Markets Daily
US economic data was mixed, while US equities snapped a 4-day losing streak. AUD was net little changed at 0.6810. Today’s calendar features testimony by BoJ governor nominee Ueda, Japan January CPI and in the US, personal income and spending.
Yesterday
Australia total private business capex grew by a solid 2.2% in Q4, meeting our expectations. However, equipment spending was sluggish, advancing by only 0.6% in the quarter (whereas we anticipated a figure closer to 2.0%). This result was constrained by a -5.2% pull-back in mining sector equipment spending – albeit coming off a high base. Estimate 5 for 2022/23 capex plans printed at $158.7bn, some 12.6% above Est 5 a year ago. We estimate, based on average Realisation Ratio (RR) calculations, that this implies capex spend will rise by 14% in the 2022/23. That represents a slight downgrade on Est 4, which implied a rise of 15% (with the downgrade on mining, to around 8% from 11%). AUD/USD paid little attention to the data, instead seemingly focused on a bounce in US equity futures, S&P e-minis +0.4%, Nasdaq +0.8%. The Aussie pushed up from 0.6805 to highs above 0.6840 before easing back to 0.6825. Regional equities were mixed, while Japan was on holiday. The ASX 200 closed -0.4%, its third consecutive small daily decline.
Currencies/Macro
The US dollar was little changed net on the day. EUR/USD is about flat net at 1.0600 but earlier slipped to 1.0577 – a two-month low. GBP/USD is about 30 pips lower on the day at 1.2015. USD/JPY is a touch lower around 134.70, after briefly spiking to 135.36 as BoJ Governor Kuroda struck a dovish tone at the G20 meeting. AUD/USD is net flat on the day at 0.6810 but did dip to 0.6782 – a two-month low. NZD eked out a 15 pip gain to 0.6230. AUD/NZD is down a net 15 pips at 1.0930.
US Q4 GDP, in its second estimate, was revised lower to 2.7%y/y (annualised) from the initial 2.9%y/y. Personal consumption was revised lower to 1.4%y/y from 2.1%y/y. The GDP price index was revised higher to 3.9%y/y from 3.5%y/y, core PCE revised to 4.3%y/y from 3.9%y/y. Weekly jobless claims were solid, initial claims at 192k (est. 200k, prior of 195k), continuing claims at 1,654k (est. 1,700k, prior 1.691k). The Kansas Fed manufacturing activity survey for February rose to zero (est. -2, prior -1).
Eurozone CPI for January was finalised higher, core rising to 5.3%y/y - a new cycle high -from the prior estimate of 5.2%.
Bank of England MPC hawk Mann delivered a speech underscoring her view that they had to lift rates further into restrictive territory, while acknowledging the challenges which the UK economy faces, which were more complex than those faced by Fed in US.
Interest rates
US long end bond yields rose initially but finished lower on the day as markets look towards tonight’s PCE deflator outcome, the PCE being the FOMC’s preferred measure of inflation. 2yr government bond yields traded a range but finished flat at 4.69%, and 10yr government bond yields fell from 3.92% to 3.87%.
Australian bond yields rose overnight and underperformed their US counterparts. 3yr government bond yields (futures) rose from 3.59% to 3.65%, and 10yr government bond yields (futures) rose from 3.88% to 3.89%. The AU-US 10yr spread widened from -3bp to 1bp on the back of US outperformance. Markets are pricing in a 90% chance of a 25bp hike at the March RBA meeting, and a terminal rate of 4.28%.
Credit followed the broader market sentiment, with CDX moving tighter to 74 (-2) and Main flat at 81 (-), while cash spreads were flat in the US and moved tighter in Europe. Three issuers came to market in Europe to price ~EUR2.35b in aggregate, with deals of note from Lloyds (GBP750m 10.25NC5.25 T2) and VF Corp. US primary issuance totalled USD13.875b in aggregate as 8 issuers came to market, led by BHP (USD2.75b across 3,5 ,and 10yrs), Eli Lilly & Co, Raytheon and UPS.
Commodities
Crude markets snapped a six-day losing streak despite further increases in crude inventory as optimism about Chinese and Indian demand lifted sentiment. The April WTI contract is up $1.51 at $75.46 while the April Brent contract is up $1.62 to $82.22. Crude oil saw another huge rise in inventory with another 7.6mb increase after the previous week’s 16.2mb rise. That takes the level of crude inventory to the highest since May 2021 as warmer weather and waning demand hits refinery production. Refinery run rates fell 17kbpd though crude exports rose back above 4.5mbpd. Distillate inventory also rose 2.7mb though gasoline fell 1.8bm. UBS joined a list of US IBs in cutting crude forecasts for 2023 and 2024, their end June forecast reduced by $10 to $100. India’s Petroleum Planning & Analysis department forecast oil products consumption would increase by 4.9% in the 12 months to April, with gasoline demand up by almost 8% and jet fuel by 16%. India’s crude oil imports in January hit 6-month highs.
In gas markets, Cheniere announced it was initiating a pre-filing review for a proposed stage 5 expansion of the Sabine Pass expansion project which would include as many as 3 large scale LNG production units, with total capacity of 20mt of LNG per year. Oil drillers in the Permian Basin were said to be delaying fracking work due to a shortage of pipeline capacity to ship gas away from the region to Houston. The March Henry Hub contract jumped circa 9% after breaking below $2 earlier in the week.
Metals slumped with aluminium down 1.2% to $2,389, copper down 2.5% to $8,879 and nickel down 4.4% to $25,275. The hawkish Fed outlook was cited as a key factor driving metals lower. The discount for spot aluminium versus the 3m contract fell to the lowest since early 2015, pointing to reduced physical demand. The LME announced it will resume nickel trading in Asian hours on March 20.
Finally note that iron ore markets slipped back below $130 on profit taking ahead of the weekend with the March SGX contract down 75c to $129.60 while the 62% Mysteel index fell 35c to $129.70. Recent moves by the Dalian exchange to limit speculative trading appeared to be capping prices though spot steel markets continued the move with rebar up 6% so far this month. Steel mills were said to be preparing for a busier construction season in the next quarter with steel output up 6% in early February.
Day ahead
At 10:30am Syd, Japan’s headline CPI is expected to rise to 4.3%yr in January from 4.0%, with the ex-fresh food measure also 4.3% and ex-fresh food and energy (‘core-core’) up to 3.3%. These measures are of course well above the BoJ’s 2% target, but in its quarterly forecasts (18 January), it projected core inflation falling back below 2%.
Starting from about 11:20am Syd, there will be plenty of interest in the first parliamentary appearance by Kazuo Ueda since he was nominated to become Bank of Japan governor from April.
UK: GfK consumer sentiment is expected to remain in very weak territory in February (market f/c: -43)
US: Although personal income and personal spending should see a bounce in January, the underlying trend reflects a loss of momentum (market f/c: 1.0% and 1.4% respectively). These dynamics are key to the slowing of PCE inflation over the course of 2023 (market f/c: headline 0.5%m/m; core 0.4%m/m and 4.3%y/y from prior 4.4%y/y). Meanwhile, new home sales volumes are expected to remain little changed in January (market f/c: 0.7%). The FOMC’s Jefferson, Mester, Bullard, Collins and Waller are also all due to speak.
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