Markets Daily
The FOMC delivered a mostly expected 25bp rate hike but toned down its guidance on further tightening. US bond yields and equities fell. AUD reversed initial gains, returning to 0.6680. Today’s calendar features RBNZ comments and the Bank of England policy decision.
Yesterday
Regional equities continued the positive start to the week for global risk appetite, after various steps by authorities to try to restore confidence in the financial sector. The ASX 200 closed up 0.9%, less than the gains in e.g. Japan, Hong Kong, Korea and Singapore. AUD recovered some of the ground lost on Monday, though only about 30 pips overall, to 0.6700.
Currencies/Macro
The FOMC delivered the anticipated 25bp increase in the funds rate to 4.75-5.00%. The accompanying statement emphasised the resilience of the US banking system, but did acknowledge that recent developments could result in tighter credit conditions for households and businesses. Forward guidance for the funds rate has been moderated. Previously the FOMC noted that it “anticipates that ongoing increases in the target range will be appropriate.” But that’s been softened to “The Committee will closely monitor incoming information and assess the implications for monetary policy. The Committee anticipates that some additional policy firming may be appropriate.”
Following the statement, yields on US Treasuries fell, extending as Treasury Secretary Yellen said that the treasury was not considering a “blanket” deposit guarantee.
In London trade, yields had broadly pushed higher in response to a series of ECB officials underscoring their inflation vigilance and intent to continue to tighten and sustain restrictive policy as well as a surprise acceleration in UK inflation.
Following the FOMC decision the EUR/USD rose from 1.0790 to a high of 1.0912, steadying at 1.0860, net +0.8% on the day. GBP/USD is only up about 30 pips net on the FOMC headlines, at 1.2270. Both NZD and AUD initially rose, but those moves were largely unwound during the press conference, as equity sentiment soured. AUD/USD popped from 0.6675 to 0.6759, then back to 0.6680, NZD/USD from 0.6215 to 0.6283, then back to 0.6220. USD/JPY followed Treasury yields lower, from 132.55 to 131.40.
UK headline CPI rose +1.1%m/m to 10.4%y/y (est. +0.6%m/m and 9.9%y/y, prior 10.1%y/y) with Core CPI of 6.2%y/y (est. 5.7%y/y, prior 5.8%y/y). Hospitality, hotels and food and beverage led the surprise rise in prices.
Interest rates
US bond yields fell sharply and the curve steepened, after the Fed delivered a 25bp rate hike but the dovish rhetoric convinced markets that the Fed is nearing the end of its rate hike cycles. Markets are pricing in rate cuts as soon as July this year. 2yr government bond yields fell 23bps to 3.93%, and 10yr government bond yields fell 18bps to 3.43%.
Australian bond yields took trend from US price action, but underperformed the US rally. 3yr government bond yields (futures) fell 13bps to 2.83%, and 10yr government bond yields (futures) fell 13bps to 3.24%. The AU-US 10yr bond spread widened 8bps on the back of AU underperformance, currently at -19bps.
Credit had been looking to consolidate recent moves until this news. Still in the banks space and UBS yesterday announced an offer to purchase notes priced by UBS Group AG in early March, but which settled on Friday (17 Mar) at the reoffer price. UBS said it was under no obligation to tender for the EUR1.5bn 4.625% Mar-28 and EUR1.25bn 4.750% Mar-32 notes, but given the merger agreement reached on Mar 19, felt it prudent to do so.
Commodities
Crude jumped for the third day helped by a large drop in gasoline and distillate inventory, driven by surging exports. The April WTI contract is up 36c at $70.03 while the May Brent contract is up 59c at $75.91. The EIA reported crude inventory rose by 1.1mb but gasoline inventory fell 6.4mb and distillates by 3.3mb. Exports of crude remained close to the recent 5mbpd+ record, dropping 1.9% to 4.93mb but combined exports of crude plus refined products surged to a record 12mbpd pointing to strong demand from Europe. Russian Deputy Prime Minister Novak said the 500kbpd cut in production would be fully implemented within a few days and maintained until the end of June. Shipping activity data confirms seaborne crude exports from Russia have been robust so far in March and refinery run rates steady. Industry consultant FGE forecast that 0.5mbpd of oil processing capacity will be halted by industrial action in France with TotalEnergies halting its biggest plant in France.
Gas prices were down another 5-6% across the board with windier weather in Europe, much higher than usual stockpiles, continued evidence of technical issues at Freeport, continued labour action at the Dunkerque LNG terminal in France and maintenance at the Wilhemshaven LNG plant in Germany all playing a role. Meanwhile, rising carbon prices mean that European power companies will be switching away from burning coal to gas. The so called ‘dark spread’ which is driven by power, coal and emissions prices has dropped to near zero according to Bloomberg’s model, encouraging the switch to gas.
Metals saw a modest bounce with copper up 1.95% to $8,928 and nickel up 1.1% to $22,765. Aluminium also rose 0.8% to $2,285 and zinc by 0.44% to $2,877. There was little fresh industry news though the improvement in Asia/Europe equity risk sentiment helped and gold regained much of the previous day’s losses, jumping 1.4% to $1,967. However, the spread between spot and 3 month nickel dropped to the lowest since 2007 while the same spread for aluminium hit lows back to 2008 indicating poor demand for physical metals.
Iron ore markets slumped further, with the focus on falling steel prices. The April SGX contract briefly traded below $120, and is last down $2.15 at $121.70 while the 62% Mysteel index is down $3.30 at $121.15. Spot rebar prices have dropped 6% since hitting a 9 month high early last week. Mysteel reported that ten mills have cut prices of products in China.
Day ahead
RBNZ Chief Economist Conway will be giving a speech on the inflation outlook at the KangaNews Summit (1:15pm Syd).
The Bank of England MPC is expected to deliver its last 25bp rate hike of the cycle at today’s policy meeting, with risks to the downside given current volatility (Westpac f/c: 4.25%). After the sharp upside surprise in UK February inflation, market pricing has firmed to +22bp.
In the Eurozone, the up-trend in consumer confidence should continue to work against inflation and interest rate pressures in March (market f/c: -18.2).
The March Kansas City Fed index will continue to reflect subdued manufacturing conditions in the region (market f/c: -2). More broadly, the Chicago Fed national activity index is set to moderate in February after an unexpected bounce last month (market f/c: 0.1). New home sales are expected to post a partial reversal in February (market f/c: -3.0%) while initial jobless claims are set to remain at a relatively low level for now (market f/c: 198k).
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