Markets Daily
Fed chair Powell's comments were no more hawkish than last week's, causing a short-lived reaction in bond yields and the US dollar (lower) and equities (higher). Currently, the S&P500 is up 1.2%.
Yesterday
The RBA raised its cash rate by 25bp to 3.35%, as was fully priced in by markets. The statement wording was arguably slightly more hawkish than even Westpac expected, namely: "The Board expects that further increases in interest rates will be needed over the months ahead.” The qualification used in December “not on a pre-set course” was excluded. While not definitive, the use of “not on a pre-set course” could be interpreted as indicating the possibility of a pause being considered in the next month. The 2-year Australian government bond yield jumped 15bp, but AUD struggled against a US dollar still supported by Friday’s booming jobs data. AUD/USD had already risen from 0.6885 to 0.6920 before the release, then spiked to 0.6951 before steadying a little lower. Earlier, Australia’s trade surplus printed at $12.2bn in December, having narrowed from $13.4bn in November. Exports slipped -1.4%, imports rose +1.0%. Australia has now completed 5 straight years of trade surpluses despite various global headwinds. The ASX 200 closed down -0.5%, underperforming most of the region.
Currencies/Macro
The US dollar index was volatile but is unchanged on the day. EUR bounced off a one-month low of 1.0669 to 1.0766 and then retraced. EUR/USD starts the local session near 1.0725. USD/JPY fell from 132.30 to a low around 130.48.
AUD was a notable outperformer in local trading yesterday (+0.5%), pushed higher by the RBA’s hawkish rate hike, but retraced much of that into offshore dealings and ahead of Chair Powell’s comments. AUD initially rose from an overnight low of 0.6888 to 0.6963 in the wake of Powell’s early comments that were no more hawkish than expected, but settled back around 0.6950. NZD similarly rose from 0.6273 to 0.6351 and then partially retraced that. AUD/NZD slightly extended the rally which followed yesterday’s RBA’s hawkish 25bp hike, from 1.0960 to 1.0994.
Fed chair Powell, in an interview, repeated last week’s comment that the disinflation process has begun, thanks to improvement in supply chains, and as people rotate their purchases from goods to services. One key area which is yet to recede is core services ex-housing. He expects to see inflation in housing services to fall over the second half of the year. The labour market should soften but the strong jobs report shows it will take time. If the labour market remains strong, the peak funds rate may need to be higher.
Interest rates
US bond yields fell initially after Fed Chair Powell spoke, but moves were fully retraced as Powell signalled rates still needs to go up and stay high for a period of time. 2yr government bond yields fell to 4.37% before finishing the session flat at 4.47%, and 10yr government bond yields fell to 3.59% before finishing the session up 4bp at 3.68%.
The RBA delivered an expected 25bp hike yesterday, markets interpreted the messaging from the statement as hawkish, which sparked a sell off in bonds. 3yr government bonds yields (futures) rose from 3.26% to 3.32%, and 10yr government bond yields (futures) rose from 3.6% to 3.67%. The AU-US 10yr bond spread widened following AU bonds sell off, currently at 0bps.
Credit markets were fairly stable heading into Powell’s interview with Main unchanged (75.5) and US cash also steady leaving CDX to ride the late volatility which sees it ~1bp tighter at 69 and on its lows for the day. Primary activity got in ahead of the volatility and saw solid volumes in play. Europe saw 12 issuers price ~EUR6.8bn (ex SSA) with supply dominated by financials including covered deals from Santander (EUR500M 5yr at MS+38) and SUMIBK (EUR750M 3yr at MS+48). The US saw 4 issuers price USD14.7bn led by Intel’s USD11bn 7-part deal which hit all tenors from 3-40yr and comes just after downgrades from all three rating agencies (the company has retained its commitment to the A rating category) resulting in NICs of 20-25bp and Comcast sold its first green deal with a USD1bn WNG 10yr at T+100.
Commodities
Crude markets bounced for the second day, helped by the weekend announcement that Saudi Arabia was increasing most prices into Asia next month and a tinge of optimism in Fed Chair Powell’s comments. The March WTI contract is up $3.08 to $77.19 while the April Brent contract is up $2.79 to $83.78. Rosneft CEO told an India Energy Week conference that Russia had notched up a “psychological victory” over the West by surviving a raft of sanctions. The EU ban and G7 price cap on Russian crude products came into effect Sunday, following the crude price cap and ban in December. Russia has become India’s largest crude seller according to data from KPLER. BP announced record annual earnings for 2022, more than doubling the previous year. And finally in gas markets, the March Henry Hub contract rose 4.4% with traders expecting Freeport LNG to announce a return to full reopening soon.
Metals were modestly higher after last week’s aggressive losses with copper up 0.4% at $8,906 while nickel rose 1% to $27,545 and zinc rose 2% to $3,196. Aluminium was largely unchanged at $2,534. There was little fresh news with the focus on Powell comments and the US$ though Anglo CEO said that “the effects of climate change are very real and we are seeing it … There were weather impacts on operations, pretty much all over the globe”.
Finally note that iron ore markets softened again as traders focussed on disappointing Chinese demand post the LNY holidays. The March SGX contract is last at $119.00, down $3.10 from the same time in the previous session while the 62% Mysteel index is down $2.10 at $122.25.
Day ahead
Japan: The current account surplus is set to narrow in December, though China’s reopening should support in time (market f/c: ¥112bn).
US: Growth in consumer credit growth is expected to continue easing in December (market f/c: $25bn), and the final estimate to December’s wholesale inventories is also due (market f/c: 0.1%). The FOMC’s Williams, Cook, Barr, Bostic, Kashkari and Waller are also all due to speak at different events.
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