Markets Daily
Markets were subdued during the liquidity-thinned US holiday. Bond yields rose slightly, as did AUD, up to 0.6910. Today we see RBA February meeting minutes and flash February PMIs across the globe, notably the Eurozone.
Yesterday
Regional equities were more upbeat than might have been expected from the US lead, most notably mainland China, the CSI 300 +2.5%. The ASX 200 managed a more understandable near-flat close. The calendar was largely empty though China’s central bank kept its key policy rates at 3.65% and 4.30%. AUD/USD started a little softer, around 0.6865, but kicked higher later with Chinese equities, pushing above 0.6900.
Currencies/Macro
The US dollar was little changed against most of the G10 on the day, with some outperformance by Scandis and the Aussie. EUR/USD ranged sideways between 1.0670 and 1.0705. GBP/USD was also net flat, trading 1.2015 to 1.2057. USD/JPY ranged sideways between 133.93 and 134.54. AUD/USD extended its Sydney session gains to 0.6910/15, net +0.5% on the day. NZD/USD rose 10 pips to 0.6255. NZ FinMin Robertson said that the RBNZ has the mandate to look through short-term surprises such as the current flooding/storm impact (the RBNZ rates decision is tomorrow). AUD/NZD rose from 1.1040 to 1.1088 – a four-month high.
Eurozone February consumer confidence was in line with expectations at -19.0 (prior revised to -20.7 from -20.9).
The German central bank (Bundesbank) released their economic updates, in which they forecast only a modest economic contraction for 2023. A contraction in 1Q123 is expected to be followed by a gradual expansion.
The ECB’s Rehn repeated their mantra that the region will avoid a recession and that rates need to rise to restrictive territory, peaking by mid-2023.
Sweden’s CPI in January fell -1.1%m/m and rose 11.7%y/y (est. -1.0%m/m and +11.8%y/y), but the ex-energy measure rose 0.4% and 8.7%y/y (est. -0.2%m/m and 8.2%y/y).
Interest rates
US treasury bond markets were closed for the holiday but the futures equivalent did trade, implying the 10yr yield rose 2bp to 3.84%. 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) rose from 3.53% to 3.59%, while the 10yr yield rose from 3.81% to 3.85%. Markets currently price the RBA cash rate to be 23bp higher at the next meeting on 7 March, peaking at 4.23% in September 2023.
New Zealand markets are pricing the RBNZ OCR to be 46bp higher at the next meeting on 22 February and to peak at 5.29% in July 2023.
In quiet conditions for credit markets (Main was half a bp wider at 78.5) the focus was on primary where 7 issuers priced EUR8.9bn. Corporates led the way with Kering (EUR1.5bn across 6/10yr), Roche (EUR1.25bn of 6.5/12yr) and Unilever (EUR1bn across 8/12yr) pricing dual tranche EUR deals and Tesco a dual currency offering (EUR500M 8yr, GBP250M 12yr) with strong order books in place, however NIC’s remained elevated.
Commodities
Crude markets saw modest gains in US holiday thinned trade as optimism about a recovery in China increased. The March WTI contract is up 79c at $77.13 while the April Brent contract is up 91c at $83.91. Bloomberg has been reporting that “China has ramped up its oil purchases as an expected recovery in the nation’s crude consumption gathers pace following the end of its strict Covid zero policy”. Unipec was said to have snapped up about 10mb from the UAE for loading in April while long-haul cargoes from West Africa have also been noted. However, Energy Aspects forecasts Western diesel/ heating oil to be the lowest for any non-pandemic Q1 since 2017 due to the mild winter and softer natural gas pricing. The US March natural gas contract fell to a fresh 28 month low. Germany will receive its first LNG cargo from the restarting Freeport LNG terminal on March 3. The full restart of Freeport is now “planned for the first quarter of 2023”.
Metals jumped on China stimulus optimism with copper up 1.4% to $9,111, zinc up 2.7% to $3,149, aluminium up 3.1% to $2,462 and nickel up 4.8% to $27,040. Citigroup also cited local power grids ordering capacity cuts of an additional 415kt of aluminium smelting capacity in China’s Yunnan province due to power shortages as a bullish factor for aluminium. The cuts come on top of last year’s circa 1.1mt cuts according to Mysteel. The IAI reported that global aluminium production rose 3.35%yy in January with production up 5.8%yy in China but down 12.2% in Europe. Nyrstar said its French zinc smelter will resume production in March “on a variable basis”. The smelter has been closed since October due to the winter power crisis in Europe.
Finally note that iron ore markets hit three-week highs on optimism driven by the recent liquidity injections from the PBoC and the ending of China zero Covid policies. The March SGX contract is up $4.85 from the same time yesterday while the 62% Mysteel index is up $1.90 at $128.90. Spot rebar prices have hit 8-month highs on optimism that construction will be boosted though wires reported the PBoC has asked banks to slow down loan issuance.
Day ahead
At 11:30am Syd, the RBA’s minutes to the February Board meeting will provide more colour around the recent hawkish shift in guidance. While we have already seen the lengthy quarterly statement, the minutes should reveal whether there was much debate over the size of the rate rise.
Advance February manufacturing and services PMI surveys by S&P Global/Markit are due in a number of countries today. Australia’s January services PMI was 48.6, manufacturing 50.0.
Japan’s PMIs are also due but the most market-sensitive releases are in Europe. A relatively mild winter has supported the recovery across Europe’s S&P Global manufacturing and services PMIs (market f/c: 49.3 and 51.0 respectively, versus January’s final 48.8 and 50.8). Also worth noting in Germany is the February ZEW survey of investors and analysts, with the expectations index seen improving to +23, current situation improving to a still grim -51.
The UK S&P Global manufacturing and services PMIs sometimes move the pound. The indexes are expected to improve from a much weaker base than in the Eurozone (market f/c: 47.5 and 49.1 respectively).
US: The S&P Global manufacturing and services PMIs should remain in fragile territory in February; notably, the latter’s stark contrast to ISM services suggests small/mid-sized service providers are under extreme pressure (market f/c: 47.4 and 47.3 respectively).
US existing home sales are expected to post a modest improvement in January after collapsing to historic lows (market f/c: 2.0%).
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