Markets Daily
Strong US retail sales data supported bond yields and the US dollar, AUD slipping to 0.69 despite resilient equities. Today’s calendar highlight is Australia’s January employment report.
Yesterday
RBA Governor Lowe appeared before a Senate committee, answering often-hostile questions about the bank’s interest rate guidance and Lowe’s visit last week to a private briefing with bankers. He reiterated the key messages of last week’s meeting statement and SoMP. AUD/USD was quiet during Lowe’s appearance, around 0.6980, but later was dragged lower by a deterioration in risk sentiment, slipping under 0.6920. Despite Wall Street’s flat close, regional equities were a sea of red, including the ASX 200, -1.1%.
Currencies/Macro
The US dollar rose against all G10 currencies on the day. EUR/USD fell from 1.0740 to 1.0690. USD/JPY followed the US 10-year Treasury yield higher, net up 1 yen on the day to 134.10, printing one-month highs. AUD extended its Sydney session decline to 0.6865, then trimmed losses to 0.6905, down 80 pips or -1.1%. NZD fell 55 pips to 0.6285, leaving AUD/NZD 30 pips lower at to 1.0990.
US retail sales in January jumped 3.0% (est. 2.0%, prior -1.1%), with the core control group measure rising 1.7% (est. 1.0%, prior -0.7%). Strength was broad based, and partly reflects a pandemic-related seasonal shift which has been evident in each of the last three holiday seasons.
US industrial production was flat in January after December’s -1%, though manufacturing rebounded by 1% from a revised -1.8%. The NY Fed’s Empire State manufacturing survey improved to -5.8 in February from the stunningly weak -32.9 in January. NAHB homebuilder confidence rose from 35 in January to 42 in February (est. 37).
UK CPI printed below expectations in January, sparking a slide in yields. Overall inflation eased from 10.5%yr to 10.1%yr (still one of the highest in the OECD), while core inflation slipped from 6.3%yr to 5.8%. GBP/USD fell from 1.2140 pre-CPI data to 1.2020, the pound and Aussie weakest in the G10 on the day.
Interest rates
US bond yields rose once again, as January retail sales jumped the most in almost 2 years. 2yr government bond yields rose from 4.61% to 4.63%, and 10yr government bond yields rose from 3.74% to 3.80%. Markets are pricing the terminal rate for Fed Funds to be 5.24%.
Australian bond yields outperformed their US peers, as RBA governor Lowe expressed some optimism of the possibility of a soft landing at his testimony to parliament yesterday. 3yr government bond yields (futures) fell from 3.56% to 3.54%, and 10yr government bond yields (futures) rose from 3.81% to 3.82%. Markets are pricing in an 80% chance of a 25bp hike at the March RBA meeting, and a terminal rate of 4.18%. The AU-US 10yr spread narrowed following AU outperformance, currently at 3bps.
Credit indices were mixed with Main closing 1.5bp tighter at 75.5, while CDX was volatile post the US retail sales print, hitting a session high of 73.5 before settling around 71.5 as we write to be half a bp wider on the day. Cash spreads were little changed as supply and outrights are assessed. Primary activity was robust with Europe seeing 8 issuers in the market and while the US saw just 2 names come to market, they priced a combined USD29bn. In Europe, Siemens was the largest corporate deal with its EUR2.5bn 3 tranche offering (8.5/13/20yr), and in the fins space, the indomitable Credit Suisse AG priced a EUR500M 3.5yr at MS+235 (IPT+260, BBSW+280). In the US, Amgen has launched its well flagged USD24bn, 8 tranche deal (2-40yr) that will effectively fund its Horizon Therapeutics acquisition in one hit, with a reported book of ~USD90bn; and MUFG has launched a jumbo deal of its own with a USD5bn, 5 part transaction that includes USD2.25bn of 3nc2 (fixed/FRN, SOFR+94/T+108), USD1bn 6nc5yr at T+138, USD500M 8nc7yr at T+153 and USD1.25bn 11nc10yr at T+163.
Commodities
Crude markets erased most of the morning’s losses helped by improved risk sentiment and the IEA lifting its forecast for demand this year. The March WTI contract is last down 51c at $78.55 and the April Brent contract down 30c at $85.28. Earlier in the session, the EIA announced that US crude inventories hit the highest level since June 2021 with a huge 16.2mb rise while gasoline stocks rose by 2.3mb. Most of the gains came from the US gulf where inventories jumped by 15mb suggesting much of the build may be due to maintenance starting ahead of fuel switching. Cushing stocks also rose to the highest since June after 7 weeks of gains. US crude production was unchanged at 12.3mbpd while exports rose 8.5% to above 3mbpd and shipment of products rose sharply driven by propane/ propylene exports which hit a record. And in gas markets, the IEA warned that Europe still faces gas shortage risks this year and could see a 40bcm supply gap (around 10% of Europe’s consumption) in the worst-case scenario. The IEA Ministerial Meeting on Gas Markets and Supply Security heard IEA head Fatih Birol state that “winter 2023-2024 is likely to be the real test”. The March TTF contract rose 4.5% from 14-month lows to a 1 week closing high.
Metals markets slumped, dragged down by warnings that Russian aluminium was being sold at a deep discount in Europe. Copper is last down 0.9% at $8,868 while aluminium is down 1% at $2,385. Nickel is down 1.8% at $25,990 while zinc is down $2.5 at $3,005. Aluminium is down close to 10% so far this month with global inventory up 56% so far this year at 9-month highs. Norsk Hydro CFO said they are seeing aluminium priced at between $200-300/mt less than the exchange trade price in London. Meanwhile global copper inventories are up by 89% so far this year hitting a 17-month high.
Finally note that iron ore markets held up versus other metals, with cautiously optimistic comments from FMG helping. The March SGX contract is up 55c at $123.65 while the 62% Mysteel index is up $1.1 at $124.05. FMG’s Forrest said he sees a “busier and more active and optimistic China now that they’re open and everybody’s getting back to work” though the recovery “might not be as high as the great old days”. Both BHP and Rio will report next week.
Day ahead
At 11:30am Syd we see Australia’s January labour force survey. Illness-related absences and a ‘catch-up’ in abnormally low summer leave should see employment growth print slightly below trend in January (Westpac f/c 15k, market 20k, rebounding from December’s -15k). With participation holding flat, Westpac expects the unemployment rate to hold at 3.5%, in line with consensus.
Australia’s January update on overseas arrivals and departures will provide insight on the momentum of travel over the summer break. MI inflation expectations are set to remain elevated and well above the RBA’s target band in February.
Japan: Only a minor bounce-back in machinery orders is anticipated in December, highlighting the risks to capex spending into year-end (market f/c: 2.8%).
US: Housing starts will remain under pressure in January as demand continues to be crimped by rising interest rates (market f/c: -2.0%). Building permits are meanwhile expected to post a modest bounce after last month’s decline (market f/c: 1.0%). The PPI should continue decelerating appreciably in January (market f/c: 0.4%mth; 5.4%yr). The Philly Fed index will likely remain in weak territory (market f/c: -7.5%) as initial jobless claims hold at a relatively low level (market f/c: 200k). The FOMC’s Mester, Bullard and Cook are all due to speak at different events.
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