Markets Daily
Sentiment improved as officials signalled support for troubled US and European banks and the ECB followed through on its signalled rate hike. The S&P500 is up 1.8%, bond yields are higher, and the USD is lightly lower.
Yesterday
Australia total employment rose by 64.6k (0.5%) in February, more than reversing the two consecutive monthly declines in January (–10.9k) and December (–16.6k). Hours worked jumped by 3.9%. The unemployment rate fell to 3.5%, (from 3.67% to 3.54%). The underemployment rate also posted a substantial decline, down from 6.2% to 5.8%. This was somewhat firmer than consensus, prompting a 15-20 pip AUD/USD rise to above 0.6640. AUD/NZD was more impressive, up about 70 pips on the day to 1.0770 in the wake of the poor NZ Q4 GDP data (-0.6%qtr) which prompted forecasters including Westpac to expect a lower peak for the RBNZ cash rate (we now see only one 25bp hike, to 5.0%, previously 5.50%). Regional equities were mostly sharply lower, including the ASX 200, -1.5%.
Currencies/Macro
Sentiment improved as officials signalled support for troubled banks and the ECB followed through on its signalled rate hike. The Swiss National Bank offered as much as CHF50bn from its liquidity facility, providing relief, and a consortium of 11 US banks announced USD30bn in deposits into a troubled Californian bank, helping ease liquidity stresses. The S&P500 is up 1.8%, bond yields are higher, and the USD is lightly lower as concerns about turmoil in the banking sector eased.
The US dollar index is down 0.3% on the day. EUR ranged between 1.0550 and 1.0635. USD/JPY bounced off 131.72 to 133.82.
AUD rose from 0.6630 to 0.6668. Underperformer NZD ranged between 0.6152 and 0.6180, hobbled by the weaker than expected Q4 GDP and current account deficit figures released earlier in the week and RBNZ rate hike downgrades. AUD/NZD extended the day’s earlier rise, from 1.0760 to 1.0800, reflecting contrasting data surprises (weak NZ GDP, strong AU jobs).
The ECB raised its main refinancing policy rate by 50bp to 3.50%. This was previously signalled, but there was some uncertainty about whether the ECB would proceed given the financial stability concerns which had surfaced over the past week. In the event ECB did hike, citing inflation being too high for too long (in their updated projections), but removed forward guidance in favour of monitoring current market tensions and being data dependent. In the press conference, President Lagarde said that there is no trade-off between price and financial stability, which was interpreted as a sign that the ECB is fully aware of the risks in the financial system.
US weekly jobless claims data continue to indicate a solid labour market. Initial Claims were 192k (est. 205k), continuing claims 1.684m (est. 1.72m). The Philadelphia Fed business survey remained weak at -23.2 (est. -15.0, prior -24.3), with lower output, new orders, employment and prices. Housing starts and permits in February were surprisingly firm. Starts rose to 1.45m (est. 1.31m) and permits 1.52m (est. 1.34m), boosted by multi-home activity.
Interest rates
US bond yields rose and the yield curve steepened, with the news of the Swiss National Bank committing to provide liquidity to Credit Suisse, as well as the ECB hiking 50bps. 2yr government bond yields rose from 3.89% to 4.16%, and 10yr government bond yields rose from 3.46% to 3.58%. Markets are pricing a 80% chance of a 25bp hike at the FOMC meeting next week.
Australian bond yields continue to be affected by global impetus, but outperformed their US counterparts. 3yr government bond yields (futures) rose 18bps to 3%, and 10yr government bond yields (futures) rose 11bps to 3.45%. The AU-US 10yr bond spread narrowed on the back of AU outperformance, currently at -13bps.
Credit indices reflected the more stable sentiment with Main unwinding some of yesterday’s outsized move to close 7.5bp tighter at 97 with CDX also 5bp firmer at 83. CS remains a focus for credit markets with CDS continuing to trade upfront as the curve remains sharpy inverted (chart below), while the tender offer announced yesterday has provided support to the short dated OpCo lines (remembering these sit outside the resolution entity). More broadly, US cash credit looked a touch firmer last night as sentiment stablised, however we also received Lipper funds flows data that saw USD3.9bn pulled from IG funds in the last week with HY funds also seeing an outflow of 1.4bn, to be the largest outflow of the year to date, which was unsurprising given the backdrop.
Commodities
Crude markets managed a small bounce as risk sentiment improved on a support package from banks for First Republic. The April WTI contract is up 71c at $68.32 while the May Brent contract is up 99c at $74.68. The move still leaves both contracts close to 15-month lows however as the ECB rate move emphasised that central banks are willing to hike rates despite financial market turmoil. Russia’s Deputy Prime Minister Novak and the Saudi Energy Minister Prince Abdulaziz bin Salman met to discuss “oil markets and efforts of the OPEC+ group to promote market balance and stability”. OPEC+’s JMMC meets April 3. Bloomberg reported signs that Russian oil and fuel exports are becoming ‘gummed up’ with ships floating off the coast of Europe, Africa and Latin America ratcheting up waiting fees. Some vessels are ‘bouncing between ports without discharging’ while others are unloading at ‘unusual locations’. Data from Vortexa a showed about 1.2 billion barrels of crude oil were on the water last week the highest for this time of year in data going back to 2016.
Metals managed a small bounce with copper up 0.34% to $8,533 while nickel rose 2% to $23,465. There was little fresh industry news though the EU proposed classifying copper and nickel as critical raw materials which could open the door to accelerated permitting and financing of projects in the EU. To become law, the proposal in the new Critical Raw Materials Act would need support from both the European Parliament and member states in the EU Council.
Finally note that iron ore markets softened with the focus on the potential for steel curbs weighing on sentiment. The April SGX contract is down $1.15 to $128.60 while the 62% Mysteel index fell $3.30 to $130.10. As noted yesterday, wires are reporting that China will again cap crude steel production in 2023, marking the third year in a row the government has mandated reduced output to cut carbon emissions from the heavily polluting sector. Coming on top of moves by Dalian exchange to “crack down on illegal behaviours such as fabricating price increase information, hoarding and price gouging” and moves by the NDRC and industry experts to discuss ways to curb “overly fast” price gains, the full wight of intervention in the iron ore market is becoming more obvious.
Day ahead
Eurozone: The final estimate to February’s CPI will provide crucial insight into the structure and momentum of services inflation (market f/c: 8.5%yr).
US: Growth in industrial production is set to remain near a stall speed in February, echoing the broader weakness evident from regional surveys (market f/c: 0.2%). Meanwhile, the February leading index should continue to signal a deteriorating economic outlook (market f/c: -0.3%). Indeed, that UoM consumer sentiment is expected to remain unchanged in March reflects the lasting effects of interest rate and cost of living pressures (market f/c: 67).
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