Markets Daily
Amid month-end rebalancing, US equities rose and bond yields fell. Currencies were mixed, JPY extending losses post-BoJ and AUD a touch softer at 0.6610. Many markets including the UK, Germany and China are closed for a holiday today but in the US we will see the April manufacturing ISM.
Friday
The first policy meeting under Bank of Japan Governor Ueda largely matched expectations. Key policy settings were unchanged – the 0% 10yr JGB target +/-0.50%, the -0.1% policy rate which pre-dates the pandemic, unlimited JGB purchases to maintain yield curve control. Quarterly forecasts were also about as expected, CPI ex-food and energy for FY23 raised to 2.5% from 1.8%yr in January, but a 1% handle for both FY24 and the first stab at FY25. GDP is seen up 1.4% this year, slipping thereafter. The Bank dropped guidance on future interest rates being at current or lower levels, including the reference to “closely monitoring the impact of COVID-19.” The BoJ also announced a “broad-perspective review” that will take 12-18 months. USD/JPY popped up from 133.80 to 134.90, later extending above 135.50 during the Ueda press conference. Australia March private credit rose 0.3%mth, 6.8%yr, the slowest annual pace since Nov 2021. Australia producer prices rose 1.0%qtr, 5.2%yr. AUD/USD spent hours around 0.6630, then followed a broad USD move down to 0.6590. Regional equities were mostly up sharply but ASX 200 only 0.2%.
Currencies/Macro
The US dollar was quite mixed on Friday. EUR/USD ranged between 1.0963 and 1.1045, overall little changed at 1.1020. GBP/USD bounced 0.5% to 1.2565, with a high of 1.2584, its strongest point since June 2022. Despite the fall in US Treasury yields, USD/JPY extended its reaction to the Bank of Japan meeting, reaching a high of 136.56 versus 133.80 pre-BoJ and starting the week around 136.20. AUD/USD dipped as low as 0.6574 and starts the week around 0.6610, down about 20 pips from Friday morning. NZD/USD rose 0.5% to 0.6180, the Kiwi outperformance cutting AUD/NZD from 1.0780 to 1.0700.
Released over the weekend, the CoreLogic Australia home value index posted another solid increase in April, 0.7%mth after 0.8%mth in March.
Also over the weekend, China’s official April PMIs were softer than expected, manufacturing down to 49.2 from 51.9 in March and the services index easing to a still strong 56.4 from 58.2.
US personal income in March rose 0.3%m/m (est. +0.2%m/m), with spending flat (est. -0.1%m/m). The core PCE deflator rose +0.3%m/m and 4.6%y/y (as expected, although Feb. was revised from 4.6% to 4.7%y/y). The Chicago PMI index in April beat expectations at 48.6 (est. 43.6, prior 43.8), with employment rising to 51.2, and production rising to 47.9. Consumer sentiment (University of Michigan) was little changed in the final April reading at 63.5. The 1yr-ahead inflation expectation component remained at 4.6%, but the 5-10yr-ahead level rose to 3.0% (from 2.9%).
Newswires reported that the US Federal Deposit Insurance Corporation (FDIC) received bids to buy First Republic Bank from three banks, while two other banks were invited to bid but declined.
Eurozone Q1 GDP rose 0.1%q.q (est. +0.2%q/q) and 1.3%y/y (est. 1.4%y/y), with Q4 revised to -0.1%q/q (from flat). Weakness in German activity weighed on the Eurozone outcome. German CPI in April was slightly softer than expected, rising 0.4%m/m and 7.2%y/y (est. 0.6%m/m and 7.3%y/y, prior 7.4%y/y).
Interest rates
US bond yields fell and the yield curve flattened, as markets look towards the FOMC meeting later this week, where markets are attributing a 90% chance for a 25bp hike. 2yr government bond yields fell 6bps to 4.01%, and 10yr government bond yields fell 10bps to 3.42%.
Australian bond yields took its trend from overnight US price action, as markets look towards tomorrow RBA meeting, where only a 10% chance is priced in for a 25bp hike. 3yr government bond yields (futures) fell 1bp to 2.97%, and 10yr government bond yields (futures) fell 3bps to 3.30%. The AU-US 10yr bond spread narrowed during the Friday day session, currently at -15bps.
Credit spreads were fairly subdued on Friday with Main a bp tighter at 83, however this saw the index 7bp tighter on the month, while CDX was half a bp better at 76 (flat for the month on a range of 72-81), with US cash spreads little changed for the day and the month (~3bp tighter for the month). It was a quiet session for primary activity and April has now seen USD62bn of IG supply, well below expectations of ~USD100bn (supply now USD456bn ytd). Hopes for supply this week are likely to require a quick start ahead of the Fed later in the week, however May Day holidays in Europe and Asia may be a headwind.
Commodities
The improved risk sentiment lifted crude prices into the end of the week and month on Friday though only after the OPEC gaps were filled mid-week. The June WTI contract closed up $2.02 at $76.78 while the July Brent contract closed up $2.11 at $80.33 though both contracts closed down circa 1.5% on the week as falling profit margins from Asian refiners weighed on sentiment. Exxon and Chevron reported a collective $18bn in Q1 profits, more than double the quarterly averages for the past 10yrs according to the WSJ. Profits were a quarterly record for Exxon. In gas markets, prices in the UK dropped almost 8% last week to fresh 21-month lows, with the discount to prices in Europe widening sharply. Shell sold its 27% stake in the Browse LNG project in Australia to BP. Australia may extend an A$12 per gigajoule ($7.60mmbtu) price cap imposed in December last year until at least 2025.
Metals stabilised for a second day after the sharp falls mid-week took the likes of copper towards early January lows below $8,500. Copper closed 0.1% up on the day Friday at $8,595 while aluminium rose 1.55% to $2,355. The International Copper Study Group said it now expects a copper deficit of 114kt in 2023 after forecasting a surplus of 155kt in September last year, helped by “the reopening of China after the zero-Covid policy [and] a recovery in the rest of the world from constrained demand in 2022”. The spread between spot and the 3-month aluminium contract flipped to the highest positive price seen since October last year, suggesting physical demand is picking up.
Iron ore and steel markets softened into the end of the week, adding to the worst month since October, driven by demand concerns in China. The May SGX contract is down 85c from the same time Friday at $104.30 while the 62% Mysteel index fell $1.20 Friday to $106.70. Baowu Steel noted that the domestic and global environment for steelmakers remains “severe”, very much in line with warnings from CISA earlier in the week that the “rapid decline in steel prices in the domestic market [is] posing severe challenges to the production and operation of steel enterprises”. China is now in Golden Week holiday this week and we would normally see a period of restocking when the market returns post the holiday.
Day ahead
Australia: The moderation ANZ job ads should persist in April. The April Melbourne Institute inflation gauge will also provide a general view of inflation risks; the March reading was 0.3%mth, 5.7%yr.
Japan: The final estimate to April’s Nikkei manufacturing PMI is due.
It is a public holiday in many jurisdictions including Queensland, the UK, Germany, France, China (closed until Thursday), Singapore, Hong Kong and Taiwan.
US: The ISM manufacturing PMI is expected to hold in weak territory in April, reflecting a challenging outlook (market f/c: 46.8 versus 46.3 in March). The final estimate to April’s S&P Global manufacturing PMI is also due (market f/c: 50.4). Softening demand will likely see construction spending remain subdued in March (market f/c: 0.1%).
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