.
Finally note that iron ore markets weakened despite lower-than-expected production data from Vale. The March SGX contract is down $2 at $125.95 while the 62% iron ore index is down $1.7 at $127.30. Vale produced 80.9mt in Q4, missing the 82.6mt forecast by analysts.
Day ahead
At 11:30am Syd we see Australia’s December building approvals data. A clearer down-trend in dwelling approvals is expected to crystalise given the cumulative rate rises to date. Westpac forecasts a -4.0% decline, while the median forecast is +1%, after the steep -9% in November.
Both the ECB and Bank of England announce policy decisions tonight. After the December meeting, ECB President Lagarde said that “we should expect to raise interest rates at a 50-basis-point pace for a period of time.” While the ECB sometimes diverges from such guidance, markets are priced for +50bp to 2.5%. There are no new forecasts but Lagarde’s press conference is always worth listening to, with a particular focus on any guidance on whether 50bp or 25bp is the likely next step.
The BoE is mostly expected to hike 50bp, to 4.0%, but with about a third of economists looking for +25bp. Pricing sits around +45bpThe distribution of dissenting votes on the policy committee will be noted with interest, after December’s vote split: 6 for 50bp, 2 for no change, 1 for 75bp.
US: Initial jobless claims are set to remain at a relatively low level for now (market f/c: 195k).
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