Markets Daily
US jobs data was much stronger than expected, raising concerns the Fed may need to tighten more than expected. Equities fell while bond yields and the US dollar rose sharply, AUD sliding to 0.6915. Today’s calendar includes Australia Q4 retail sales volumes, ahead of the RBA decision tomorrow.
Friday
Australia’s housing finance data was another sea of red in December, the total value of approvals down -4.3% to be -25.4% lower for the year. All major segments and states recorded declines. By segment, there were similar sized falls for the value of owner occupier and the value of investor loans, down -4.2%mth and -4.4%mth respectively. AUD/USD was barely changed on the day, trading a tight 0.7048 to 0.7082 range as markets awaited the US payrolls report. The ASX 200 closed up 0.6%, with the equity mood mostly upbeat in the wake of strong gains on Wall Street.
Currencies/Macro
The US dollar jumped on the jobs report, closing up against all G10 currencies on Friday, its gains ranging from 0.6% versus the Canadian dollar to 2.2% against the Kiwi. EUR/USD fell from 1.0925 pre-NFP to 1.0790 early Monday. GBP/USD tumbled from 1.2240 to 1.2040.
USD/JPY rose from 128.50 pre-data to close for the week at 131.20. Early Monday it resumed its rally, to 132.45, after a weekend report in Nikkei News that Bank of Japan Deputy Governor Amamiya is a candidate to replace Governor Kuroda in April, implying continuity of policy settings. AUD/USD fell from 0.7055 to 0.6925 at the weekend close, then probed 0.6900 to start the week. NZD/USD fell from 0.6470 to 0.6315. AUD/NZD is net a touch higher at 1.0940.
US non-farm payrolls in January rose 517k, well above expectations (est 189k, prior revised to 260k from 223k). Gains were broad-based, led by hospitality and leisure. The unemployment rate fell to 3.4% - a 53-year low (est. 3.6%, prior 3.5%), despite the participation rate rising to 62.4% from 62.3% (est. 62.3%). Underemployment rose to 6.6% (prior 6.5%). Average hourly earnings rose 0.3%m/m and 4.4%y/y (est. 4.3%y/y, prior 4.8%y/y revised from 4.6%y/y).
US services ISM was also strong, rising to 55.2 (est. 50.5, prior 49.2 in Dec). Business activity rose to 60.0 from 53.5, new orders 60.4 from 45.2. Prices paid fell to 67.8 from 68.1.
Interest rates
US bond yields rose sharply following Friday’s non-farm payrolls, which came in significantly stronger than markets had expected, raising concerns the Fed would have to increase rates for longer. 2yr government bond yields rose from 4.10% to 4.28%, and 10yr government bond yields rose from 3.39% to 3.52%. Markets are pricing in a terminal rate of 5.02% in June.
Australian bonds took direction from the US sell-off, but outperformed their US counterparts. 3yr government bond yields (futures) rose from 3.01% to 3.15%, 10yr government bond yields (futures) rose from 3.39% to 3.51%. Markets are fully priced in for a 25bp hike at the tomorrow’s RBA board meeting. The AU-US 10yr bond spread narrowed as AU bonds outperformed the US, currently at -1bps.
The turn in risk sentiment on Friday did little to disrupt a strong week for credit with cash spreads holding up well in both EUR and USD markets despite some late weakness in CDX on Friday (out 2bp to 69). Primary was quiet as we would expect on a NFP Friday, however with the broader rally in credit seen last week that culminated in four of Thursday’s five US IG issuers pricing either inside guidance or relaunching deals at tighter levels as the market rallied (this was a new one) provides momentum into the new week.
Commodities
The potent combination of surging stockpiles, the rise in the US$ and prospect of higher US rates for longer sent crude and energy markets sharply lower Friday. The March WTI contract fell $2.49 to close at $73.39 while the April Brent contract fell $2.23 to $79.94. Over the weekend, The EU and G7 agreed price caps for Russian products that trade at a surplus to crude such as diesel at $100 and $45 for products that trade at a discount such as fuel oil. EU diplomats also agreed to delay a review of the $60 crude cap until March when they will review all product price caps on a regular two-monthly basis. The March US gasoline contract fell 5.3% Friday while the March diesel contract fell 15% last week. The European equivalent fell 3.1% Friday, closing just below the equivalent of $110/b. Natural gas prices hit fresh 2 ½ year lows in the US despite the record breaking cold and high winds hitting New York City and New England over the weekend.
Metals finished a heavy week with further losses as the much stronger than expected US jobs data brought on the prospect of higher US rates for longer plus a stronger US$. Copper closed down 1.4% at $8,925 Friday while aluminium fell 1.95% to $2,566 and nickel fell 4.46% to $28,460. Zinc dropped almost 5%. On the week, copper fell 3.6%, closing below $9,000 for the first time in almost a month. Rising Shanghai copper and zinc inventory weighed on sentiment, adding to signs that post LNY holiday demand in China is disappointing.
Finally note that iron ore markets were mixed Friday with the SGX contract down 30c at $122.50 while the 62% Mysteel index rose $1.85 to $126.65. Iron ore stockpiles rose 2.3% last week, adding to signs of disappointing demand post the LNY holidays, while SMM last week reported that stocks of HRC were 26% higher than before the holidays.
Day ahead
At 11:30am Syd we see Australia’s Q4 inflation-adjusted retail sales survey. We have already seen the monthly nominal readings of +0.4%, +1.7% and -3.9%, the weak December reading being cited by the ABS as a sign of cost of living pressures finally impacting spending. Retail price gains look to have outstripped nominal spending in the quarter, likely resulting in a decline in real sales (Westpac f/c: -0.3%qtr).
The January Melbourne Institute Australia inflation gauge is due; the December reading was 5.9%yr.
New Zealand markets are closed for the Waitangi Day public holiday.
Eurozone: The recent improvement in the outlook should support Sentix investor confidence in February. However, retail sales remain at risk of weakness in December given price pressures.
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