Markets Daily
Markets were choppy Friday but mostly little changed overall, with limited news and data. AUD printed 6-week lows, then trimmed losses to 0.6865. Today’s calendar is quiet, with US markets closed for Presidents Day.
Friday
RBA Governor Lowe and colleagues answered questions from Parliament’s lower house economics committee for about 3 hours. Topics included Lowe’s private briefing with bankers, the impact of interest rate rises on renters, whether consecutive falls in employment are concerning and the dangers of entrenched inflation. Lowe said that policy is not on a pre-set course, despite dropping this phrase from February’s statement. AUD/USD chopped a little lower, from 0.6875 to 0.6835.
Currencies/Macro
The US dollar rallied in London, then faded. EUR bounced off 1.0613 (a one-month low) to 1.0698. USD/JPY fell from 135.10 (a two-month high) to 134. AUD/USD bounced off 0.6812 (a low since 6 January) to 0.6865. NZD bounced off 0.6194 (one-month low) to 0.6247. AUD/NZD rose from 1.0990 to 1.1010.
In the US, the Conference Board’s leading index fell 0.3% in January (as expected, prior -0.8%).
Richmond Fed president Tom Barkin said that he favoured a 25bp hike at the last meeting on 1 February to give the central bank “flexibility” in bid to quell inflation: “I like the 25 basis-point path. It gives us the flexibility to respond to data as it comes in…Moving inflation back to target will require more rate increase. How many of those, I think we will have to see.” Fed Governor Bowman said rates need to rose further because inflation remains “much too high”: “we’ll have to continue to raise the federal funds rate until we start to see a lot more progress”.
Interest rates
US 2yr treasury yields fell from 4.71% to 4.61%, while the 10yr yield fell from 3.93% to 3.81%. Markets currently price the Fed funds rate to be 29bp higher at the next meeting on 23 March, peaking at 5.30% in July 2023.
Australian 3yr government bond yields (futures) fell from 3.55% to 3.51%, while the 10yr yield fell from 3.87% to 3.79%. Markets currently price the RBA cash rate to be 23bp higher at the next meeting in March, peaking at 4.18% in September 2023.
New Zealand markets are pricing the RBNZ OCR to be 44bp higher at the next meeting on 22 February and to peak at 5.24% in August 2023.
Credit was mixed with CDX closing in positive territory (72.5, in half a bp) after a late push tighter, however cash spreads were another 1-2bp wider as we continue to back away from the tights of early February. It was a quiet close to a solid week for primary activity that featured a number of jumbo USD corporate deals led by Amgen and supported by Pepsi, Philip Morris, CVS Health, and it will be a slow start this week with the US out for Presidents Day this evening.
Commodities
The crude complex fell Friday and was down circa 4% on the week as higher inventory and hawkish Fed talk weighed on sentiment. The March WTI contract fell $2.15 Friday to close at $76.34 while the April Brent contract fell $2.14 to $83.00. Brent has been stuck in a broad $75-$90 range so far this year and looks no closer to breaking out as rising inventory/ slowing global growth caps while China reopening supports. However, Goldman remains “convicted that oil and metal fundamentals will rebound this spring and [they] maintain [their] bullish outlook”. Wires noted a surge of $110 December 2023 calls trading on Thursday as traders bet Brent will surge later in the year. Despite Russia’s plan to reduce oil output by 500kbpd in March, Russian oil companies will maintain exports at current levels by reducing domestic refinery supplies according to press. And in gas markets, the plunge continued with the March Henry Hub contract down another 4.77% Friday to a fresh 28 month low while the European equivalent fell to a fresh 17 month low.
Meanwhile metals meandered with copper and aluminium down a modest 0.2% to $9,009 and $2,390 while nickel fell a heavier 3.2% to $25,630. Nickel fell 7.8% last week. The record increase in liquidity pumped into the China market helped copper and aluminium stabilise despite global copper inventories hitting highs back to September 2021 and global aluminium inventory surging by 56%.
Finally note that the iron ore and steel complex jumped further into the end of last week as the PBoC injected record amounts of liquidity into the domestic market. The PBoC offered 835bn yuan of 7-day reverse repo Friday, a record amount going back to 2004. The March SGX contract rose another 75c to $126.00, bringing gains for the week to almost 5% while the 62% Mysteel index rose $1.75 to $127.00. Steel prices have jumped on optimism that the annual session of the National People’s Congress which will commence in Beijing on March 5 will focus on policies with “more forceful measures” to expand domestic demand and spending. The Dalian May rebar future jumped 5.4% last week while the May iron ore future jumped 5.3% even as the Dalian Exchange called for calm to “ensure the smooth operation of the market”.
Day ahead
Eurozone/UK: European consumer confidence is consolidating after a better-than-expected winter (market f/c: -19). The correction in the UK’s Rightmove house prices should remain entrenched over the course of this year.
US markets will be closed for Presidents Day. Canada is closed for Family Day.
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