Markets Daily
US bond yields rose further, as Friday’s strong jobs data continued to resonate. Commodity FX outperformed, AUD up to 0.6780. London’s holiday dampened turnover. Today’s calendar includes Australia’s federal budget and Q1 real retail sales plus China April trade balance.
Yesterday
The April NAB business survey (conducted late April) showed the business conditions index declined by a further 2pts to be at +14 in April. That has the index well down from the highs of around +24 during Q2 and Q3 last year but still consistent with solid activity. The confidence index was little changed at 0 versus -1 in March. Australia March building approvals were about flat (-0.1%) in February, with private detached houses -2.8% after +11.3% in February. AUD/USD extended Friday’s rally, up another 40 pips to 0.6785, on track for a sixth consecutive daily gain. Regional equities mostly took their cue from Wall Street’s strong lead, the ASX 200 up 0.8% and China stocks particularly upbeat.
Currencies/Macro
The US dollar was barely changed against most G10 FX but underperformed against commodity currencies. EUR/USD fell 15 pips to 1.1005. GBP/USD was a touch lower at 1.2620 with UK markets closed for the second of three Monday holidays this month. USD/JPY rose from 134.80 to 135.10, safe-havens yen again underperforming. AUD/USD extended its local session rally as far as 0.6804 before easing back to 0.6780, net +0.5% on the day. Outperformer NZD rose from 0.6295 to 0.6345. AUD/NZD fell 35 pips to 1.0685.
US wholesale trade sales fell -2.1% in March (est. +0.4%, prior 0.4%), while inventories were finalised at flat (est. and prior +0.1%). The Fed’s Senior Loan Officer Survey revealed slightly tighter credit conditions. For business loans, the percentage of banks reporting tighter standards and weaker demand edged up to 46% from 44.8% in the Q4 survey.
The ECB's Knot indicated more hikes are likely: "the real problem at the moment is that core inflation is still too high".
Interest rates
US bond yields rose, continuing the Friday sentiment following payrolls data, and markets recalibrate expectations on Fed rate hikes to come. Markets are pricing in a 10% chance for a 25bp hike at the June FOMC meeting. 2yr government bond yields rose 9bps to 4.00%, and 10yr government bond yields rose 7bps to 3.51%.
Australian bond yields took their trend from US price action, as domestic markets wait for the Federal budget to be delivered tonight. 3yr government bond yields (futures) rose 6bps to 3.11%, and 10yr government bond yields (futures) rose 7bps to 3.48%. The AU-US 10yr bond spread widened on the back of AU underperformance, currently at -3bps.
Credit spreads opened the week wider with CDX out half a bp to 81 and US cash credit also 1-2bp wider, however the focus last night was in the primary space. With London out for one of its 3 long weekends in May it was a very quiet session in Euro credit, however the same cannot be said for the US where 11 IG deals were completed for USD22.55bn with banks notably absent from the docket as corporate issuers look to get ahead of US CPI on Wednesday. Merck led the way with its USD6bn 6-part deal (5-40yr) that will partly fund the Prometheus acquisition, Apple priced USD5.5bn (1-30yr) post earnings, T-Mobile also completed a USD3.5bn offering (5-30yr) and CAT priced a USD1.25bn 3yr at T+65 (BBSW+79).
Commodities
Crude markets bounced for the second day as the oversold conditions brought back buyers, wildfires in Canada impacted supply and fuels jumped. The June WTI contract is up $1.52 at $72.86 while the July Brent contract is up $1.40 at $76.70, and the June gasoline contract jumped 3.1% while the May European fuel oil contract jumped 4.6%. A total of 102 fires are burning across Canada and the province of Alberta declared a state of emergency with at least 145kbpd of oil and gas being impacted. Top Republicans have called for an audit of the SPR in a letter sent to the Government Accountability Office. The letter said that “management of the SPR has undermined America's energy security”. Energy Secretary Jennifer Granholm has said the Department of Energy will refill the reserve when prices are “advantageous to the taxpayer”. Meanwhile gas prices jumped on the wildfires in Canada, the June Henry Hub contract up 4.3%.
Metals rose on talk of China stimulus with copper up 1% to $8,580, aluminium up 1.5% to $2,321, zinc up 2.2% to $2,681 and nickel up 3% to $24,705. There was little fresh industry news though comments from President Xi at a Central Financial and Economic Affairs Commission meeting on Friday highlighted industrial security as a “priority of priorities” prompting the likes of Goldman Sachs and OCBC to suggest the government may announce specific measures to address challenges in coming months including subsidies for manufacturing and changes to education policies.
Finally note that iron ore markets jumped as traders saw the recent slump as being overdone as the market has dropped circa 25% from the March highs. The June SGX contract is up $5.05 at $104.40 while the 62% Mysteel index jumped $7 to $109.15. CISA data showed steel inventory at Chinese mills down 2.3% to 18.1mt in late April compared to mid-April though that is circa 17% above the average level for the same time of year over the last 3yrs. Steel production at major steel mills fell 3.6% to 2.21mt per day in the third ten days of the month to be 2% below the average of the same period over the last 3yrs.
Day ahead
Australia: With nominal sales having stalled flat at a time of large price increases, real retail sales is set to be substantially negative in Q1 (Westpac f/c: -1.0%, due at 11:30am Syd).
Australia's 2023/24 federal budget (7:30pm Syd) is set against the backdrop of high inflation and sharply higher interest rates, which is placing considerable pressure on household incomes. The budget will attempt to deliver some relief for the most vulnerable households, balanced against the need for restraint in terms of the impact of fiscal policy on the economy. The federal budget profile has improved relative to that in the October budget - with national income stronger than official forecasts and given ongoing labour market strength. On our figuring, the budget deficit for the four years to 2025/26 has improved by $110bn due to the “stronger economy”. Some of this will be deployed to meet the cost of net new spending, as well as the escalating cost of existing programs – the scale and dimensions of these forces is unclear. Local media report that a $4bn surplus will be announced for the year to June 2023.
China: The trade surplus is expected to narrow in April on weaker export values (market f/c: $71.3bn). Ongoing robust growth in M2 money supply and new loans should also remain present (market f/c: CNY1400bn and 12.5% respectively). Note that the M2 and credit data is due between May 9th-15th.
US: NFIB small business optimism is set to weaken further in April given the emerging evidence of tightening credit standards post-SVB (market f/c: 89.8). The FOMC’s Jefferson and Williams are due to speak at different event.
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