Markets Daily
Markets were mixed ahead of key events and data later in the week. The euro outperformed after hawkish ECB comments, while AUD underperformed, slipping to 0.6730. Today’s calendar features the RBA policy decision and testimony by Fed Chair Powell.
Yesterday
AUD/USD opened the week on a soft note, dropping about 25 pips to 0.6745, a move many attributed to disappointment at China’s seemingly cautious 5% growth target for 2023. The Aussie traded with little direction thereafter, sitting at 0.6755 in late Sydney trade. The Melbourne Institute February inflation gauge eased to 0.4%mth, 6.3%yr, from 6.4%yr in January. Mainland China equities underperformed the region, most other bourses in the green following the strong lead from Wall Street over the weekend. The ASX 200 closed up 0.6%, a more modest gain than most.
Currencies/Macro
The US dollar was mixed against majors. EUR/USD rose from 1.0630 to 1.0675, matching gains in the Swiss franc which bounced after Switzerland inflation was higher than expected at 3.4%yr. USD/JPY ranged between 135.37 and 136.19, for no net change at 135.95. The Aussie was weakest in the G10, down 45 pips or -0.6% on the day at 0.6725. NZD/USD fell 30 pips to 0.6190. AUD/NZD trimmed its early Sydney losses to 1.0870.
US factory orders ex-transport in February rose 1.2%m/m (est. +1.0%m/m, prior -1.2%m/m). Headline factory orders fell -1.6%m/m (est. -1.8%m/m, prior revised to +1.7%m/m from +1.8%m/m). Finalised durable goods orders were little changed, although ex-transport rose to +0.8%m/m from +0.7%m/m.
Eurozone Sentix investor confidence fell to -11.1 (est. -5.5, prior -8.0), with expectations down to -13 from -6.
Eurozone retail sales in January disappointed, headline sales up 0.3%m/m (est. +0.6%m/m) and -2.3%y/y (est. -1.8%y/y), with December revised to -1.7%m/m from -2.7%m/m.
ECB speakers provided mixed messages, from the dovish Centento warning about not rushing into conclusions over inflation risks, to Lagarde and Pill saying that more had to be done beyond a March 50bp hike, to the extremely hawkish Austrian member Holzmann calling for 50bp hikes in each of the next four (March, May, June and July) meetings.
Interest rates
US 2yr treasury yields bounced off 4.82% to 4.88%, the 10yr yield from 3.90% to 3.98%, in sympathy with German bond yields which rose after Holzmann’s comments. The 2-10yr curve is the lowest (and most inverted) since 1980. Markets currently price the Fed funds rate to be 32bp higher at the next meeting on 22 March, peaking at 5.48% in September 2023.
Australian 3yr government bond yields (futures) ranged between 3.49% and 3.54%, while the 10yr yield ranged between 3.73% and 3.78%. Markets currently price the RBA cash rate to be 23bp higher at the next meeting on 7 March, peaking at 4.15% in October 2023.
New Zealand markets are pricing the RBNZ OCR to be 40bp higher at the next meeting on 5 April and to peak at 5.49% in October 2023.
Credit spreads reflected the early positive moves (Main in 2.5bn to 74, that’s 6bp in 2 sessions) but faded through the US session in line with equity which saw CDX flat (70.5) and cash little changed. Against this backdrop we saw another strong open for primary volumes ahead of Powell/NFP later in the week. Europe saw 6 issuers price EUR13bn with TD’s EUR5bn covered deal (EUR3.5bn 3yr and EUR1.5bn 7yr) the largest on the day and for local flavour, NBN priced its debut EUR green deal with EUR750M 6yr at MS+85 (BBSW+137) and EUR600M 10yr at MS+115 (BBSW+175) with the 10yr extending the group’s curve. In the US, 15 issuers priced USD16.9bn across a broad mix of corps, utilities and financials with CBA completing its USD1.5bn 3yr at SOFR+75/T+70, Rio also in the market with a USD1.75bn print across 10/30yr, and notably, Advanced Auto relaunched its 3yr tranche 5bp tighter than the original launch level.
Commodities
Despite disappointment about the 5% China GDP growth target, crude is again closing with modest gains, with the April WTI contract up 85c at $80.53 while the May Brent contract is up 43c at $86.26. WTI is at a 6-week closing high. Traders will be watching Fed Chair Powell before the Senate and House Tuesday and Wednesday for guidance on Fed hikes. In a sign of how significant the ‘dark tanker’ trade in Russian crude has become, Vortexa estimated one third of Russian Ural blend was being switched at sea – a record high of 570kbpd in February up 190kbpd mm. The STS transfer included a VLCC off Spain’s North African city of Ceuta.
Meanwhile gas markets in the US reversed Friday’s gains and some, with weather data trending warmer cited as a key driver. The April Henry Hub contract is down 13.4% at $2.609. Prices in Europe slipped to fresh one year plus lows with both the April TTF and NBP contracts down 6+%. That’s despite Cheniere CCO Anatol Feygin telling Blomberg that “China has contracted a lot of volume” and this “has the ability to really impact Europe’s ability to attract those marginal volumes”. The TTF contract hit lows back to August 2021, helped by European gas storage being 59% full versus the 5yr seasonal norm of 38%.
Metals markets saw modest losses, weighed down by disappointment about the China growth target for 2023. Copper is down 0.4% at $8,950 while nickel is down 0.6% at $24,445 and aluminium down 0.8% at $2,387. There was little fresh news though the premium for spot aluminium versus the 3m contract is close to decade plus lows suggesting limited physical demand.
Finally note that iron ore markets weakened on pressure from the NDRC and slightly disappointing growth target weighed on sentiment. The April SGX contract is down $1.35 at $124.35 while the 62% Mysteel index is down $3.75 at $125.45. The NDRC issued a statement over the weekend warning that it would severely “crack down on illegal behaviours such as fabricating price increase information, hoarding and price gouging”, suggesting the regulators were indeed concerned about the recent “rapid rise in iron ore prices”.
Day ahead
The RBA policy decision is due at 2:30pm Syd. In line with consensus and market pricing, Westpac anticipates that the RBA will lift the cash rate by 25bps, to 3.60%. The RBA, in responding to a significant inflation challenge and a tight labour market, has quickly raised interest rates. Rates have been raised from a record low of 0.1% in May 2022, with moves at each monthly Board meeting, including 50bp hikes for the four meetings from July to September. The RBA slowed the pace of tightening in October, back to 25bp increments, with policy moving into the contractionary zone.
Last week, the Q4 GDP report revealed a weak consumer, impacted by the rising cost of living and elevated interest costs despite strong nominal wage gains and a further reduction in the savings rate. The Board will be mindful of these signals but will remain focused on its task of ensuring a return to the inflation target zone of 2-3%.
At 11:30am Syd, Australia’s trade balance is set to print another sizeable surplus in January given still-elevated commodity prices (Westpac f/c: $12.5bn).
China: There should be little pressure on foreign reserves in February (market f/c: $3157bn).
Federal Reserve Chair Powell will commence his semi-annual congressional testimony with an appearance before the Senate Banking Committee. His prepared text was released on Friday but the Q&A session is lengthy and potentially market-moving.
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