Markets Daily
US bond yields jumped in response to CPI data, but equities recovered losses, helped by mixed Fed comments. FX markets were volatile but AUD proved resilient, up slightly to 0.6985. Today’s calendar includes testimony by RBA Governor Lowe, UK Jan CPI and US Jan retail sales.
Yesterday
Australia’s data was mixed. The Westpac-Melbourne Institute Consumer Sentiment Index fell -6.9% from 84.3 in January to 78.5 in February, now barely above pandemic lows, with respondents post-RBA announcement about 10% gloomier than those prior to the hawkish hike. In contrast, the NAB survey showed that business conditions and confidence bounced in the second half of January as businesses benefited from robust spending over the first ‘disruption-free’ summer break since the onset of COVID-19. The survey was in the field from January 27 to February 2. Business conditions: up 5pts to +18. Business confidence: up 6pts to +6. AUD/USD didn’t respond to the data, net unchanged on the day around 0.6965. In line with media leaks, Japan’s government nominated Kazuo Ueda to replace Governor Kuroda from April. The ASX 200 closed up a modest 0.2%, taking little inspiration from the US rally.
Currencies/Macro
The US dollar was volatile after the CPI data, eventually finishing mixed, A$ outperforming. EUR fluctuated between 1.0707 and 1.0803 for little net change at 1.0740. GBP/USD traded 1.2118 to 1.2269, ultimately up 35 pips at 1.2175. The yen underperformed, USD/JPY up from 132.10 pre-CPI to 133.32 – a one-month high. AUD/USD fluctuated following the US CPI data between 0.6922 and 0.7029, slightly higher overall at 0.6085. NZD similarly fluctuated between 0.6297 to 0.6390 and is 20 pips lower at 0.6340. AUD/NZD extended yesterday’s NZ inflation expectations data led rally from 1.0950 to 1.1025.
US CPI inflation in January at 0.5% m/m was as expected, but the annual pace was revised higher to 6.4% (est. 6.2%, prior 6.5%). The ex-food and energy measure rose 0.4% m/m (as expected) and 5.6% y/y (est. 5.4%, prior 5.7%). Price pressures remained broad-based, with notable strength seen in energy and new cars.
There was a mix of comments from Fed members following the CPI data. Richmond’s Barkin said the central bank may need to raise interest rates to a higher level than previously anticipated should inflation keep running too fast for comfort. Dallas’s Logan said: “We must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions”. Philadelphia’s Harker said: “In my view, we are not done yet… but we are likely close…At some point this year, I expect that the policy rate will be restrictive enough that we will hold rates in place and let monetary policy do its work.” New York’s Williams said: “I am confident that the gears of monetary policy will continue to move in a way that will bring inflation down to 2%... We will we stay the course until our job is done.”
Interest rates
US bond yields rose as US CPI data came in hot, showing consumer prices rose 0.5% in January and year-on-year figures fell less than expected to 6.4%. 2yr government bond yields rose from 4.51% to 4.60%, and 10yr government bond yields rose from 3.70% to 3.74%. Markets are pricing the terminal rate for Fed Funds to be 5.27%.
Australian 3yr government bond yields (futures) rose from 3.49% to 3.56%, and 10yr government bond yields (futures) rose from 3.76% to 3.82%. 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 7bps.
Credit spreads reacted to the CPI with Main a couple of bp tighter leading in the print before giving up those gains to close unchanged at 77, and CDX is also unchanged at 71.5 from tights of 70.5. Cash spreads have held in better as supply remained light ahead of the Fed with Whirlpool the only issuer to venture into the US market.
Commodities
Crude finished the day lower, hit by the news that the US administration will release another 26mb of crude from the SPR and the slightly-higher-than-expected CPI outcome. The March WTI contract is down $1.02 to $79.12 while the April Brent contract is down $1.01 to $85.60. The release of crude this year was mandated by congress back in 2015, so this is not new news. However, the Energy Department had sought to stop some of the sales required by the 2015 budget so that it can start filling the SPR following last year's record 180mb release. Meanwhile OPEC increased its oil demand forecast for 2023 by 100kbpd and reduced its forecast for non-OPEC supply by 150kbpd with the key focus being the “return of China from its mandated mobility restrictions”. And in gas markets, the EU will begin talks on whether to prolong voluntary emergency steps to reduce gas demand. The EU Energy Commissioner Simson said “Europe has won the first battle but there is a long fight ahead of us”.
Metals were again mixed with copper up 1.6% to $8,960 and zinc up 2.5% to $3,117 but aluminium down 0.6% to $2,426 and nickel down 4.8% to $26,470. The sharp and continued rise in copper, aluminium and zinc inventory is weighing on metal sentiment though Japan’s top zinc smelter agreed to a more than 10% increase in the zinc premium for 2023, forecasting that the market will be in a 150kt deficit in 2023. And the China Nonferrous Metals Industry Association warned that nickel prices are likely to drop in the second half as rising supply from Indonesia hits the market.
Finally note that iron ore markets edged higher with miner reporting season coming into view. The March SGX contract is up $1.80 to $123.10 while the 62% Mysteel index is up $1.65 to $122.95. FMG will report ahead of the open today with BHP reporting Tuesday and Rio reporting Wednesday. CBA noted that iron ore could drift lower to $100 in coming months, hit by rising port inventory and a further contraction in China’s property sector.
Day ahead
RBA Governor Lowe will appear before the Senate Economics Legislation Committee at 11:15am Syd.
Eurozone/UK: Declining fuel prices will likely see another fall in the UK’s headline CPI in January (market f/c: 10.3%yr). Similarly in Europe, falling energy prices should alleviate some of the pressure on the trade deficit in time. In December however, industrial production likely declined as a consequence of lingering energy inflation (market f/c: 0.8%).
US: A sizeable rebound in retail sales is anticipated in January given the surge in retail auto sales (market f/c: 2.0%). The New York Fed’s Empire State index will likely remain in weak territory in February (market f/c: -18), though industrial production should bounce back from its decline in December (market f/c: 0.5%). Meanwhile, business inventory growth is expected to continue (market f/c: 0.3%) and the NAHB housing market index will remain near its historic lows (market f/c: 37).
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