Markets Daily
Equity sentiment improved in Europe and the US, helping AUD rise to 0.6965. Today’s data calendar includes Australia Feb consumer sentiment and Jan business confidence, Japan Q4 GDP, UK Dec unemployment and the global focus, US Jan CPI. Japan announces its nomination for BoJ governor.
Yesterday
Regional equities were quite mixed, with sizeable moves in both directions. The ASX 200 finished somewhere in the middle, -0.2%. AUD/USD traded quietly, mostly 0.6900-25. An empty regional data calendar only encouraged an eye on the NFL Super Bowl.
Currencies/Macro
The US dollar was mostly softer as equity markets rallied. EUR/USD rose from 1.0680 to 1.0725, GBP/USD from 1.2060 to 1.2140. The yen was easily weakest in the G10 as the BoJ nominations loomed, USD/JPY up about 1 yen or 0.8% to 132.40. AUD/USD rose from 0.6910 in the London morning to 0.6965 as US equities closed near their highs. NZD/USD rose 55 pips to 0.6360, leaving AUD/NZD 20 pips lower at 1.0950.
The New York Fed’s survey of consumer expectations showed that expected growth in household income fell by 1.3 percentage points to 3.3% - the largest one-month drop in the nearly ten-year history of the series. Inflation expectations one-year ahead were little changed at 4.95%, from the previous month’s 4.99%, while the three-year-ahead measure fell to 2.71% from 2.99%.
Fed Governor Bowman echoed recent hawkish commentary, saying that the Fed will keep hiking rates to bring inflation down to 2%. Inflationary pressures are moderating, but not as much as she would like. Additionally, the labour market is too strong, necessitating further action.
Interest rates
US bond yields were mixed, as markets look to Tuesday’s CPI outcome. 2yr government bond yields rose to 4.56% before settling flat on the day at 4.51%, and 10yr government bonds yields fell from 3.73% to 3.70%. Markets are pricing the terminal rate for Fed Funds to be 5.20%.
Australian bond yields underperformed their US counterparts overnight, yields rose marginally across the curve. 3yr government bond yields (futures) rose from 3.48% to 3.49%, and 10yr government bond yields (futures) rose from 3.74% to 3.75%. Markets are pricing in an 85% chance of a 25bp hike at the March RBA meeting, and a terminal rate of 4.2%. The AU-US 10yr spread widened following AU underperformance, currently at 5bps.
Credit spreads were mixed with indices taking back some of the weakness seen late last week (Main 1.5bp tighter at 77.5 and CDX in a bp to 72) however cash spreads continue their slow leak wider as signs of indigestion take shape. With the US CPI this evening issuance was likely to be front ended this week and last night saw 10 issuers come to the market in Europe for EUR12.7bn, and the US also saw 10 borrowers price USD19.2bn. Financials were active across the capital structure IN Europe including SocGen with a 2 part covered deal including EUR750M 3yr at MS-1 (BBSW+43) and EUR1.5bn 9yr at MS+27 (BBSW+85) and ING completed Tier 2 in both EUR (EUR500M 12nc7yr at MS+220, BBSW+285) and GBP (GBP750M 10.25nc5.25 at UKT+280, BBSW+280). In the US we got some large corporate deals including Pepsi with a USD3bn 5 part deal (3-30yr), Philip Morris selling USD5.25bn across 4 tranches (3-10yr) to fund its Swedish Match acquisition and CVS Health raised USD6bn (3-30yr) for its Signify Health buy.
Commodities
Crude markets swung higher in a choppy session helped by rising risk sentiment ahead of the key US CPI report. The March WTI contract is up 35c at $80.07 while the April Brent contract is up 9c at $86.48. There was little fresh news to move the market though wires reported late in the day that the US would release another 26mb from the SPR in a non-emergency release as part of a congressionally mandated sale. Deliveries are estimated to take place between April and June. Loadings of Azeri crude at the Turkish port of Ceyhan resumed after last week’s devastating earthquake caused a temporary closure. EU Energy Commissioner Simson said that Russia’s oil production cut “was forced on them” due to the EU ban and G7 price cap.
In gas news, Freeport requested FERC approval for the first phase of full commercial restart which would include putting all 3 liquefaction trains plus 2 storage tanks and a loading dock online. The March European natural gas contract fell 4.1% to a fresh 14 month low.
Metals were mixed with copper up 1.2% to $8,960 and zinc up 2.5% to $3,117 while aluminium fell 0.6% to $2,426 and nickel slumped 4.8% to $26,470. Copper was helped by the announcement from Freeport-McMoran that it had suspended mining at the Grasberg plant due to mudflow. The halt follows disruptions at the Las Bambas and Antapaccay mines in Peru due to political unrest.
And finally note that iron ore was under pressure at the start of the week with rising Chinese stockpiles weighing on sentiment. The March SGX contract is down $2.95 at $121.00 while the 62% Mysteel index fell $4.45 to $121.30. Iron ore port inventory rose to the highest level since September last year and steel inventory at dealers is also well above seasonal average levels.
Day ahead
Australia: Given the resumption of rate hikes in February and the RBA’s hawkish shift in rhetoric, Westpac-MI Consumer Sentiment will likely remain under pressure in February (10:30am Syd). January saw a 5% jump to a still-low 84.3.
At 11:30am Syd we see the January NAB business confidence survey. The December reading showed below-average confidence of -1 but still upbeat business conditions at +12.
Japan’s government announces its nominations for Bank of Japan governor and two deputy governors around 11am Tokyo/1pm Syd. Local newswires are confident that academic and former BoJ board member Kazuo Ueda will be nominated as governor, with Shinichi Uchida and Ryozo Himino as deputies.
Although a further rise is unlikely, New Zealand inflation expectations are expected to remain elevated across short and longer-term horizons in the RBNZ’s Q1 survey (1pm Syd).
Japan: Despite the drags from weak exports and inflation, GDP growth is set to post a solid rebound in Q4 (market f/c: 0.5%).
Eurozone/UK: The second estimate to Eurozone Q4 GDP will provide more detail around how the region narrowly avoided contraction. Meanwhile, the UK’s ILO unemployment rate should remain near its lows for now in the December survey (market f/c: 3.7%).
Rising energy prices will be a support to the headline CPI in January (f/c: 0.5%); importantly for policy though, lingering momentum in services will limit the easing in the core CPI (market f/c: 0.4%). The annual rates are seen easing slightly from December, to 6.2%yr overall, 5.5%yr ex-food and energy.
Inflation will remain the key factor weighing on NFIB small business optimism in January (market f/c: 91). The Fed’s Barkin, Logan, Harker and Williams are all due to speak at different events.
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