Markets Daily
Strong rebounds in PMIs in Europe and the US drove bond yields higher and caused sharp declines in equities. AUD slipped to 0.6855. Today’s busy calendar includes Australia Q4 wages and construction data, the RBNZ policy decision, Germany Feb IFO survey and FOMC meeting minutes.
Yesterday
The minutes of the Reserve Bank Board’s meeting in February reveal a decidedly more hawkish Board than we saw at the last meeting in December. Most importantly, the Board only considered two policy options – a 50 basis point increase or 25 basis points. The option to keep rates on hold, as was the case in December, was not even considered. The RBA also sounded less confident that inflation had peaked in Q4. AUD/USD popped up about 15 pips on the headlines, to its session high of 0.6920, later fading below 0.6895 as equity sentiment cooled. S&P 500 futures slipped -0.4%, regional equities were quite mixed and the ASX 200 closed down -0.2%.
Currencies/Macro
The US dollar rose against all G10 except sterling on the day. EUR/USD was choppy but ultimately 40 pips lower at 1.0650. GBP/USD was looking soft, probing below 1.2000, when strong UK PMIs sparked a rally that extended above 1.2100, backed by a 16bp jump in 2-year gilt yields. USD/JPY rose from 134.25 to 135.00. AUD/USD extended its day’s decline to 55 pips or -0.8% to 0.6855. NZD/USD fell 40 pips to 0.6210. AUD/NZD is 15 pips lower at 1.1035.
US S&P flash February PMIs were firmer than expected, with services rising to 50.5 (est. 47.3, prior 46.8), manufacturing at 47.8 (est. 47.2, prior 46.9), and the composite at 50.2 (est. 47.5, prior 46.8).
Eurozone PMIs also showed an outperformance in services which rose to 53.0 (est. 51.0, prior 50.8). Although manufacturing fell to 48.5 (est. 49.3, prior 48.8), the composite rose to 52.3 (est. 50.7, prior 50.3). The ZEW survey saw gains in both expectations and current conditions for Germany and the Eurozone. German expectations rose to 28.1 (est. 23.0, prior 16.9), with current conditions of -45.1 (est. -50.5 and prior -58.6). Eurozone expectations rose to +29.7 (prior 16.7), with current conditions of -41.6 (prior -54.8).
UK flash February PMIs (S&P Global) were also stronger, services rising to 53.3 (est. 49.3, prior 48.7), manufacturing to 49.2 (est. 47.5, prior 47.0), and the composite to 53.0 (est. 49.0, prior 48.5).
Canada’s CPI in January was softer than expected. Headline CPI rose 0.5%m/m and 5.9%y/y (est. +0.7%m/m and 6.1%y/y), while core CPI rose 5.0%y/y (est. 4.9%y/y, prior revised to 5.2y/y% from 5.0%y/y).
Interest rates
US bond yields rose once again, as markets continue to price in more rate hikes for the Fed, with increasing expectations that more hikes are needed in order to bring inflation down. 2yr government bond yields rose from 4.61% to 4.73%, and 10yr government bond yields rose from 3.81% to 3.95%.
Australian bond yields followed trends in the US market, 3yr government bond yields (futures) rose from 3.57% to 3.65%, and 10yr government bond yields (futures) rose from 3.83% to 3.93%. The AU-US 10yr spread narrowed from 1bp to -3bps on the back of AU outperformance. Markets are pricing in an 85% chance of a 25bp hike at the March RBA meeting, and a terminal rate of 4.27%.
Credit markets were clearly weaker in both cash and synthetic last night as the rates move and broader sentiment add to recent supply pressure. Indices were under pressure with Main 3bp wider at 81.5 and CDX out 4bp to 75.5 with cash also 2-3bp wider. Supply got in ahead of the US led sell off with Europe seeing ~EUR4.6bn of supply led by financials including a post earnings Tier 2 deal from NatWest (11nc6yr at MS+260), while the US saw 7 issuers in the market for USD7.65bn with Mizuho the largest deal of the day pricing USD2.6bn across 3 tranches.
Commodities
Crude markets reversed earlier gains and swung lower as higher US yields and weaker housing data hit sentiment. The March WTI contract is last down 18c at $76.16 while the April Brent contract is down $1.14 to $82.93. Refiners in China have been on a buying spree and that demand has extended to the US with SOEs booking at least 10 supertankers for March according to Bloomberg. However, Citi warned that “after this recovery, I’d say it’s the last hurrah for demand in China, and close to the last hurrah for demand around the world”. And in products markets, Russia was said to be considering banning sales of products to countries who adhere to a price cap according to Interfax, citing Deputy Prime Minister Novak. Finally in gas markets, Freeport was given FERC approval for more operations and the company is targeting a ramp up to 2bncfd over the next several weeks. The March Henry Hub contract hit the lowest back to September 2020 due to abundant inventories driven by lower demand on the East Coast and Texas and rising production in shale regions.
Metals were mixed with copper steadying at 3 week highs, up 0.4% to $9,179 and aluminium unchanged at $2,459 while zinc fell 0.6% to $3,106. There was little fresh market news though LME on warrant copper stockpiles fell to lows back to November last year.
Finally note that iron ore markets remained an outlier, continuing their aggressive move higher on China policy optimism. The 62% Mysteel index is up $2.65 at an 8-month high of $131.55. On Monday, China said it was launching a pilot program for real estate investment funds, adding to optimism in the construction industry. The May rebar contract is up 7% over the last week. Daily steel production in China in the 1st 10 days of Feb rose to the highest in 3 months.
Day ahead
At 11:30am Syd, we see the RBA’s preferred measure of Australian wages, the Wage Price Index. Westpac expects the index to post another robust gain in Q4 as the earlier minimum wage increase continues to filter through some industries, 1.1%qtr, 3.6%yr. This is of course still well short of both Australian inflation and the rate of wages growth in many major economies.
We also see one of the first inputs to Australia’s Q4 GDP report due a week from today. Fewer instances of disruptions and the still sizeable work pipeline should see another modest rise in construction work (Westpac f/c: 1.6%qtr).
The Westpac-Melbourne Institute Leading Index will likely continue to signal a below-trend pace of growth in Australia.
At 12pm Syd, the RBNZ delivers its first monetary policy decision since 23 November 2022. In response to a still intense inflation outlook, the RBNZ is widely expected to deliver a 50bp rate hike to 4.75%, while their forecast for the peak OCR may be lowered slightly. Market pricing is a little short of 50bp for today, perhaps reflecting the cyclone impact on spending and confidence. Markets price the OCR to peak around 5.4%.
Germany: The IFO business climate survey should continue to reflect an improving outlook in February (market f/c: 91.2).
The FOMC February meeting minutes will provide further insights into the near-term path for policy.
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