Markets Daily
US regional bank sector concerns weighed on risk sentiment again overnight, the S&P500 down 0.7%. Short maturity bond yields fell, while currencies were mixed. The ECB and Norges both hiked by 25bp as widely expected.
Yesterday
Australia’s trade surplus climbed to the second largest on record in March, +$15.3bn versus +$14.2bn in February. Exports rose 3.8%, led by resources such as iron ore and lithium but services (tourism and education) also continue to rebound. Imports rose 2.5%, led by motor vehicles and other consumption goods. Risk sentiment was very negative early in the wake of more US banking sector jitters which hurt oil prices and drove demand for havens gold and US Treasuries. In this wave, AUD slipped to 0.6640, but sentiment improved once China mainland markets reopened after holidays. AUD squeezed as high as 0.6699 before steadying around 0.6670. The ASX 200 closed about flat as Hong Kong and Shanghai rallied.
Currencies/Macro
US banking sector concerns weighed on risk sentiment, the S&P500 falling 0.7% while the VIX volatility “fear gauge” spiked higher. The rout in regional US bank stocks sent the KBW broad banking index down 4%, taking its loses to 10% over the past three days. Short maturity bond yields fell, while currencies were mixed.
Underperformer EUR fell from 1.1082 to 1.0986 after the ECB opted to hike rates by 25bp before retaking the 1.10 level. Safe haven demand amid the US banking sector rout boosted JPY, with USD/JPY falling from 134.88 to 133.50. AUD rose from 0.6660 to 0.6706. Outperformer NZD rose from 0.6240 to 0.6299, while AUD/NZD fell from 1.0700 to 1.0623.
The ECB hiked rates by 25bp, as was widely expected, taking the deposit rate to 3.25%. It also said that reinvestment of APP would cease in July. Lagarde, in the press conference, repeatedly stressed that the ECB consider that they have more work to do in order to have policy “sufficiently restrictive” to contain inflation that remains “too high”. Both the statement and Lagarde referred to the lagged effects of their cumulative hiking starting to be more evident.
Norway’s central bank, Norges Bank, hiked by 25bp to 3.25%, as was widely expected. Officials said the policy rate will “most likely” be raised further next month, in line with the March projection of reaching 3.5% by summer. Recent NOK weakness was noted.
US nonfarm productivity in Q1 fell 2.7% (est. -2.0%, prior +1.6%). Unit labour costs rose 6.3% (est. +5.6$, prior +3.3%).
Interest rates
US 2yr treasury yields fell from 3.87% to 3.66%, currently 3.76%, while the 10yr yield fell from 3.41% to 3.29%, currently 3.36%. Markets currently price the Fed funds rate to be 8bp lower at the next meeting in June, and around 95bp lower by year end.
3yr government bond yields (futures) fell from 3.00% to 2.82%, while the 10yr yield fell from 3.35% to 3.23%. Markets currently price the RBA cash rate, currently 3.85%, to be 2bp higher at the next meeting on 6 June, with a peak of 3.88% priced for August.
Credit spreads for both cash and synthetic were dragged wider by the banks with Main out 4bp to 90.5 and CDX 1.5bp wider at 83.5 (off wides of 85), while US cash spreads were 3-5bp wider with banks underperforming that move and regional banks in particular seeing significant weakness. The volatility and rolling central bank updates have curbed primary activity.
Commodities
Crude markets tested pre-OPEC production cut lows while fuels crashed to fresh multi year lows as weak Asian demand and a Saudi price cut added to negative sentiment. The June WTI contract is closing down just 4c though at $68.56, but that is after a crash below the March lows while the July Brent contract is up 21c at $72.54. Saudi Arabia cut its selling price for Asian customers for the first time in four months, with the spread for Arab Light falling 25c. Both WTI and Brent markers are down circa 15%ytd with OPEC set for its only second in person meeting since the outbreak of Covid in Vienna on June 3-4. Russia’s Deputy Prime Minister said, “we will monitor the market”.
Meanwhile in fuel markets, the August European thermal coal contract hit fresh 15-month lows, June RBOB gasoline contract tested 16-month lows, the NY diesel contract hit fresh 17-month lows and European natural gas prices fell to fresh 21-month lows. India amended its draft power policy to halt new coal-fired capacity. India and China account for 80% of all active coal projects, though the change would not impact the current 28.2GW of coal-based projects in construction according to Reuters.
Metals were weaker with aluminium down 1% at $2,295 while nickel fell 3% to $24,000 though copper managed again to hold above $8,500, last up 0.8% at $8,535. Chile lifted its copper price forecast citing tight supplies with global warehouse stockpiles at just 3 to 4 days of global consumption. The countries Copper Commission lifted its forecast for copper prices for this year from $3.85/lb to $3.90/lb and $3.80 next year from $3.65. Chile also announced it was opening public discussions over increasing copper processing. Gold tested 15-month highs with trade above $2,060, rising 0.5% on the day to $2,050.
Finally note that the return of Chinese markets saw iron ore plunge below $100, with the June SGX contract last at $96.60 though the 62% Mysteel index is down just $1.15 to $102.85. Billet prices slipped to fresh 2 ½ year lows as steel mills slashed prices. The post Golden Week holiday period normally marks the peak construction period and steel mills restocking, though the unexpected contraction in the manufacturing PMI and new orders in the steel PMI to below 40% is hitting sentiment.
Day ahead
Australia: The RBA’s Statement on Monetary Policy will provide a full update on the Board’s forecasts and outlook for the broader economy. In line with the recent stabilisation the housing market, housing finance approvals should continue to post only modest declines in March (Westpac f/c: -0.3%), though weakness in owner-occupier loans are set to outstrip that of investor loans (Westpac f/c: -0.5% and 0.0% respectively).
China: The Caixin services PMI should continue to exhibit great strength in April (market f/c: 57.0).
Eurozone: Another decline in retail sales is anticipated in March, reflecting the intense pressures facing European households (market f/c: -0.2%).
US: Other surveys are pointing to a continued downtrend in non-farm payrolls growth in April (Westpac f/c: 150k; market 183k), which should see the unemployment rate trend upwards over the coming months (Westpac and market f/c: 3.6%). With slack gradually emerging, average hourly earnings growth will begin to recede towards average (Westpac f/c: 0.2%; market 0.3%). With pressures mounting, demand for consumer credit will remain relatively subdued (market f/c: $16.75bn). The FOMC’s Bullard and Cook are also due to speak.
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