Markets Daily
The reaction to Friday’s strong US jobs data extended, bond yields and the US dollar rising while stocks fell again. AUD slipped to 0.6880. Today we see the RBA policy decision, Australia December trade data and hear from Fed Chair Powell.
Yesterday
Australia Q4 retail sales volumes dipped -0.2%qtr after +0.3% in Q3, a little firmer than expected. However, we still have another 4 weeks or so until Q4 GDP. The Melbourne Institute’s January inflation gauge picked up to 0.9%mth, 6.4%yr from 0.2%mth, 5.9%yr in December. The US dollar initially extended Friday’s payrolls-led gains, AUD/USD slipping as low as 0.6886, but later ground back up to 0.6940, for a small net gain. Regional equities mostly took their cue from Wall Street, trading well into the red (ASX 200 -0.25%). Japan was the exception, stocks rallying and the yen weakening on media reports that BoJ Governor Kuroda could be replaced by equally dovish deputy Amamiya.
Currencies/Macro
The US dollar rose against all G10 currencies for a second consecutive day, extending its response to the strong US jobs and services ISM reports on Friday. EUR/USD fell from 1.0800 to 1.0725, GBP/USD slipped 35 pips. USD/JPY consolidated its early Asia gains at 132.65. AUD/USD dipped as low as 0.6856 then steadied around 0.6880, net down 40 pips. NZD/USD fell a net 25 pips to 0.6305. AUD/NZD fell 25 pips to 1.0915.
Eurozone retail sales in December fell -2.7%m/m (est. -2.5%m/m, prior revise to +1.2%m/m from +0.8%m/m). Eurozone Sentix Investor confidence rebounded to -8.0 (est. -13.5, prior -17.5). German factory orders in December rose 3.2%m/m (est. +2.0%m/m, prior revised to -4.4%m/m from -5.3%).
Canada’s Ivey PMI for January rose to 60.1 (highest since May), reversing the surprising fall in December (revised to 49.3 from 33.4).
Interest rates
US bonds sold off significantly for the second consecutive trading session, after hawkish Fedspeak fuelled concerns that there will be more interest rate increases needed to control inflation. 2yr government bond yields rose from 4.28% to 4.47%, and 10yr government bond yields rose from 3.52% to 3.64%.
Australian bond yields rose, taking its trend from US price action, but once again outperformed their US counterparts. 3yr government bond yields (futures) rose from 3.10% to 3.17%, and 10yr government bond yields (futures) rose from 3.47% to 3.54%. Markets are fully priced for a 25bp hike at today’s RBA board meeting. The AU-US 10yr bond spread narrowed as AU bonds outperformed the US, currently at -10bps.
Credit was mixed with Main out 3 to 75 and CDX a bp wider at 70 as indices reacted to the Friday’s data with caution, however cash spreads remain firm and primary markets are open with a mix of deals priced and mandates announced setting up a solid short term outlook for supply. Europe saw 7 issuers price EUR5.45bn, including a post earnings deal from Ford (EUR1bn long 4yr at MS+192) and the US also saw 7 issuers (USD13bn) with corporates in the mix including large deals from NextEra (USD4bn 4 part across 5-30yr) and T-Mobile (USD3bn across 5/10yr), Micron relaunched its 2-part USD1.25bn deal in what is becoming a trend (tap of 29s, new 10yr) and in the fins space, DB priced a USD1.5bn 11nc10yr Tier 2 deal at T+345, another example of the 1yr call structure for Tier 2 in the US.
Commodities
Crude markets saw a modest bounce helped by Saudi Arabia unexpectedly raising crude prices for next month and the earthquake in Turkey. The March WTI contract is up 89c at $74.28 while the April Brent contract is up $1.23 at $81.17. Saudi raised the price of Arab Light in Asia by more than 20c to $2 above the benchmark versus a consensus expectation of a 20c cut in prices. Prices into Europe were raised by $2. Protests in Colombia have seen daily production curtailed by circa 50kbpd for the last week. And the devastating earthquake that hit Turkey and Syria saw part suspension of the Ceyhan oil terminal. The terminal exports about 1mbpd from Iraq and Azerbaijan. Meanwhile gas prices stabilised with the recent extreme cold in the US lifting sentiment. The March Henry Hub contract is up 2.8% at $2.48.
Metals continued their move lower with copper down 0.9% to $8,899.5, aluminium down 1% to $2,544, zinc down 3.7% to $3,121 and nickel down 5% to $27,175. Sharp rises in copper and zinc inventory post the LNY holiday have weighed on metal sentiment as has the prospect of higher for longer US rates and a stronger US$. News that the US is preparing a 200% tariff on Russian aluminium had little impact as traders had been factoring in an outright ban and the tariff would only apply to metal crossing US borders.
Finally note that iron ore markets weakened with the March SGX contract down 40c to $122.10 while the 62% Mysteel index fell $2 to $124.35. Rising iron ore inventory and steel product are reflecting weaker Chinese demand post the LNY holiday, with reopening now expected to impact the consumer more than construction/ housing activity.
Day ahead
The RBA Board’s policy decision is due at 2:30pm Syd. Westpac anticipates that the RBA will lift the cash rate by 25bps, to 3.35%. Markets are fully priced for 25bp. The RBA, in responding to a significant inflation challenge and the tightest labour market in 50 years, has quickly raised interest rates. Rates have been raised from a record low of 0.1% in May 2022, with moves at each monthly Board meeting, including 50bp hikes for the four meetings July to September. The RBA slowed the pace of tightening at the October meeting, back to 25bp increments, with policy arguably moving into the contractionary zone.
Australia’s Q4 CPI report revealed that annual trimmed mean (underlying) inflation reached 6.9%, significantly higher than the RBA’s November forecast for 6.5%. Inflation is still clearly too high, and more work needs to be done in our view. The RBA will release its Statement on Monetary Policy on Friday including updated forecasts, some of which will be flagged in the brief statement today.
At 11:30am Syd, sizeable Australian trade surplus should be supported by rebounding coal shipments and tourism in December. Westpac looks for export values to have risen 0.7%, imports up 0.2%, for a surplus of $13.5bn, versus $13.2bn in November and a median forecast of $12.5bn.
Fed Chair Powell will be interviewed by Bloomberg at the Economic Club of Washington during US trade (4am Syd).
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