Markets Daily
US bond yields rose again after a poor 30-year auction, helping the US$ rebound. AUD slid to 0.6930. Today’s calendar includes the RBA quarterly statement, China January CPI, UK Q4 GDP and US February consumer sentiment.
Yesterday
An empty data calendar left the Aussie dollar watching equities for direction. This meant quiet trade around 0.6925/30 until S&P 500 futures began to rally, albeit only 0.3%. AUD/USD pushed up to 0.6960. China equities led regional gains, the ASX 200 a clear underperformer, -0.5%. The Japanese yen was choppy as markets awaited the government’s nomination for Bank of Japan governor.
Currencies/Macro
The US dollar was little changed against most of the G10 over the day, Scandis the clear exception. EUR/USD rose a net 25 pips to 1.0735, though with a high of 1.0791. The Swedish krona was easily strongest on the day, USD/SEK plunging from 10.55 to 10.20 following the hawkish Riksbank outcome, though only taking the krona back to where it was last week. USD/JPY roundtripped from 131.50 to 130.35 and back. AUD/USD followed the broad trend of softer US$ until the NY morning, followed by a greenback recovery, rising as high as 0.7011, then sliding back to 0.6935, for a tiny net gain on the day. NZD similarly traced from 0.6310 to 0.6389 and back to 0.6325. AUD/NZD edged down 15 pips to 1.0965.
US weekly initial jobless claims were 196k (est. 190k), prior 183k), continuing claims at 1.688m (est. 1.660m, prior 1.650m).
German CPI inflation in January was softer than anticipated. Headline CPI rose +1.0%m/m and 8.7%y/y (est. +1.0%m/m and 8.9%y/y, prior 8.6%y/y) with the EU harmonised measure rising +0.5%m/m and 9.2%y/y (est. +1.3%m/m and 10.0%y/y, prior 9.6%y/y). There was a reweighting of the inflation basket.
Sweden’s central bank, Riksbank, raised its benchmark rate by an expected 50bp to 3.00%, signalling more tightening to come (25bp in April), but also that they were approaching the peak (they project 3.30% for the forecast period). The hawkish surprise was a more active start to selling of their QE-related bonds, and a strong signal that this is aimed at supporting the SEK currency.
Interest rates
US bond yields rose, following weak demand for the 30yr UST auction, as well as a surprise hike from the Bank of Mexico. The US 2-10yr curve became more inverse, reaching -86bp at one point which is the most inverse level for the curve since the 1980s. 2yr government bond yields rose from 4.42% to 4.49%, and 10yr government bond yields rose from 3.60% to 3.67%.
Australian bond yields took their lead from the US bond price action. 3yr government bond yields (futures) rose from 3.35% to 3.42%, and 10yr government bond yields (futures) rose from 3.67% to 3.72%. Markets are pricing in an 85% chance of a 25bp rate hike at the March RBA meeting. The AU-US 10yr spread widened following AU underperformance, currently at 5bps.
Credit has been mixed reflecting the waning sentiment in the US with Main a bp tighter at 75.5, cash continuing to hold firm, but CDX fading to be a bp wider (71) and 2bp off its session tights as we write. Primary activity was solid in Europe where 8 issuers price EUR6.2bn with fins providing 7 of those deals, while in the US only 2 deals were completed with BP selling USD2.25bn of 10yr at T+112, and adding some local flavour, Westpac NZ priced its USD750M 5yr at T+105.
Commodities
Crude markets gave back some ground as rising US rates and inventories weighed on sentiment. The March WTI contract is down 68c at $77.79 while the April Brent contract is down 87c at $84.22. Crude markets have been stuck in a $10 range so far this year as traders work through the impact of higher central bank rates and Russian price caps/ bans versus China reopening. Vortexa chief economist David Wech noted that Russian oil continues to flow into the market, with oil and fuel being diverted from Europe to Asia, and “that’s the most important thing”. Europe is in a “good supply situation” with adequate barrels and increased imports from the US and North Africa. Meanwhile thermal coal prices continued their plunge with the March Rotterdam contract dropping close to 5% to a low back to February last year. The contract is down 37% so far this year. And Adani was said to be offering thermal coal in Asian markets at a discount for “quick sales”. The Newcastle benchmark has dropped by 43% so far this year. Press reported that the first shipments of met coal from Australia to China in 2 years are sitting outside Zhanjiang harbour and just about to dock.
Metals were better bid despite higher US rates, a rising US$ and higher inventory weighing on overall sentiment. Copper gained 1.2% to $9,000 while aluminium rose 1% to $2,507. Nickel jumped 6.4% to $29,150. The LME said that 94% of copper on warrant in January was Russian as was 41% of aluminium. Trafigura said it was facing a $577m loss after uncovering a nickel fraud.
Finally note that iron ore eked out modest gains with the March SGX contract up $3 to $124.10 while the 62% Mysteel index rose $2.45 to $124.70. ArcelorMittal warned that with “continued weakness expected in real estate during the year, steel consumption is expected to stabilise in 2023 with potential upside dependent on government infrastructure stimulus”.
Day ahead
At 11:30am Syd, the RBA’s Statement on Monetary Policy will provide a full update on the Board’s central forecasts and their detailed views around the outlook.
At 12:30pm, China’s inflation will likely remain at a subdued level for now, regarding both consumer prices (market f/c: 2.1%yr) and producer prices (market f/c: -0.5%yr). The current account surplus has been showing resilience as of late given the support from the rest of Asia.
The UK’s Q4 GDP release should provide further evidence on the underlying deterioration of economic conditions, though the Bank of England’s February forecasts are for a shallower recession than they projected in November. Consensus is 0.0%qtr, 0.4%yr, with the December month reading -0.3%mth.
The UK trade deficit is expected to widen in December, though weaker consumer demand should help reduce the deficit in time (market f/c: -£2.8bn).
US: The University of Michigan’s consumer sentiment gauge is expected to continue consolidating in February (market f/c: 65). Meanwhile, the Fed’s Waller and Harker are both due to speak at a crypto conference.
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