Markets Daily
The US dollar and bond yields fell sharply in response to a slight moderation in US inflation, AUD probing above 0.6700. Equities cooled as FOMC minutes warned of recession. Today’s calendar features Australia March employment data and China March trade balance.
Yesterday
RBA Deputy Governor Bullock took part in a panel discussion on lessons for monetary policy from the pandemic. She said that a negative cash rate was considered extensively, that she would prefer QE over yield curve targets in future and that the RBA’s messaging on holding the cash rate steady until 2024 was garbled. Regarding the decision to pause in April, Bullock said it was mostly about preserving jobs and that pauses were common in tightening cycles. AUD/USD traded very tight ranges again, from 0.6649 to 0.6677. The ASX 200 rose 0.5%, its 10th gain in the past 11 sessions, to a high since 7 March.
Currencies/Macro
The US dollar fell against all G10 currencies on the day, hurt by the US CPI data. EUR/USD rose from 1.0925 to 1.1000 – highest since early February. GBP/USD bounced off 1.2400 to 1.2480, net +0.5%. USD/JPY fell from 133.80 pre-CPI to 132.74, later trimming its decline to 133.20. AUD/USD rose from 0.6670 pre-data to a high of 0.6723, a one-week high, then consolidated just below 0.6700. NZD/USD rose a net 0.3% on the day to 0.6215, with a post-CPI high of 0.6242. AUD/NZD rose 0.2% on the day to 1.0775.
US CPI in March was slightly lower than expected. Headline CPI rose 0.1%m/m and 5.0%y/y (est. 0.2% and 5.1%yy, prior 6.0%y/y). Core CPI rose 0.4%m/m and 5.6%y/y (est. 0.4%m/m, prior 5.5%y/y), with a major contributor being shelter-related costs which are expected to moderate.
The minutes of the March FOMC meeting indicated extensive discussion over the banking turmoil. There was some softening in outlooks for the policy rate due to the banking crisis, which also "increased the already-high level of uncertainty associated with the outlooks on economic activity." However, ultimately "all" participants supported the 25bp rate hike. Inflation was still seen as unacceptably high and there had been little evidence showing disinflation in core services excluding housing. In the absence of banking stresses, "some" participants would have considered a 50bp hike in March. Fed staff projected a mild recession starting later this year due to the impact of the banking stresses (a downturn in growth was only seen as a "possibility" in February).
San Francisco Fed president Daly said, “Looking ahead, there are good reasons to think that policy may have to tighten more to bring inflation down. But there are also good reasons to think that the economy may continue to slow, even without additional policy adjustments.” Richmond Fed president Barkin saw signs of demand cooling, but was wary of declaring victory on inflation too soon, and noted that prices excluding food and energy were still too high.
ECB member and hawk Holzmann continued to suggest that ECB should hike by 50bp at their next meeting (4 May).
Bank of Canada left its policy rate unchanged at 4.50%, as was widely expected. Their accompanying statement and updated MPR did lower the near-term growth and inflation outlook, but also indicated potential for stickier core inflation into and through 2024. The BoC said that it was prepared to hike again if needed to achieve their inflation goals.
Interest rates
US bond yields fell after March US CPI showed prices slowed more than expectations. 2yr government bond yields fell 6bps to 3.96%, and 10yr government bond yields fell 4bps to 3.39%.
Australian bonds underperformed their US counterparts, 3yr government bond yields (futures) rose 1bp to 2.86%, and 10yr government bond yields (futures) rose 1bp to 3.23%. The AU-US 10yr bond spread widened following AU underperformance, currently at -16bps.
Credit markets were slightly wider with CDX +0.8 to 77.5bps and iTraxx Europe tighter -1.5bps to 83.0bps. Primary activity saw a relatively busy session in Europe with eight issues pricing totalling EUR6.1bn; whilst the skew was to covered bond issuance, Belgium based KBC Group’s 7NC6 bail-in notes tightened 27bps between IPT and pricing with 2.7x book coverage. In the US, Walmart tapped the market following the promising inflation data with a USD5.0bn five tranche offering which reportedly amassed more than USD27bn in orders before tightening.
Commodities
Crude markets hit highs for the year as Russian shipments dropped and inventory at Cushing fell for the sixth week. The May WTI contract is up $1.77 to $83.30 while the June WTI contract is up $1.67 to $87.28. WTI is up 10% so far this month, helped in large part by the surprise OPEC production cut. Bloomberg tanker tracking data showed Russian shipments falling below 3mbpd for the first time in 8 weeks following comments from Russian Deputy Prime Minister Novak late March that Russia would reach the pledged output cuts “in coming days”, aiming to “narrow the discount on its oil exports”. Prompt spreads have tightened sharply with WTI at highs back to November. EIA inventory data showed a 597kb crude build though crude exports fell by a hefty 2.5mbpd from recent record rates and SPR stocks fell by 1.6mb after falling 400kb in the previous week. Gasoline inventory fell 330k and distillate fell by 606k while Cushing fell another 409k, taking tanks near to the lowest level since January. IEA Executive Director Birol told an energy forum that OPEC’s surprise cut means that global oil markets could see tightness in the second half of 2023, which would push oil prices higher, warning that “there are good surprises and bad surprises in the world. For the global economy this is a bad surprise”.
Metals were modestly higher across the board with copper up 1.2% to $8,960, zinc up 1% to $2,786, aluminium up 0.9% to $2,324 and nickel up 0.8% to $23,670. Gold also spent all day above $2,000 though the slightly softer than expected headline CPI thwarted trade above $2,025. Severe tropical cyclone Ilsa is forecast to dump heavy rain inland, impacting Newcrest’s Telfer gold mine in the Great Sandy Desert.
Iron ore markets were mixed despite the approach of Cyclone Ilsa off the Pilbara coast. The May SGX contract is down $1.40 from the same time yesterday at $117.35 while the 62% Mysteel index is down 95c at $120.80. Mysteel reported that mills are having to cut prices to stimulate demand. Spot rebar prices have dropped to lows back to late December, suggesting demand has indeed been softer even as CISA data points to surging steel production and falling steel product inventory.
Day ahead
Australia’s March labour force survey is due at 11:30am Syd. The fading of earlier seasonality should see jobs growth return to a slower but still robust level; Westpac anticipates employment growth will print +25k, though risks are tilted to the upside (median forecast 20k, February +65k). With participation holding flat, the unemployment rate is expected to remain at 3.5% (median 3.6%).
Further detail around the return of Chinese arrivals into Australia will be the key focus of the March overseas arrivals and departures update. Meanwhile, Melbourne Institute inflation expectations should continue tracking a trend deceleration.
China’s trade surplus is set to rise in March after the seasonal decline associated with Lunar New Year (market f/c: $40bn versus $17bn in February).
Eurozone/UK: Energy-intensive sectors have been a drag on European industrial production as of late (market f/c: 1.0%). Meanwhile, the UK’s trade deficit should narrow over the course of this year given the mounting headwinds facing consumers (market f/c: -£4.9bn).
US: The annual rate of producer inflation will continue to decelerate sharply in March (market f/c: 3.0%yr). Initial jobless claims should meanwhile remain near a relatively low level for now (market f/c: 235k).
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