Markets Daily
The ECB and BoE both hiked by 50bp, but markets interpreted their cycles are near an end. Bond yields fell and the US dollar rose, AUD slipping back to 0.7080. Today’s calendar includes Australia December housing finance and the US January employment report.
Yesterday
Australia dwelling approvals produced a large upside surprise for December, a massive spike in high rise approvals driving an 18.5% jump in total approvals. This was against market expectations of a flat result following significant declines in Oct-Nov that pointed to rate rises and other pressures finally starting to impact. The composition cautions strongly against reading too much into the monthly gain with ‘core’ non-high rise approvals still trending clearly lower. AUD/USD mostly consolidated its post-FOMC jump, though it managed a marginal new high since June 2022, at 0.7158. Regional equities were mixed, with the ASX 200 somewhere in the middle of the pack, +0.1%.
Currencies/Macro
The US dollar rose against most of the G10, helped by the dovish rates reaction to the ECB and Bank of England. EUR/USD fell from 1.0990 pre-ECB to 1.0910. GBP/USD was soft heading into the BoE announcement, around 1.2330. The 50bp hike sparked a jump to 1.2390, but it soon faded, cable finishing NY trade around 1.2230.
USD/JPY lacked direction, eventually 20 pips lower at 128.70, the yen strongest in the G10. AUD/USD followed the likes of the euro, sliding from 0.7140 to 0.7080. NZD was somewhat more resilient, eventually down 30 pips to 0.6475, its outperformance trimming AUD/NZD by 40 pips to 1.0930.
The ECB increased its policy rate (main refinancing rate) by 50bp to 3.0%, as was widely expected. It also affirmed its intention to hike by a further 50bp in March, with the likelihood of further tightening after that. They stated that they are data dependent and decisions will be made on a meeting-by-meeting basis, which markets interpreted as signalling a slowdown in pace. It also confirmed quantitative tightening would start in March.
The BoE increased its policy rate by 50bp to 4.0%, as was expected, with dissent from two MPC members who voted for no change. Guidance was less emphatically hawkish than previously, which markets interpreted as signalling an end to the tightening cycle is near. The Monetary Policy Report forecast a lower path for inflation and a slight upgrade to growth resulting in a shallower and shorter recession.
US unit labour costs in Q4 were weaker than expected at 1.1%q/q (est. 1.5%q/q, prior revised down to 2.0%q/q from 2.4%q/q). Weekly initial jobless claims fell to 183k (est. 195k), continuing claims lower at 1.655m (est. 1.694m). Factory orders in December rose +1.8%q/q (est. +2.3%m/m), with ex-transport falling 1.2%m/m (est. +0.2%m/m, prior revised to -1.2%m/m from -0.8%m/m).
Interest rates
Bonds in the Eurozone and the UK rallied sharply, following the ECB and BoE policy meetings, with both central banks hiking their cash rate by 50bps. Although ECB president Lagarde signalled at least another 50bps in March and “further policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach”, markets interpreted this as the ECB is nearing the end of its tightening cycle. We saw the market held a similar sentiment towards the BoE, following a lowering of the latter’s inflation projections. 10yr bund yields fell 22bps to 2.07%, and 10yr gilts yields fell 30bps to 3.00%.
US bond yields fell, taking a lead from the Eurozone bond rally but significantly underperformed their EU and UK counterparts. 2yr government bond yields finished unchanged at 4.10%, and 10yr government bond yields fell from 3.42% to 3.40%. Markets are pricing in a 4.9% terminal rate in June 2023.
Australian bond yields fell, taking trend from the bond rally in Europe. 3yr government bond yields (futures) fell from 3.21% to 3.03%, and 10yr government bond yields (futures) fell from 3.58% to 3.42%. Markets are pricing in a 95% chance of a 25bp hike at the February RBA board meeting. The AU-US 10yr bond spread narrowed as AU bonds outperformed the US, currently at 2bps.
Credit has reacted to the strong outright rally across the US and Europe in the last couple of sessions with cash spreads in both EUR (4-7bp) and USD (3-6bp, tracking toward pre-Ukraine levels) seeing significant moves tighter, matching the gains seen in indices with Main in 5.5bp to 72.5 and CDX 2bp tighter at 66.5. While Euro primary markets were closed ahead of the CBs, the US saw 5 issuers price USD10.45bn (refer below) led by the second jumbo deal of the week following IBMs multi-currency offering on Monday. This time it was Oracle with a USD5.25bn 4 part deal (5-30yr) as it looked to continue to pay down the Cerner bridge facility.
Commodities
Rising inventory weighed on prices again with the March WTI contract down 57c at $75.84 while the April Brent contract is down 69c at $82.15. And despite Russian product bans and price caps coming into effect this weekend, diesel prices have been hit even harder. The March ARA gasoil contract is down 4.2% and 12.5% over the last 5 sessions while the March NY ULSD contract is down 5.3% and 15% on the last week. Meanwhile in gas markets, Freeport applied for FERC permission to restart some docking and loading of LNG ships. The facility has been closed since an explosion in June. And Chinese press reported that the first shipments of coal under an easing of the unofficial Australian ban arrived in China on Jan 16 with more due Feb 8.
Metals were subdued with copper down 0.6% at $9,033 and aluminium down 1% at $2,604 while zinc was largely unchanged at $3,355 and nickel rose 2.4% to $30,000. Copper has been buffeted by waning demand concerns and higher central bank rates on the one hand versus production hits in Peru due to civil unrest and falling LME warehouse stocks on the other. US Senator Sinema urged congress to reconsider the designation of copper a critical mineral. The US Geological Survey added nickel, lithium and zinc to the list in 2022 and reviews the list every three years.
Finally note that iron ore markets softened again with the March SGX contract down another $3.15 to $122.80 and the 62% Mysteel index down $2.80 to $124.50. Wires reported disappointing post LNY demand in China and rising inventory of steel product as factors weighing on prices during the week. Total stockpiles of HRC were 26% higher than before the holidays according to an SMM report.
Day ahead
Australia: A slower pace of declines in housing finance approvals is anticipated in December, supported by the ongoing down-trend in turnover and average prices (Westpac f/c: -3.0%); weakness in owner-occupier loans is expected to outstrip that of investor loans (Westpac f/c: -2.5% and -3.0% respectively). The release is due at 11:30am Syd.
China: The recent easing of COVID-zero restrictions should see the Caixin services PMI return to expansionary territory in January (market forecast: 51 versus 48 in December, due 12:45pm Syd).
US: The moderation in the pace of non-farm payrolls growth is widely expected to continue in January but further easing will be necessary to reach the FOMC’s ‘target’ pace of 100k/mth. The median forecast on Bloomberg is 189k after 223k in December, with the +/-1 standard deviation of forecasts 159k to 236k. The unemployment rate should remain little changed for now (market 3.6%, Westpac 3.5%) as downward pressure continues to build in average hourly earnings (market 0.3%, Westpac 0.2%).
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