Markets Daily
Alarm over the recent US bank failures subsided, and markets partly retraced. European and US equities closed higher and bond yields rose. The USD was mixed, AUD a touch higher at 0.6680. US CPI data matched expectations. Today’s data includes China industrial production and US retail sales.
Yesterday
Australia March Westpac consumer sentiment remained at 78.5. This marks the second consecutive month of extremely weak sentiment. Index reads below 80 are rare, back-to-back reads even rarer. Indeed, both the COVID shock and the Global Financial Crisis saw only one month of sentiment at these levels. In the February NAB survey, the Australia business conditions index slipped by 1pt, easing to +17. This continues a moderating trend evident over the past half year but the still relatively high level of the business conditions index suggests that the economy is operating at a relatively high level. However, confidence crumbled, with the index slumping 10pts to be in the pessimistic zone at -4. AUD/USD traded well within the previous day’s range, drifting down about 40 pips to a low of 0.6632, then edging back to 0.6655. This was a fairly resilient performance given a sea of red in regional equities, the ASX 200’s -1.4% decline about middle of the pack.
Currencies/Macro
The US dollar was mixed on the day. EUR/USD slipped to 1.0679 in the European morning but was ultimately unchanged at 1.0730. GBP/USD is net 30 pips lower at 1.2150. USD/JPY followed US Treasury yields higher, up 1 yen overall at 134.25, the yen the worst performer on the day. AUD/USD was volatile around US CPI but eventually gained 0.2% at 0.6680, aided by the US equity rally. NZD/USD rose a net 0.3% to 0.6235. AUD/NZD rose from 1.0691 (a three-month low) to 1.0715.
US headline CPI in February was in line with consensus, rising 0.4%m/m and 6.0%y/y (prior 6.4%y/y). Ex-food and energy CPI rose 0.5%m/m (0.452% unrounded) and 5.5%y/y (est. 0.4%m/m and 5.5%y/y). BLS reported that the largest contribution was from shelter-related costs.
UK employment data was broadly in line with expectations, with minor gains for employment (payroll for Feb rose 98k vs est. 65k, but prior was revised lower), and unemployment was unchanged at 3.7% (est. 3.8%, prior 3.7%). Average hourly earnings rose 5.7%y/y (as expected, prior 6.0%y/y), but the ex-bonus measure was slightly softer at 6.5%y/y (est. 6.6%y/y, prior 6/7%y/y).
Interest rates
US bond yields rose, as US CPI outcome came in strong, which was within expectations. 2yr government bond yields rose 27bps, from 3.97% to 4.25%, and 10yr government bond yields rose 12bps, from 3.57% to 3.69%. Markets are pricing a 75% chance of a 25bp hike at this month’s FOMC meeting.
Australian bond yields followed the trend in US markets, 3yr government bond yields (futures) rose from 2.94% to 3.05%, and 10yr government bond yields (futures) rose from 3.35% to 3.48%. The AU-US 10yr bond spread was 1bp wider, currently at -21bps.
Credit remains mixed at this point with indices taking back some of the downside seen in recent sessions with Main in 5bp to 90 and CDX 6bp tighter at 85 (last week we would have described these levels as around YTD wides), broader cash credit has staged a recovery to be 7-10bp tighter across the various sectors, and while banks are also marked tighter on a sector basis, the market has become more targeted with US spotlight regionals significantly weaker, while the broader banks sector is better.
Commodities
Oil slumped into the end of a choppy session as rising supply weighed on sentiment. The April WTI contract is down $3.28 at $$71.52 while the May Brent contract fell $3.16 to $77.61. That’s the lowest close for Brent in over a month. OPEC is forecasting a modest surplus next quarter and reported that Russian crude production was unchanged at 9.8mbpd. President Biden approved the giant ConocoPhillips oil project in northwest Alaska despite an election pledge to block new drilling on public lands. And French refineries remain blocked by ongoing strikes against pension reform in France meaning US cargoes keep flooding into the region to replace Russian supply according to Bloomberg ship tracking data. And in gas markets, the prospect of warmer weather in Europe saw a second day of heavy losses with the April TTF contract down another 11%. And wires reported that all remaining curbs on Chinese imports of Australian coal will be dropped, ending the trade restrictions that have been in place since late 2020.
Metals were hit by the higher-than-expected core CPI with gold down 0.5% to $1,903 while copper fell 1.1% to $8,827. Zinc also dropped by close to 1% at $2,917 though aluminium rose 0.8% to $2,352. There was little fresh industry news though Peru reported that copper exports plunged 25%yy in January due to extended social unrest. The discount for spot aluminium versus the 3 month is at the most negative seen since 2008, pointing to limited demand.
Finally note that iron ore markets saw further measured gains with the April SGX contract up 30c at $132.70 while the 62% Mysteel index rose 55c to $133.00. Morgan Stanley reported that the iron ore market looks “relatively tight” over the first half due to more steel production expected to come during the construction season. Meanwhile Port Hedland reported a further fall in exports to 38.81mt.
Day ahead
Australia: The February estimate for overseas arrivals and departures will provide timely insight on the return of Chinese visitors and students in early 2023.
At 1pm Syd we see China’s Jan-Feb activity data. The recovery in retail sales is set to forge ahead on the removal of COVID-zero restrictions (market f/c: 3.5%yr ytd); fixed asset investment should also hold in supportive territory (market f/c: 4.5%yr ytd). While near-term global demand risks remain for industrial production, burgeoning support from Asia will provide a longer-term offset (market f/c: 2.6%yr ytd).
Eurozone: Weakness in energy-intensive sectors should continue to weigh on broader industrial production in January (market f/c: 0.3%).
US: A modest decline retail sales is anticipated in February, representing a retreat after January’s surge (market f/c: -0.4%). The PPI will continue its rapid deceleration in February (market f/c: 0.3%) and growth in business inventories should fall to a stalling speed (market f/c: 0.0%). Both the Fed Empire State index and NAHB housing market index is expected to remain in broadly weak territory in March, reflecting the ongoing pressures in manufacturing and housing (market f/c: -7.8 and 40 respectively).
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