Markets Daily
US bond yields fell and equities rallied on Friday after a key inflation measure was lower than expected. Oil prices jumped as OPEC announced a surprise output cut. AUD slipped to 0.6680. Today’s busy data calendar includes Australia February housing finance and building approvals and the US March manufacturing ISM survey.
Friday
Australia private credit growth softened further in February, up just 0.3%mth, trimming annual growth to 7.6% from 8.0%yr. Housing credit growth eased to 5.8%yr from 6.1%yr in January. China’s official March services PMI was the strongest in at least 10 years, jumping to 58.2 from 56.3. The manufacturing PMI eased to 51.9 from 52.6, still a touch above the median forecast. Regional equities were understandably upbeat, the ASX 200’s 0.8% gain quite typical. AUD/USD squeezed up to a high of 0.6738 amid broad-based US$ decline, only to slide back to 0.6710, net unchanged.
Currencies/Macro
The US dollar firmed against most major currencies on Friday. EUR/USD fell from 1.0900 to 1.0835, GBP/USD fell from around 1.2400 to 1.2330. USD/JPY was choppy, overall a little higher, starting the week up 0.5% versus Friday morning, at 133.30. AUD/USD slipped about 40 pips to 0.6680. NZD/USD closed for the weekend nearly flat, at 0.6260, then dipped 20 pips early Monday, seemingly in response to the OPEC news. AUD/NZD is a touch lower net, at 1.0700.
Australian housing prices rose 0.8% in March (capital cities index), trimming the decline from the April 2022 peak to -9%. Prices in Sydney led gains, up 1.4%.
US personal income in February rose 0.3% (est. 0.2%) and spending rose 0.2% (est. 0.3%), the savings rate rising from 4.4% to 4.6%. The core PCE deflator rose 0.3%m/m and 4.6%y/y (est. 0.4%m/m, 4.7%y/y, prior 4.7%). Consumer sentiment (University of Michigan) fell to 62.0 in its final estimate (est. 63.3, prior 63.4). Inflation expectations for 1 year ahead fell to 3.6% (est. 3.8%, prior 3.8%), but for 5-10 years ahead rose to 2.9% (est. 2.8%, prior 2.8%).
Interest rates
US bond yields fell after the PCE deflator, which is the Fed’s preferred indicator for inflation, showed a slowing in inflation in the US. 2yr government bond yields fell 9bps to 4.03%, and 10yr government bond yields fell 8bps to 3.47%.
The Australian bond curve implied by futures flattened slightly, as markets look towards tomorrow’s RBA policy meeting. 3yr government bond yields (futures) rose 1bp to 2.92%, and 10yr government bond yields (futures) fell 2bps to 3.27%. The AU-US 10yr bond spread widened slightly, on the back of long end AU underperformance, currently at -22bps.
Credit indices were positive to close the week with Main in 3.5bp to 84.5 (from ~80bp pre SVB) and CDX in 2bp to 76 (from ~75bp pre SVB, not roll adjusted) with US cash also firmer and IG spreads have now recovered around 50% of the widening seen post the SVB news. As expected it was a quiet session for primary supply on Friday and we now enter a holiday shortened week with expectations remaining light.
Commodities
In a surprise weekend move, Saudi Arabia led a coordinated cut of more than 1mbpd which comes on top of the 500kbpd production cut announced by Russia in March. Russia extended its cut through to the end of the year and the weekend “voluntary cuts”, which came outside of a regular meeting schedule, will begin in May and extend through to the end of 2023. Press suggested the surprise move may be in ‘retaliation’ for the White House ruling out SPR purchases. The US National Security Council said, “we don’t think cuts are advisable at this moment given market uncertainty”. Goldman raised its forecast for Brent in December to $95 on the OPEC cut and for 2024 to $100 from $97. Also over the weekend, a spokesman for the Iraqi Kurdistan Regional Government said that it had reached a preliminary agreement with the Iraqi government to resume oil exports from the north this week. Turkey stopped the flow of circa 450kbpd from March 25. Meanwhile, BP’s oil refinery in Rotterdam suffered an unplanned shutdown in its key refinery in Rotterdam. The unplanned unit halt comes on top of French strikes which have decimated fuel supply in France. The April Rotterdam fuel oil contract jumped 10% last week.
Metals were mixed into the end of the first quarter despite the strength in China PMIs and disappointing copper production number in Chile. Copper finished the week, month and quarter below $9,000 at $8,993 though aluminium rose 1.3% to $2,417. The China non-manufacturing PMI jumped to a decade high while the manufacturing construction sub index hit a record high. Chile announced its lowest copper production since 2017 and Codelco forecast that production for 2023 could fall as much as 7% with an extended drought as well as a string of operation issues impacting. Production fell 11% in 2022.
Finally note that iron ore markets had their largest weekly gain since mid-January. The May SGX contract is down $1.20 from the same time Friday while the 62% Mysteel index is unchanged at $127.80. The 62% index is up 5.6% on the week while the April Dalian contract is up 6.5% over the last 5 days. The record seen for the construction sub index of the manufacturing PMI helped sentiment as did the rise in both new orders and output in the steel PMI though the China Economic Daily News warned that the administration would “strengthen the study and judgement of supply, demand and price trends, and improve the ability to respond quickly to price changes”.
Day ahead
At 11:30am Syd we see official data on Australia’s housing market for February. Dwelling approvals have been highly volatile recently. An underlying downtrend should remain present in February (Westpac f/c: -2.0%). With prices and turnover stabilising, the pace of declines in housing finance approvals will likely moderate in February (Westpac f/c: -1.0%); weaker construction activity should see the fall in owner-occupier loans outstrip that of investor loans in the month (Westpac f/c: -0.6% and -1.2% respectively).
At 11am Syd we see the Australia March inflation gauge from Melbourne Institute. The February reading was 0.4%mth, 6.3%yr.
Japan: The Tankan large manufacturers index is expected to weaken further in Q1 given building domestic and global headwinds (market f/c: 3). The final estimate to the March Nikkei manufacturing PMI is also due.
China: The Caixin manufacturing PMI should continue to receive support from the reopening in March (market f/c: 51.4, due 11:45am Syd).
Eurozone/UK: The final estimate to the March S&P Global manufacturing PMIs is due for both Europe (market f/c: 47.1) and the UK (market f/c: 48.0).
In the US, the ISM manufacturing PMI is expected to remain in contractionary territory in March, though some support from easing cost and supply pressures is evident. The median forecast is 47.5, little changed from 47.7 in February. Construction spending should remain subdued in February given softening demand (market f/c: 0.0%).
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