Markets Daily
Interest rates fell in response to weaker US and German economic data. The USD was mixed, AUD outperforming, up to 0.6740. Today’s calendar is dominated by flash April PMIs in the Eurozone, US and elsewhere, plus Japan March CPI.
Yesterday
The local focus was the release of the RBA external review, with media conferences by Treasurer Jim Chalmers and then RBA Governor Lowe. The government says it will accept all 51 recommendations, though that still leaves plenty of detail for the RBA itself to decide later this year. Most of the noteworthy recommendations were reported in media earlier in the week, including a separate monetary policy committee, 8 meetings per year and press conferences each meeting. AUD/USD was net unchanged on the day at 0.6710/15, with a range of 0.6697 to 0.6727. Equities were mostly a little softer.
Currencies/Macro
The US dollar was mixed on the day. EUR/USD ranged between 1.0934 and 1.0989 for little net change at 1.0970. GBP/USD was also choppy at times but eventually net unchanged at 1.2440. USD/JPY fell from 134.80 to a low of 134.02, mostly after the US jobless claims and Philly Fed data. AUD/USD showed notable strength, rising as far as 0.6772 then consolidating up 30 pips at 0.6740. NZD/USD remained weighed by the softer NZ CPI data, down a net -0.4% on the day at 0.6175. AUD/NZD extended its reaction to the NZ inflation data to 85 pips, printing three-month highs around 1.0920.
US weekly initial jobless claims rose to 245k (est. 240k, prior 240k), with continuing claims also rising, to 1865k (est. 1825k, prior 1804k). Claims data still indicates a solid labour market but is starting to trend in a weaker direction. The April Philadelphia Fed business survey index fell further to -31.3 (est. -19.3, prior -23.2) – the weakest since May 2020. The Conference Board’s leading index fell 1.2% (est. -0.7%, prior -0.5%) – the largest fall since April 2020. Seven of the 10 components were negative, led by building permits, new orders, and consumer expectations. Existing home sales in March fell -2.4% (est. -1.8%, prior +13.8%).
New York Fed president Williams said banking stresses could tighten credit: "the banking system is sound and resilient (but recent jitters) will likely lead to some tightening in credit conditions for households and businesses, which in turn will weigh on spending.” Cleveland Fed president Mester wants to raise rates "somewhat further into restrictive territory...with the funds rate moving above 5% and the real funds rate staying in positive territory for some time."
German PPI inflation in March fell -2.6%m/m and rose 7.5%y/y (est. -0.6% and +9.8%, prior +15.8%), mainly due to falling energy prices, although the core rate excluding energy still fell sharply to 7.9%y/y from 10.2%y/y.
Interest rates
US bond yields fell and the curve steepened following weaker US economic data. 2yr government bond yields fell 10bps to 4.14%, and 10yr government bond yields fell 6bps to 3.53%. Markets are pricing an 80% chance for a 25bp hike at the May FOMC meeting.
Australian bond yields fell, taking their trend from US price action but underperformed their US counterparts. 3yr government bond yields (futures) fell 3bps to 3.91%, and 10yr government bond yields (futures) fell 3bps to 3.47%. The AU-US 10yr bond spread widened on the back of AU underperformance versus the US, currently at -6bps.
Credit indices moved wider, with CDX at 77 (+2) and Main at 83 (+2), and cash spreads were wider in the US and marginally tighter in Europe. Primary issuance was subdued in the US, with a lone corporate pricing a USD400m transaction, though activity was more robust in Europe as four IG issuers priced ~EUR4.3b. Issuance was highlighted by Sydney Airport’s EUR1.0b 10yr transaction at MS+135 (IPT+165a) and Porsche’s 5yr EUR750m debut bond offering, with both corporates seeing strong order books of EUR3.9b and EUR5.0b respectively.
Commodities
Crude markets largely filled the post OPEC+ surprise cut gap as concerns about weaker global growth weighed on prices. The June WTI contract is down $2.15 at $77.09 while the June Brent contract is down $2.32 at $80.80. Bloomberg reported that Brent futures have seen a slump in trading because the dated Brent calculation will include WTI barrels from Midland from June. Meanwhile in the physical market, supplies from northern Iraq and Nigeria remain curtailed. The Iraqi PM was quoted as saying midweek that “today or tomorrow we will go to sign the agreements with the oil companies to resume exports”. However, there are no signs that a pipeline carrying circa 400kbpd has been reopened. On the potential for SPR purchases later this year, special presidential coordinator for global infrastructure and energy security Amos Hochstein did suggest that “as we get into the fall, if prices are in the right place, we are still 100% committed to replenishing the SPR over a period of time” though he did note that that “we cannot release, purchase and repurchase at the same time”. However, in a sign of weak demand for fuel, the May RBOB gasoline contract has fallen 8.8% so far this week while European May diesel futures are down 8% over the last week and close to 1 year lows. And in LNG news, FERC re-approved both the Rio Grande and Texas LNG gas projects at the port of Brownsville in Texas. The Rio Grande project is designed to produce 27mtpa of LNG while the Texas LNG would add 4mtpa.
Metals markets slid with copper and aluminium down 0.9% to $8,884 and $2,422 while nickel fell 1.8% to $25,090. Concerns about a possible US recession and weak global growth remain a potent cap on price gains. Chief China economist Jinny Yan for ICBC told the CRU World Copper Conference in Chile that strict Covid restrictions had “scarred” household consumption and that the much-anticipated Chinese rebound is yet to come. The IAI reported that global aluminium production fell 1%mm in March while Chinese production fell 1.5%mm. And Chile dropped the tax limit on the copper royalty bill to 47% of operating profits from 48% and for companies producing less than 80kt, the maximum tax burden will be 45.5%. Changes will be introduced to the bill over the weekend ahead of discussion at the Senate finance committee meeting Tuesday.
Finally note that iron ore markets slumped to lows for the year as concerns about steel demand and news of ample supplies from Rio hit prices. The SGX contract is down $3.50 from the same time yesterday at $112.95 while the 62% Mysteel index is down $2 to $117.95. The September Dalian iron ore contract hit lows back to early December, emphasising how much recent warnings from the NDRC that it will clamp down on manipulation and “unreasonable prices” are having on sentiment. Rio reported a Q1 record for shipments as it ramped up production from the Gudai-Darri mine. Mysteel reported that some mills in Tangshan are choosing to go into maintenance due to falling steel prices.
Day ahead
The day ahead will see S&P Global advance April PMIs for manufacturing and services for many economies including the US, Europe, and UK. These often move markets. Consensus on the Eurozone manufacturing PMI is 48.0, services a healthy 54.5. The UK PMIs are expected to be little changed on the month at 48.4 for manufacturing, 52.8 for services and the US 49.0 manufacturing, 51.5 services. The same surveys are due in Australia and Japan but are low profile.
Japan’s CPI inflation rate for March is expected to slip from 3.3% to 3.2%, on a smooth path to return to target. Base effects should keep the core measures above 3% for now. At its meeting one week from now, the Bank of Japan is likely to maintain its forecasts for inflation to weaken over the next two years.
The UK releases March retail sales data, with turnover volumes expected to remain weak, -3.1%yr ex-automotive fuel.
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