Markets Daily
US and European equities extended Monday’s gains though AUD struggled with the bounce in US bond yields, slipping half a cent to 0.6670. Today we see UK February CPI and the FOMC statement, quarterly forecasts and Chair Powell press conference.
Yesterday
The minutes of the Reserve Bank Board meeting on March 7 highlight that unlike recent meetings when several policy options were considered, the March meeting only considered the case for 25 basis point increase – the resulting decision. However the minutes note that “Members agreed to reconsider the case for a pause at the following meeting, recognizing that pausing would allow additional time to reassess the outlook for the economy.” AUD slipped after the minutes were released, from about 0.6715 to 0.6690, later extending its decline slightly, still narrow ranges overall. The ASX 200 alternated wins and losses for a sixth straight session, closing up 0.8%.
Currencies/Macro
Steadily improving sentiment lifted yields and stocks, though moves in FX were dominated by a mild rise in EUR but currencies which were more likely to have easier central bank stances slipped. Data was generally secondary to market moves and the rebounds in banking stocks (Euro Stoxx Banks Index +4.75%) and their recently battered bonds suggested that the worst of the market concerns may have been alleviated.
However, the cancelling of corporate issuance and marking down of Investment Funds showed that there are still stresses across financial markets ahead of tomorrow’s FOMC.
The second day of meetings between presidents Xi and Putin provided an unworkable (in Western eyes) proposal for a peace plan in Ukraine (freezing currently held territories) and loosely detailed grounds for a ceasefire.
The US dollar was very mixed. EUR firmed around +0.5% to 1.0770 while currencies where CBs are likely to be less hawkish slipped. GBP slipped -0.5% to 1.2215, JPY -0.9% to 132.50 while AUD and notably NZD (after another soft GDT auction) underperformed. AUD slipped 50 pips or -0.7% to 0.6670 and NZD struggled, falling -0.8% to 0.6190.
US February existing home sales posted a sharper than anticipated rebound from their recent sharp downswings (from annualised 6.34mn in early 2022 to 4.0mn in Jan 2023) with a 14.5% bounce to 4.58mn (est +5%).
Canadian Feb headline CPI pulled back to 5.2%y/y (est. 5.4%y/y) from 5.9%y/y on larger base effects. However, core measures were much as expected. Core Trim pulled back to 4.8%y/y (est. 4.9%y/y, prior 5.1%y/y) and Core Median to 4.9%y/y (est. 4.8%y/y, prior 5.0%y/y).
March ZEW investor/analyst surveys posted much as anticipated pullbacks from their prior sharp six month of rebounds. German March Expectations slipped to 13.0 (est. 15.0) from 29.1 in Feb, Current Conditions slipped to -46.5 (est. -44.3, prior -45.1). Eurozone March Expectations slipped to 10.0 from prior 29.7 with Current Conditions -44.6 from -41.6 in Feb.
UK Feb. Public Sector Net Borrowing widened to +GBP15.9bn (est. +GBP10.2bn) after the notable (surplus) -GBP9.1bn (revised from -GBP6.2bn) in Jan.
The Global Dairy Trade Auction saw the GDT Index declined -2.6% (Westpac est. flat) with Whole Milk Powder slipping -1.5%.
Interest rates
US bond yields rose and the curve flattened, as markets look to the FOMC meeting this week. 2yr government bond yields rose 19bps to 4.16%, and 10yr government bond yields rose 12bps to 3.61%. Markets are ascribing an 80% chance of a 25bp hike at the FOMC meeting this week.
Australian bonds took their trend from US price action, but outperformed their US counterparts. 3yr government bond yields (futures) rose 13bps to 3%, and 10yr government bond yields (futures) rose 14bps to 3.33%. The AU-US 10yr bond spread narrowed on the back of AU outperformance, currently at -27bps.
The more stable backdrop provided support to credit markets with indices taking back a significant portion of the recent widening which sees Main another 7bp tighter to 90.5 (roll 6bp) and CDX 8bp tighter at 80.5 (roll ~3.5bp). Cash markets are also more constructive as marks are moved tighter and price discovery commences at significantly tighter levels. Primary activity provided another positive sign as 9 issuers ventured into the US IG markets as they looked to navigate between improved sentiment to open the week and the FOMC this evening.
Commodities
Crude markets jumped again as Treasury Secretary Yellen showed willingness to extend support to smaller lenders if required. The April WTI contract is up $1.69 to $69.33 while the May Brent contract is up $1.47, back above $75 at $75.26, Russia said it will extend its 500kbpd production cut through June, even as it overtook Saudi Arabia as China’s biggest supplier of crude according to Chinese customs data. However, the Chinese and Russian leaders failed to agree on the Power of Siberia-2 pipeline saying only that Russia and China would “make efforts to advance work on studying and agreeing” plans to build the pipeline.
Meanwhile France was forced to release fuel from strategic stocks to avert problems with petrol stations running dry. And Quantum Energy Partners CEO warned that the US shale patch may lose as much as 20% of its activity over the next year if energy prices hold at current levels. And head of LNG at Vitol group warned that gas prices could rebound to €100 as demand comes back, though the rebound in China's fuel purchases is the big unknown. Gas prices rose modestly in Europe as traders noted issues at an LNG facility in Angola and problems at Freeport LNG which is struggling to resume full capacity.
Metals were mixed with copper reacting to improved risk sentiment, up 1% to $8,971 while zinc fell 0.4% to $2,873 and nickel fell another 1.4% to $22,475. That’s a fresh 4-month low for both nickel and zinc. Gold also slumped back below $1,950 as risk aversion waned and focus turned to the FOMC meeting. Trafigura confirmed it was amongst companies that bought nickel that was just a bag of stones. Chinese customs data showed it had doubled the amount of Russian aluminium imported in the year since the Russian invasion of Ukraine.
Iron ore prices slipped further as the authorities again warned over the weekend that they would take measures to curb “unreasonable” price rises. The May SGX contract is down $1.65 to $123.85 while the 62% Mysteel index fell $1.20 to $124.45.
Day ahead
Australia: The Westpac-MI Leading Index will likely continue to signal a below-trend pace of growth in March given the continued easing across many components.
The UK’s February CPI report will provide a timely and crucial update on the structure and momentum of inflation pressures, in time for the BoE’s policy meeting later this week. Consensus is for overall inflation to ease to 9.9%yr from 10.1%yr in January, with the core rate edging down to 5.7% from 5.8%.
Versus their January/February meeting, the FOMC have a lot of new information and risks to consider before coming to a decision on the stance of policy. The data certainly remains supportive of further hikes, with job creation continuing at a pace well in excess of that the FOMC feel is consistent with inflation at target. The February CPI report was constructive for a return to at-target inflation in the second half of 2023, but currently remains elevated. Then there are the uncertainties around the banking sector. To our mind, recent developments will have a lasting contractionary impact on the economy, but is not a reason to panic. Hence we look for another 25bp hike at the March meeting (5am Thu Syd), to 4.75-5.00%, but for this to be the last of the cycle, followed by a pause to 2024. The accompanying quarterly forecasts and especially Chair Powell’s press conference will also be keenly watched.
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