Markets Daily
Fed officials argued for further tightening but US equities and bonds were little changed and the USD somewhat softer. AUD rose to 0.6730. Today’s calendar includes UK March CPI and the Fed Beige Book.
Yesterday
The RBA Board’s April meeting minutes leant hawkish, including a considerable discussion of the case for raising rates once again rather than pausing. The Board also highlighted potential new inflation risks from unexpectedly strong immigration, which net it thought “could be somewhat inflationary for a period” plus “the increased risk of larger wage increases in parts of the economy, including in the public sector.” China’s activity data printed mostly firmer than consensus, including Q1 GDP growth accelerating to 4.5%yr and March retail sales surging 10.5%yr. Industrial production growth was below consensus but still picked up, to 3.9%yr in March from 2.4%yr in Jan-Feb. The combination of these releases 30 minutes apart helped the Aussie outperform G10 FX on the day, from 0.6700 pre-minutes to above 0.6735 in late trade. Regional equity sentiment was mixed, the ASX 200 joining the bourses lower on the day, -0.3%.
Currencies/Macro
The US dollar index snapped a 2-day rally, down 0.4% on the day. EUR/USD rose 45 pips to 1.0975, GBP/USD up 50 pips to 1.2425. USD/JPY fell 45 pips to 134.00. AUD/USD extended its local session rally to 0.6747 before consolidating around 0.6730, net up 0.4%. NZD/USD rose from 0.6180 to 0.6225 before consolidating near 0.6210. AUD/NZD reached 1.0871 – a three-month high – then returned to 1.0835.
US housing starts in March were 1.420m (annualised), slightly above the median estimate of 1.400m, while permits of 1.413m undershot the 1.450m median.
Atlanta Fed president Bostic (centrist) favoured one more 25bp rate hike to a 5.125% midpoint, and then a hold for "quite some time." He reiterated that the FOMC will do what it takes to get inflation down to the 2% target. The economy has outperformed expectations with aggregate demand extremely strong, and a recession is not his base case. On banking sector strains: “The acute tensions seem to be subsiding…What they’re (regional and community banks in the Southeast) telling me is that they’re not having their customers call them wondering whether they should move their money. They’re not seeing removals of deposits out of them and into larger banks.”
St. Louis Fed president Bullard (hawk) favoured several more rate hikes totalling 75bp, saying: “Wall Street’s very engaged in the idea there’s going to be a recession in six months or something, but that isn’t really the way you would read an expansion like this…The labour market just seems very, very strong…it doesn’t seem like the moment to be predicting that you have a recession in the second half of 2023.”
Canada’s CPI in March was broadly in line with expectations at 4.3%y/y (prior 5.2%y/y). The average of core measures was 4.5%y/y (prior 4.9%y/y).
Eurozone April ZEW surveys were mixed. German expectations fell to 4.1 (est. 15.6, prior 13.0), current conditions rose to -32.5 (est. 40.0, prior -46.5). Eurozone expectations fell to 6.4 (prior 10.0) and current conditions rose to -30.2 (prior -44.6).
UK unemployment in February rose to 3.8% (est. unchanged at 3.7%), with March payrolls missing expectations at 31k (est. 48k, prior revised to 39k from 98k). However, average weekly earnings in February remained at 5.9%y/y (est. 5.1%y/y).
ECB Chief Economist Lane repeated the ECB stance on inflation, which remains too high despite shocks receding, and that the ECB should hike at its next policy meeting.
Bank of Canada Governor Macklem said that policy needs to stay high for longer, and that central banks had more work to do to get inflation back to target, but also acknowledged encouraging declines to date. He added that Canadian demand continues to run ahead of supply.
Interest rates
US bond yields fell slightly as markets continue to recalibrate its Fed hike expectations. 2yr government bond yields finished the session flat on the day at 4.20%, and 10yr government bond yields fell 2bps to 3.58%.
Yesterday’s RBA Board meeting minutes showed the RBA considered a case for a 25bp hike vs pause in the April meeting, saying that the month of April will be to “gather more information”. 3yr government bond yields rose 6bps to 3.12%, 10yr government bond yields rose 5bps to 3.52%. The AU-US 10yr bond spread narrowed following AU underperformance, currently at -6bps.
Credit continued to grind tighter, with CDX at 74 (-) and Main at 81 (-1), and cash was tighter in both the US and Europe. Primary issuance continued in Europe with 5 IG issuers pricing transactions for EU3.5b in aggregate, with deals of note including Transurban’s EU650m 10Y at MS+115 (the company’s first visit to Europe in three years, with the order book totalling EU3.75b and the deal tightening from an IPT of MS+150a), National Bank of Canada’s 5Y covered transaction, and a 7Y green bond from Acciona Energia. Primary in the US comprised of three deals totalling USD6.5b, with CK Hutchison, Ontario Teachers' Finance, and JBIC pricing transactions.
Commodities
Crude markets slipped a little further as signs of softening in demand weighed on prices. The May WTI contract is down just 4c at $80.79 while the June Brent contract is down 6c at $84.68. China’s processing of crude rose to 63.3mt in March, a record 1 month high. However, in another sign of waning global demand, exports of diesel fell 43% versus the average for the same month in the last 5 years while exports of gasoline fell 52%. Investor demand for crude is also showing signs of slowing with the four largest oil ETFs posting net outflows for the last 4 weeks. That’s the longest run of outflows since July last year as investors look to book profits post the OPEC+ production cut induced rally.
Metals markets jumped helped by the stronger China Q1 GDP and signs that a key vote for a mining royalty bill in Chile may pass in the congress this week. Copper is up 0.4% to $9,002 while aluminium is up 2.6% at $2,439. Nickel jumped another 3.7% to $25,615 while tin rose another 1.7% to be up 17% in the last 5 sessions. CESCO Week has started in Chile with traders, bankers and producers converging on Santiago. The Chilean government expects the amended Mining Royalty Bill to pass congress this week with the maximum tax rate for copper producers reduced to 48% from the previously proposed 50% of operating profits. The senate’s finance committee was set to vote Tuesday with a full senate vote due Wednesday and the bill set to return to the house for a final vote soon assuming the senate passes the amended bill. Anglo received approval on a $3bn overhaul of its Los Brocos copper mine in Chile. Alcoa will report its first quarter results on Wednesday.
Finally note that iron ore markets bounced on strong Chinese steel production data. The May SGX contract is up $1.25 to $118.60 while the 62% Mysteel index rose 90c to $119.95. China produced 95.73mt of steel in March, up 6.9%yy with crude steel production ytd up 6.1% versus last year. March production was up 15% versus the average for the same month over the last 5 years. Steel product production also rose 8.1%yy in March with year to date production up 5.8%yy. Still, iron ore prices remain below $120 following recent warnings from the NDRC over ‘price gouging’. Rio will report quarterly production data Thursday while BHP will report Friday.
Day ahead
Australia: Some improvement in the Westpac-MI Leading Index may be on the cards given the notable improvement in consumer sentiment.
Japan: The final estimate to February’s industrial production is due.
Eurozone/UK: The March CPI report in the UK is set to show moderating headline inflation pressures but only a modest easing in core inflation (market f/c: 9.8%yr headline; 6.0%yr core).
The final estimate to March’s CPI is also due for the Eurozone (market f/c: 6.9%yr).
US: The Federal Reserve’s Beige Book will provide a comprehensive update on conditions across the 12 Fed districts.
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