Markets Daily
US yields and the US dollar bounced on stronger manufacturing data. US equities were little changed and major European markets were closed. AUD outperformed slightly, at 0.6630. Today’s calendar features the RBA policy decision then a speech by Governor Lowe and Eurozone April CPI.
Yesterday
Trade was muted given holidays in many countries including China, Singapore, Hong Kong and most of Europe. The ASX 200 closed up 0.4%, Japan’s Topix +1.0%. The Aussie was quiet around 0.6610-20 for some hours, then nudged up to 0.6640. Australia’s calendar is busy this week but not so much on Monday. The Melbourne Institute inflation gauge rose 0.2%mth, 6.1%yr while ANZ-Indeed Job Ads edged down -0.3% in April.
Currencies/Macro
The US dollar rose against most major currencies on the day as yields rose on the ISM data. EUR/USD fell from 1.1020 to 1.0964 after the ISM report, later steadying around 1.0975. GBP/USD fell 75 pips or -0.6% over the day to 1.2495. USD/JPY was already up 60 pips on the day at 136.80 before the US data, then extending to 137.53 – a two-month high. AUD/USD initially rose to 0.6668 before falling to 0.6630 in the wake of the ISM data, still up a net 0.2% on the day, strongest in the G10. NZD/USD peaked at 0.6200 before falling to 0.6165. AUD/NZD rose 0.5% to 1.0750.
US ISM manufacturing in April was stronger than expected at 47.1 (est. 46.8, prior 46.3). All major components – prices paid, employment, and new orders – rose. The 53.2 for the prices paid index was a high since July 2022. Construction spending in March rose 0.3% (est. 0.1%, prior revised from -0.1% to -0.3%).
US regulators announced JPMorgan Chase & Co will acquire First Republic Bank. JPMorgan will take over the bank's assets, including around US$173 billion loans, $30bn securities, and$92bn deposits. JPMorgan and the Federal Deposit Insurance Corp. agreed to share the burden of losses, as well as any recoveries on the firm's single family and commercial loans.
Interest rates
US bond yields rose across the term structure following strong US ISM data, as markets await Wednesday’s FOMC meeting. 2yr government bond yields rose 13bps to 4.14%, and 10yr government bond yields rose 15bps to 3.57%.
Australian bonds took their trend from US price action but outperformed their US counterparts. The focus today will be the May RBA board meeting, where markets are largely expecting the RBA to hold policy rates (10% priced in for 25bp hike). 3yr government bond yields rose 6bps to 3.05%, and 10yr government bond yields rose 8bps to 3.44%. The AU-US 10yr bond spread widened following AU outperformance, currently at -15bps.
US cash credit was firm last night, however CDX closed 2bp wider at 77.5, underperforming both cash credit and equity, however primary activity was the main focus. Supply in the US was expected to be front loaded this week ahead of the Fed and Monday saw a strong open for corporate markets with 11 issuers pricing USD22.6bn and banks notably absent as JPM completed the FRC transaction. We saw jumbo deals from Meta, who priced an USD8.5bn 5 tranche transaction (5-40yr, NIC 12-15bp), Comcast with USD5bn across 4 parts (5-41yr, NIC 5-10bp) and HCA priced USD3.25bn from 5-30yr (NIC 3-5bp), all of which included long dated tranches.
Commodities
Crude markets gave back much of Friday’s end of month gains with concerns about a Fed hike and stronger US$ plus the weaker than expected weekend China data weighing on sentiment. The June WTI contract is down $1.06 at $75.72 while the July Brent contract is down 96c at $79.37. There was little fresh news with both the UK and China on holiday. JP Morgan did report that low diesel prices are weighing on crude prices, “spurring worries of an impending recession”. Biofuels’ share of total US diesel supply is set to grow from 4% in 2022 to 15% by 2030 according to JP Morgan, marking a permanent shift in demand. Meanwhile coking coal markets remained in “freefall” with May SGX Australia coking coal swap down circa 20% last month and at 16-month lows with lack of Chinese demand the key driver.
Metals were sidelined with the UK bank holiday and China Golden Week limiting activity. Iron ore markets were also closed due to the Singapore holiday. Tata Steel will report earnings on Tuesday while ArcelorMittal will report on Thursday.
Day ahead
The RBA Board holds its May meeting today in Perth (announcement 2:30pm Syd), Westpac anticipates that the RBA will keep the cash rate on hold at 3.60%. The Q1 CPI report delivered a downside surprise on underlying inflation, with the trimmed mean measure printing 1.2% (6.6%yr), well below the market’s expectation and our own. This was largely associated with a broad-based step-down in the pace of goods inflation (9.5%yr to 7.6%yr). While annual services inflation experienced another large rise, it was not enough to offset the disinflation amongst goods components, resulting in a further moderation in headline inflation from 7.8%yr to 7.0%yr. Relative to the RBA’s February forecasts, the easing in annual headline inflation is running ahead of expectations. Hence, we believe the cash rate is currently at a level that will prove to be the peak for this tightening cycle.
RBA Governor Lowe is due to speak to a dinner in Perth, starting at 9:20pm Syd time.
European markets reopen after the long weekend, as does most of Asia – China the exception, closed until Thursday.
The Eurozone’s April CPI report will provide a crucial update on services inflation ahead of the ECB policy meeting later this week. The median forecast is 7.0%yr versus 6.9%yr in March and 5.6%yr on the core measure versus a euro area record high 5.7%yr in March.
Nationwide house prices in the UK should post another decline in April (market f/c: -0.5%). The final estimate to April’s S&P Global manufacturing PMIs are also due for both Europe and the UK.
US: JOLTS job openings are expected to move clearly lower in March after tracking broadly sideways for many months (market f/c: 9725k). After two months of moderate declines, only a partial rebound in factory orders is anticipated in March (market f/c: 1.3%).
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