Markets Daily
US bond yields fell again on soft data, this time March private payrolls and the ISM services survey. Recession talk increased. AUD trimmed its decline to 0.6720. Today’s data includes Australia February trade balance and China March Caixin services PMI.
Yesterday
RBA Governor Lowe repeated Tuesday’s message that interest rates “may well” have to rise again but in his speech he gave detail on some of the reasons for pausing this month, including the speed of the rise so far. In the Q&A, Lowe said that the RBA projected inflation to take longer to return to target than some other banks because it was keen to limit the likely increase in unemployment. AUD/USD edged up to 0.6770 on the initial headlines but then began a descent to 0.6715. There was a clear switch to the Kiwi, after the RBNZ delivered a big surprise by hiking 50bp to 5.25%. Regional equities were quite mixed, Japan down sharply but Korea and India up, while the ASX 200 was about flat. China, Taiwan and Hong Kong were closed.
Currencies/Macro
The US dollar was mixed against major currencies on the day. EUR/USD fell about 50 pips to 1.0905. GBP/USD chopped down 40 pips to 1.2460. USD/JPY fell as far as 130.64 following the ISM data, later trimming its decline to 50 pips, at 131.20. AUD/USD extended its local session decline as far as 0.6677, then chopped up to 0.6720, net -0.4% or 30 pips. NZD/USD retraced its earlier ½ cent RBNZ-led gain, net flat on the day at 0.6320. AUD/NZD preserved its initial reaction to the RBNZ’s surprise 50bp hike, extending its fall to 1.0588 (lowest since December) before retracing to 1.0635 (it was 1.0710 pre-RBNZ).
US private sector payrolls (ADP) rose 145k in March (est. 210k, prior 261k). The March services ISM fell to 51.2 (est. 54.4, prior 55.1). All major components – prices, employment, and new orders – fell. In the wake of the data, the Atlanta Fed again downgraded its estimate of Q1 GDP, from 1.7% to 1.5%.
German factory orders in February easily beat expectations, rising 4.8% (est. 0.3%, prior 0.5%), with large item production rising significantly.
Interest rates
US bond yields fell for the third consecutive session this week, after weak economic data continues to weigh in on investor sentiment, triggering a flight-to-safety bid. 2yr government bond yields fell 5bps to 3.78%, and 10yr government bond yields fell 3bps to 3.31%.
Australian bond yields continued to take trend from US price action. 3yr government bond yields (futures) fell 4bps to 2.82%, and 10yr government bond yields (futures) fell 5bps to 3.23%. The AU-US 10yr bond spread widened following AU underperformance, currently at -8bps.
The caution on growth has flowed into credit spreads with Main out 3bp to 90 and CDX 2.5bp wider at 80.5 with cash spreads also a touch softer. In Europe, Aroundtown announced the result of its bond tender with the group opting to take EUR438.3M of its steeply discounted bonds, short dated bonds, above the maximum acceptance amount of EUR400M (from EUR4.1bn total bonds in the tender). Primary activity has continued ahead of Good Friday with Europe seeing 6 IG issuers price ~EUR5.25bn. This included a EUR1bn hybrid from Orange (PerpNC7yr to yield 5.5%), further covered supply (Erste, CreditAg) while BPCE has followed BNP (SNP last night) into the non-covered space with a EUR1bn 3yr Sen Pref. deal at MS+70 (BBSW+118) and EUR fins markets thaw. The US saw just the 2 issuers with Micron and Realty Income both pricing dual tranche deals (detail below).
Commodities
Crude markets softened modestly as the focus shifted to signs of weakness in US growth and inventory draws which fell short of expectations. The May WTI contract is down 36c at $80.35 while the June Brent contract is down 17c at $84.77. The EIA reported crude inventory draws of 3.7mb, 4.1mb for gasoline and 3.6mb for distillate. However, the SPR saw the first draw since late last year, with 404kb leaving the reserve, meaning the net nationwide crude draw was actually 4.1mb. Crude exports surged back above 5mb and a measure of domestic gasoline demand – 4 week average of product supplied - has surged 15% in the last 10 weeks. The May gasoline contract hit its highest close back to July of last year. Saudi Arabia raised official selling prices for its Arab Light crude to Asia by 30c, the third consecutive monthly rise. The front time spread for Dubai crude jumped to above $1 in backwardation, emphasising how tight the market is in the Asian region.
While copper managed to stabilise, other metals continued their recent weakness with zinc hitting fresh 5-month lows. Copper is last up 0.3% at $8,779 though aluminium fell 1.3% to $2,340 and nickel fell 2.7% to $22,500. Zinc fell 0.9% to $2,807, the lowest close since November 4th. There was little fresh industry news though weakness in the ISM services index added to the negative bias.
Iron ore markets fell further after NDRC warnings earlier in the week that it will “increase supervision and resolutely maintain the normal order of the market”. The May SGX contract is down $1.20 from the same time yesterday to $117.05 while the 62% Mysteel index is down $2 at $119.00. The NDRC statement required futures companies to “operate in accordance with the law” and “comprehensively, accurately and objectively analyse the iron ore market when issuing research reports” while they “must not deliberately exaggerate price increases”. The September Dalian contract is down 4% so far this week despite signs of surging steel production with CISA reporting production for the third 10 days of March up 4.7%yy and up 9.4% versus the average over the last 3 years.
Day ahead
At 11:30am Syd we see Australia’s February trade data. A partial reversal of January’s spike in imports, centred on transport goods, should see the trade surplus rise. Westpac forecasts a surplus of $12.6bn versus $11.7bn in January, with exports +0.3% m/m, imports -1.5% m/m. The median forecast is $11.2bn.
The half-yearly RBA Financial Stability Review is also due for release. In yesterday’s speech, Governor Lowe said that “Our financial markets are working well and Australia’s banks remain well positioned to provide the credit and other financial services that the economy needs.”
NZ: ANZ commodity prices have recently been boosted by gains across meat and forestry prices.
At 11:45am, the Caixin/S&P Global China services PMI should continue to be buoyed by reopening dynamics in March (market f/c: steady at 55).
US: Initial jobless claims should remain at a relatively low level, at least for now (market f/c: 200k). St. Louis Fed president Bullard is also due to speak. The March employment report is due on Friday. While the NYSE will be closed for Good Friday, bond and money markets will open for a shortened session. Consensus is 235k on non-farm payrolls, 3.6% unemployment rate, average hourly earnings up 4.3%yr.
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