Markets Daily
A fall in long-dated US bond yields stoked equity gains and undermined the US dollar. AUD gains were tempered at 0.6750 after China’s cautious 2023 growth target. Today is a partial holiday in Australia and the data calendar is light.
Friday
Australian January housing finance approvals fell a further -5.3%. Weakness continues to be broadly based, with marginally bigger falls for construction-related loans (–8.9%), first home buyers (–7.4%) and investors (–6%) compared to owner occupiers purchasing existing dwellings (–3.8%). Refinance is still the only segment booming at the moment. AUD/USD was mostly quiet, edging up about 20 pips to 0.6750. Equity sentiment helped the Aussie’s cause, several key regional indexes up >1%, the ASX 200 +0.4%. Tokyo CPI fell from 4.4%yr in January to 3.4%yr in February, indicative of the base effects that will help tame Japan’s headline inflation in H1 23.
Currencies/Macro
The US dollar weakened against most G10 currencies on Friday. EUR rose a muted 25 pips to 1.0620. GBP/USD rallied 80 pips to 1.2025. USD/JPY followed US Treasury yields lower and starts the week around 136, down 80 pips. AUD/USD rose in line with positive risk sentiment, reaching a high of 0.6775 just ahead of the New York weekend, but slipped under 0.6750 early Monday, perhaps in response to the weekend announcement by China’s government that it would target 5% GDP growth this year, a little less ambitious than expected. NZD/USD is net unchanged at 0.6220. AUD/NZD rose to 1.0888 in NY, then trimmed its gain to 1.0850 today, still up 25 pips net.
US services ISM for February was firmer than expected at 55.1 (est. 54.5, prior 55.2), helped by solid new orders, production and employment. Prices paid fell to 65.6 (prior 67.8) – a low since January 2021.
Eurozone PPI in January fell -2.8%m/m, still up 15.0%y/y (est. -0.4%m/m and 17.8%y/y), driven by a sharp -9.4%m/m fall in energy prices. Ex-energy it rose 1.1%m/m, with gains in key components including +1.5%m/m for non-durable consumer goods and +1.6%m/m for durable consumer goods.
ECB officials continued to signal significant tightening, with hawkish members advocating restrictive levels of 4% and to remain there for some time.
Interest rates
US bond yields fell and the curve flattened further as investors debate the prospects of Fed hawkishness and the impacts on the economy. 2yr government bond yields fell from 4.88% to 4.85%, and 10yr government bond yields fell from 4.05% to 3.95%. Markets are fully priced in for a 25bp hike at the FOMC meeting this month.
Australian bond yields fell, taking a lead from US price action. 3yr government bond yields (futures) fell from 3.61% to 3.58%, and 10yr government bond yields (futures) fell from 3.91% to 3.83%. Markets are fully priced for a 25bp hike at the March RBA meeting tomorrow. The AU-US 10yr bond yields widened for the second consecutive session after US outperformance, currently at -10bps.
Credit indices reflected the positive sentiment on Friday to close the week sharply lower with Main and CDX each 4bp tighter (to 76.5 and 71 respectively), snapping back to mid-February levels, with US cash also 2-3bp tighter. Primary activity was muted with just the 2 deals completed in Europe (refer below) while the US saw no supply on Friday, but closed the week with USD43bn priced at an average NIC of ~17bp.
Commodities
Crude markets saw a volatile Friday as the WSJ reported that UAE officials were “having an internal debate about leaving OPEC, a decision that would shake the cartel and undermine its power in global markets” sending May Brent down 2.8% before a denial saw it up 4.4% from the lows. The April WTI contract closed up $1.52 at $79.68 while the May Brent contract closed up $1.08 at $85.83. Saudi Arabia also raised its prices for Arab Light crude premium to Asia by 50c while prices for Northwest Europe and the Mediterranean rose by as much as $1.50. And India’s imports of crude from Russia jumped from less than 1% in February 2022 to 35% in February 2023 while imports from Saudi Arabia fell 16%mm and from the US fell 38%mm in February. And the head of Vitol Asia said that “most analysis seem to have been revising their estimates for Chinese oil and gas consumption up for the balance of this year, substantially so, which will make 2023 one of the biggest years for year-on-year demand that we have seen”.
Meanwhile gas prices surged in the US into the end of the week with the April Henry Hub contract up 8.8% as rising heating demand lifted prices to a 6-week high. Prices in the UK and Europe continued falling though with the April contracts down circa 12% on the week to fresh 1yr lows.
Metals finished the week in a more consolidative tone with copper down 0.4% at $8,923 while aluminium was down 0.2% at $2,394 though nickel rose 0.7% to $24,395. However, copper rose 2.4% on the week while aluminium rose 2.5% and zinc 2.7% helped by strong Chinese PMI data during the week. That was the best week for copper and aluminium back to mid-January. The UK’s FCA announced it would start an enforcement investigation into the LME for the period Jan 1 to the suspension of trading on March 8, 2022.
And finally note that iron ore markets finished the week mixed with the April SGX contract down 21c at $126.00 while the 62% index rose $1 to 127.50. The NDRC and ‘industry experts’ were said to have met to discuss the “overly fast” rise in iron ore prices. Industry experts had called for measures to punish hoarding and price gouging. Vale announced a project to transform scarp that had been dumped at a tailings dam at Carajas into pellets to be used in blast furnaces. The $485m Galedo project will have initial capacity of 5mt/ year, rising to 10mt at full capacity by 2026. Premier Li announced a growth target of around 5% in China for the year at the National People’s Congress which started over the weekend.
Day ahead
Australia: The Melbourne Institute inflation gauge will provide an unofficial update on inflation in February, with January’s reading 0.9%mth, 6.4%yr. It is a public holiday in Victoria, Western Australia, South Australia and Tasmania. The ASX is open.
NZ: ANZ commodity prices will likely receive support from rising meat prices in February (Westpac f/c: 1.0%).
Eurozone: Broader conditions will continue to be supportive of Sentix investor confidence in March (market f/c: -5.5); however, inflation will continue to act as a drag on retail sales in January (market f/c: 0.6%).
US: The investment outlook is generally subdued, as evinced by the weakness in factory orders (market f/c: -1.8%).
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