Markets Daily
Hawkish Fedspeak weighed on risk sentiment, US equities sliding and the Aussie weakest in the G10, down to 0.6925. Today’s global calendar is very light.
Yesterday
Australia’s data calendar was quiet. AUD/USD edged up 10 pips to 0.6970. Regional equities were mixed, only Korea and Taiwan as upbeat as the overnight lead from Wall Street. The ASX 200 closed up 0.4%. US President Biden’s State of the Union address had no apparent impact on markets, as is almost always the case no matter who is president.
Currencies/Macro
The US dollar was little changed against most G10 currencies but notably firmer against commodity-linked FX such as the Aussie. EUR/USD faded in late NY to be a fraction lower at 1.0710. GBP/USD steadied slightly higher at 1.2065. USD/JPY rose 0.3% to 131.40. AUD/USD rose to 0.6996 in London trade but then ratcheted lower in line with US equities, to 0.6925. NZD was slightly more resilient, net -0.3% to 0.6305. AUD/NZD fell from an overnight peak (and three-month high) of 1.1031 to 1.0980.
A number of Fed officials were on the wires. New York Fed president Williams said that the Fed still has work to do on inflation, that 25bp rate increases are appropriate, and a peak of 5.00% to 5.25% seems reasonable. He said that, broadly, financial conditions have tightened a lot in the past year, consistent with the Fed moving to a restrictive stance, but that were conditions to loosen, the Fed could tighten further. There is much uncertainty regarding the inflation outlook. Underlying demand in the economy remains strong., and there are positive indications of the economy's resilience.
Fed governor Cook said, “We are determined to bring inflation down to our target…I think we are not done yet with raising interest rates, and we will need to keep interest rates sufficiently restrictive.” The strength of the January payroll report was a surprise. Hawkish governor Waller said, “We are seeing that effort begin to pay off, but we have farther to go…and, it might be a long fight, with interest rates higher for longer than some are currently expecting.” Minneapolis Fed president Kashkari (FOMC voter this year) said the Fed will likely need to raise interest rates to around 5.4% in order to bring inflation down to its 2% goal.
Interest rates
US bond yields fell, after good results from the 10yr treasury note auction, and as markets consider the US CPI outcome next week and how that’s going to impact the Fed’s policy decisions ahead. 2yr government bond yields fell from 4.46% to 4.43%, and 10yr government bond yields fell from 3.67% to 3.62%.
Australian bond yields took their trend from the US bond price action. 3yr government bond yields (futures) fell from 3.28% to 3.27%, and 10yr government bond yields (futures) fell from 3.6% to 3.58%. Markets are pricing in a 75% chance of a 25bp rate hike at the March RBA meeting. The AU-US 10yr spread narrowed slightly, currently at -1bp.
Credit spreads have held relatively firm through the recent volatility with indices a touch weaker last night as Main closed a bp wider at 76 and CDX gave back some of last night’s gains to also be a bp wider at 70, with cash spreads also flat to a bp wider but remaining only just off their YTD tights. Europe saw 10 IG issuers in the market (ex-SSA) including 2 carmakers as GM completed a dual currency (EUR750M 6yr and GBP400M 3.5yr) transaction following Ford’s EUR transaction earlier in the week and Volvo was also in the market with a EUR700M 3yr. In the bank space, ING priced a EUR4bn 2 part transaction split evenly across a 3yr at MS-2 (BBSW+44) and a 10yr at MS+19 (BBSW+77). The US saw 3 issuers price USD2.75bn last night, but the performance of Intel from the previous evening was also notable. Intel’s 7 tranche deal came with NICs of 25-30bp from 5-30yr (recent corporate reporting and credit downgrades adding pressure to the name) but has already seen a 15-20bp rally on the first day of trading as concessions are rapidly unwound.
Commodities
Crude rose for a third session despite further increases in US inventory and production with the March WTI contract up $1.33 to $78.47 and the April Brent contract up $1.40 to $85.09. Crude inventory rose by 2.4mb to the highest since June 2021 while gasoline jumped by another 5mb to the highest since March last year while distillates rose by 2.9mb. That brings combined crude plus products inventory to the highest level since September 2021, emphasising how the record US SPR release, milder US winter plus weaker demand has boosted overall inventory levels. US crude production rose by another 100kbpd to 12.3mb though the EIA did lower its forecast of US crude production in 2024 to 12.65mb from 12.81 in January. Turkey restarted crude oil flows to the export terminal at Ceyhan Tuesday though it’s still unclear if the port sustained any damage from the recent devastating earthquakes. And Interfax reported Russian Deputy PM Novak saying, “volumes for February have been placed” in reference to “the embargo and the price cap on oil products”.
Meanwhile in gas markets, the European March TTF contract fell to a fresh 17 month low while European thermal coal prices dropped to a 1yr low. Higher than expected gas in storage, the expected restart of Freeport LNG facility plus forecasts of milder weather from the weekend are all weighing on European thermal energy markets.
Metals markets were mixed with copper unchanged at $8,921, aluminium down 1.5% at $2,487 and nickel up 0.5% at $27,395. LME aluminium stocks jumped by the most in a year as the metal deposited in the South Korean port of Gwangyang hit a record. The LME doesn’t report the origin of deliveries but the proximity to Russia adds to suspicions that it’s coming from Russia. The LME will start providing a monthly report on the origin of metals later this month. Aluminium dropped below $2,500 for the first time in a month.
Finally note that iron ore markets showed some signs of stabilising after recent falls with the March SGX contract up $2.1 at $121.10 while the 62% Mysteel index was unchanged at $122.25. BHP suspended all Pilbara operations after a worker was killed at a rail yard in Port Hedland. Severe Tropical Cyclone Freddy is forecast to track west well away from the Pilbara region over the next couple of days.
Day ahead
The data calendar is very light. In China, robust growth in M2 money supply and new loans is to be expected as authorities continue to support the recovery (market f/c: CNY4200bn and 11.7% respectively). Note that this data is due between February 9th-15th.
US: Initial jobless claims are set to remain at a low level for now (market f/c: 190k).
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