Markets Daily
US bond yields and the USD jumped on Friday after resilient retail sales and a rise in inflation expectations, plus some hawkish Fedspeak. AUD slid back to 0.6700. Today’s low-key calendar includes US Empire State manufacturing sentiment.
Friday
Severe tropical cyclone Ilsa hit northern Western Australia, the most powerful storm to hit that region in about a decade. The market focus was on the iron ore hub at Port Hedland, which escaped the path of the cyclone, the port reopening promptly. The data calendar was empty. AUD/USD mostly consolidated Thursday’s sharp gains, not attempting to break 0.6800, easing a touch lower to 0.6775. Regional equities were overwhelmingly positive, the ASX 200 closing up 0.5%.
Currencies/Macro
The US dollar index rose against all G10 currencies on the day. EUR/USD fell from 1.1060 pre-retail sales to 1.0990 early Monday. GBP/USD dropped from 1.2510 to 1.2415. USD/JPY followed the yield rise from 132.45 to 133.80. AUD/USD flickered up to 0.6806 in the immediate response to the US retail sales data but soon started sliding in line with the US$ rebound, to a low of 0.6695, starting the week just above 0.6700. The Kiwi underperformed, NZD/USD down about 90 pips or -1.4% to 0.6205. AUD/NZD starts the week up 30 pips versus Friday morning, just above 1.0800.
US consumer sentiment survey (University of Michigan) rose to 63.5 in April (est. 62.1), with gains in both current (68.6, est. 66.0) and expectations (60.3, est. 58.5) components. One year ahead inflation expectations rose from 3.6% to 4.6% (est. 3.7%), with the more important and 5-10yr ahead measure remaining at 2.9% (as expected).
US retail sales for March fell -1.0%m/m (est. -0.5%m/m), although the core control group fell only 0.3%m/m (est. -0.5%m/m). Industrial production rose 0.4%m/m (est. +0.2%m/m), with Feb. revised to +0.2%m/m from flat. Capacity utilisation rose to 79.8% (est. 79.1%).
Fed Governor Waller (hawk) said he favoured more monetary policy tightening to reduce persistently high inflation, although he said he was prepared to adjust his stance if credit tightens more than expected: “Because financial conditions have not significantly tightened, the labour market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further. How much further will depend on incoming data on inflation, the real economy, and the extent of tightening credit conditions.”
Chicago Fed president Goolsbee said central bank officials shouldn’t be too aggressive with further rate hikes in the wake of recent stress in the banking sector, though he said he wants to see more data before deciding what action he would support at the Fed’s next meeting: “Let’s just be mindful that we’ve raised a lot, it takes time for that to work its way through the system.”
Interest rates
US bond yields rose and the curve flattened following strong retail sales data and hawkish Fedspeak that have seen markets raise Fed hike expectations. 2yr government bond yields rose 13bps to 4.10%, and 10yr government bond yields rose 7bps to 3.51%. Markets are pricing an 80% chance for a 25bp hike at the May FOMC meeting.
Australian bond yields took its trend from US price action. 3yr government bond yields (futures) rose 10bps to 3.02%, and 10yr government bond yields rose 9bps to 3.41%. The AU-US 10yr bond spread widened following AU underperformance, currently at -11bps.
Credit recorded a positive end to the week with CDX tightening to 74 (-1) and Main at 82 (-1), while cash also moved tighter in Europe and the US. Primary issuance was muted, a result of bank earnings releases, with no issuers coming to market in the US. Europe saw 3 issuers price transactions totalling EU3.0b in aggregate, with Rabobank pricing a EU1.25b 6NC5 SNP deal and Credit Mutuel pricing a EU1.0b 6yr covered transaction.
Commodities
Crude markets rose Friday and saw gains for the fourth consecutive week helped by the recent OPEC+ cuts, signs of tightening in the physical market and a warning from the IEA that “oil market balances were already set to tilt into a substantial deficit. The latest cuts risk exacerbating those strains”. The May WTI contract closed up 36c Friday at $82.52 while the June Brent contract closed up 22c at $86.31. The IEA also noted that daily Russian oil exports average 8.1mbpd last month, the highest since April 2020, “as deep price discounts attract traders willing to risk handling the barrels”. Russian revenue from production was down 43%yy according to the IEA, meaning that sanctions were having the desired impact. The weighted average export price of Russian crude was $50.67 in March compared with the cap at $60. US diesel prices fell on the week though with the May NY ULSD contract closing at the low for the month as demand weakens due to a slowing economy, waning inventory cycles and high diesel inventories.
Metals saw solid gains on the week with zinc up 2% at $2,846, aluminium up 2.4% at $2,390 and copper up 3% at $9,044. Nickel jumped 3.8% on the week to $24,600. Copper inventory at LME warehouses around the world dropped the lowest level since 2005, down 42% so far this year. Stockpiles in China fell for the 7th consecutive week. It’s a big week for copper traders with World Copper Conference being held in Chile this week.
Iron ore markets closed at lows back to early January despite Tropical Cyclone Ilsa closing Port Hedland late last week. The May SGX contract is down $2.35 from the same time Friday at $114.40 while the 62% Mysteel index is unchanged at $118.55. Port Hedland reopened at 11am local time Friday with no signs of damage to infrastructure. The recent falls leaves the September Dalian contract at lows back to December 2022 while rebar prices have dropped to early December lows and coke prices are at lows back to November. That suggests we are seeing signs of slowing steel demand in China making this week’s China Q1 GDP and March IP plus quarterly production updates from BHP and Rio all the more important.
Day ahead
In the US, the New York Fed releases its April Empire State survey of regional manufacturing sentiment, seen improving slightly to -18 from a dismal -24.6 in March. Homebuilder confidence (NAHB) has partly recovered recently but remains at low levels. Mortgage rates are off their peak, but the outlook remains uncertain.
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