Markets Daily
Bond yields rose in the wake of stronger economic data in the US and Europe, and hawkish Fedspeak. The USD fell during Asia’s equity rally, then trimmed losses somewhat, AUD steadying around 0.6750. Today’s data includes Australia January dwelling approvals and Eurozone February CPI.
Yesterday
Australia Q4 GDP was softer than expected, up 0.5%qtr, 2.7%yr, versus consensus 0.8%qtr, 2.7%yr (upward revisions). There was a notable slowdown in consumer spending. Australia’s monthly CPI Indicator rose 7.4% in the year to January compared to Westpac’s 7.9%yr forecast and the market’s 8.1%yr. These soft reports sparked a fall in AUD/USD from 0.6720 to 0.6695, but an hour later it was rescued by strong China February PMIs. The official China manufacturing index rose to 52.6 from 50.1, the services index to 56.3 from 54.4. The Aussie extended its recovery to above 0.6750 in late Sydney trade as regional equities took heart from the China data and headlines about looser fiscal policy. The ASX 200 closed little changed, -0.1%, lagging the likes of China’s CSI 300 +1.4% and Korea’s Kospi +0.4%, let alone Hong Kong Hang Seng’s +4.2% on the first day without a mask mandate in almost 3 years.
Currencies/Macro
The US dollar was mixed to weaker against G10 FX on the day. EUR/USD rose 0.8% to 1.0660. Sterling underperformed, GBP/USD slipping back to 1.2015, net flat on the day. USD/JPY fell to 135.26 but then followed US yields back to 136.25, net unchanged. AUD/USD managed a modest 20 pip gain to 0.6750, retreating from a high of 0.6784. Clear outperformer NZD rose 65 pips or 1% to 0.6250. AUD/NZD fell from 1.0880 to 1.0800, disappointing AU GDP data weighing.
US ISM manufacturing survey for February matched expectations at 47.7 (est. 48.0, prior 47.4) but there was a large jump in the prices paid component to 51.3 (est. 46.5, prior 44.5).
Minneapolis Fed president Kashkari said he is leaning toward increasing his terminal Fed rate projection from the 5.4% he indicated in December and is open minded whether to vote for a 25bp or 50bp hike at the next meeting. He is concerned services demand hasn’t slowed. Atlanta’s Bostic said the Fed rate should rise to between 5% and 5.25% and remain there well into 2024.
German CPI inflation in February was stronger than expected at 0.8% m/m and 8.7% y/y (est. +0.5% m/m and 8.5% y/y, prior 8.7% y/y) with the EU harmonised version rising 1.0% m/m and 9.3% y/y (est. +0.7% m/m and 9.0% y/y, prior 9.2% y/y).
ECB speakers, notably key hawk Nagel, continued with their mantra for further significant tightening in March and beyond. Nagel (Germany) said in a statement regarding quantitative tightening that he is "in favour of taking a steeper path of reduction starting in July", expecting markets "to cope well with the reduction in the Eurosystem's asset holdings". On the policy rate: "one thing is clear: the interest-rate step announced for March will not be the last. Further significant interest-rate steps might even be necessary afterwards, too".
Bank of England Governor Bailey presented a speech with a nuanced view on whether or not further tightening was needed, citing inflation slightly below their expectations but labour markets remaining tight.
Interest rates
US bond yields rose substantially, following hawkish Fedspeak from two Fed officials who supported more rate increases. 2yr government bond yields rose from 4.82% to 4.88%, and 10yr government bond yields rose from 3.92% to 3.99%. Markets are now pricing the terminal yield to be 5.45% for the US.
Australian bond yields fell, following weaker than expected Q4 GDP and monthly inflation data, and the yield curve steepened. 3yr government bond yields (futures) fell from 3.52% to 3.47%, 10yr government bond yields (futures) fell from 3.79% to 3.83%. Markets are pricing a terminal rate of 4.34%. The AU-US 10yr spread narrowed sharply on the back of AU outperformance and US sell off, from -3bps to -16bps.
Credit held in relatively well against the broader weakness with Main and CDX both little changed (79.5 and 76 respectively) as was US after it had pushed a couple of bp wider early in the week into the strong supply. Primary activity slowed somewhat last night as Europe saw just 3 issuers in the market (EUR2.5bn) with Teva Pharmaceuticals the largest (EUR1.3bn across 6/8yr) and no sign of nbn just yet. In the US, 6 issuers priced USD6.8bn, taking the weekly run rate to USD37bn, with issuers including Sumi Trust which priced a USD2bn deal across 3yr fixed/FRN (T+110, SOFR+112) and a 5yr green tranche (T+128), and Simon Property a USD1.3bn deal a 10yr (T+165) and a 30yr (T+195).
Commodities
Crude markets were volatile, buffeted by better-than-expected crude inventory data, rising bond yields and Fed expectations. The April WTI contract is last up 65c at $77.70 while the May Brent contract is up 90c at $84.35. US crude inventory rose by a less than expected 1.16mb while distillate rose by just 179kbpd and gasoline fell 874kbpd. US crude exports set a weekly record of 5.6mb while inventories at Cushing increased for the 9th consecutive week, hitting highs back to June 2021. Cargoes of Russian ESPO blend (Eastern Siberia-Pacific Ocean) produced by Rosneft was being “snapped up” by China’s state refiners that have returned to the market and fresh interest from India according to Bloomberg. Russia plans to cut production by 500kbpd in March in retaliation for the G7 price cap.
Metals jumped on news of a decade high for the China PMI and a rise in Chinese home sales by major developers. Copper is up 1.9% at $9,128 while aluminium rose 3% to $2,444 and zinc rose 4.5% to $3,134. Bloomberg reported that Norilsk Nickel was selling some of its metal directly to China in yuan using a mixture of LME and SHFE prices. Nornickel supplies about 7% of the world's nickel and hopes to boost its share of Chinese demand. Nickel was up 0.8% at $25,000. Panamanian officials were said to be close to reaching an agreement on a new contract for the Cobre Panama mine which accounts for about 1.5% of global copper production. A resolution between First Quantum and the Panamanian government would end a dispute that has lasted for several months. The news follows the resumption of the Grasberg mine in Indonesia which was shut for the second half of February due to a mudslide and signs of improved industrial relations in Peru. Chile reported copper production up 1.3%yy in January.
Finally note that iron ore also jumped on the China PMI news and a bullish steel report from Mysteel. The April SGX contract is up $2.55 from the same time yesterday at $126.50 while the 62% index rose $1.50 to $124.50. Mysteel reported that almost two-thirds of Chinese steel companies expected sales to improve this month and are looking to the National People’s Congress which starts this weekend for more policy to bolster growth. And coking coal prices in China have jumped sharply after the recent mine accident in Inner Mongolia with coking coal auctioned this week said to be sold out.
Day ahead
A large pull-back in Australia dwelling approvals is anticipated in January, reflecting broadening weakness and an unwinding of the earlier high-rise spike, After December’s +18.5%mth, Westpac forecasts a -10% decline, median -7% (11:30am Syd).
Eurozone: Lower energy prices should continue supporting the decline in the annual headline CPI in February (market f/c: 8.3%yr); however, the stickiness of the core CPI remains the key concern for policy (market f/c: 5.3%yr). The unemployment rate is meanwhile expected to remain near its lows in January (market f/c: 6.6%).
US: The final estimate to Q4 nonfarm productivity is due (market f/c: 2.5%). Initial jobless claims should remain at a relatively low level for now (market f/c: 195k). Fed Governor Waller (hawk) is also due to speak.
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