Markets Daily
A mild risk-off tone was evident in European and US trade, equities closing lower and AUD slipping to 0.6760. Australia’s budget was received calmly, with key parameters well flagged in advance. Today’s calendar is light ahead of US April CPI.
Yesterday
Australia real retail sales fell -0.6% in Q1 following on from a -0.3% decline in Q4. The back-to-back falls mark the biggest six-month contraction in retail sales volumes since 1986 (excluding the COVID and GST introduction periods). Annual growth in sales volumes slowed to 0.3%yr – stalling speed, and a material -1.3%yr contraction in per capita terms. The detail shows weakness in the quarter centred on household goods. China’s April trade surplus was well above expectations, a massive $90bn, with export values +8.5%yr and import values -7.9%yr, the latter weighed by lower commodity prices. China’s imports from Australia rose 22%yr. AUD/USD was quiet for some hours, mostly trading around 0.6775-85, but slid towards 0.6760 in late trade as China and Hong Kong stocks rolled over. The ASX 200 opened heavily, then trimmed losses to -0.2%.
Currencies/Macro
The US dollar was little changed against most major currencies on the day but a bit firmer against Scandis, euro and the Aussie. EUR/USD fell 40 pips to 1.0965. GBP/USD was about flat at 1.2620, as EUR/GBP slipped to lows since December 2022. USD/JPY was a touch higher at 135.20. AUD/USD fell as far as 0.6747 then trimmed losses to about 20 pips, at 0.6760. NZD/USD is a touch lower on the day at 0.6335. AUD/NZD fell 20 pips to 1.0670.
Australia’s federal budget projected a return to a surplus for the first time since 2008, before returning to a deficit in 2023/24. Net debt is forecast to rise from 21.6% GDP at June 2023 to a still modest 24.0% GDP in 2025/26 (reduced from 28.5% of GDP in the October Budget).
The US NFIB April small business sentiment survey fell to a new decade low at 89.0 (est. 89.7, prior 90.1). The survey showed continuing concerns over tightening credit conditions and policy but also signs that less firms were looking to lift prices.
NY Fed president John Williams said they will monitor the "totality of the data", and be particularly focused on credit conditions into the upcoming June FOMC. He is confident that the Fed is on the path toward restoring price stability, although inflation is still too high, and labour demand remains strong albeit gradually slowing. He added: “I do not see in my baseline forecast any reason to cut interest rates this year…In my forecast we need to keep the restrictive stance of policy in place for quite some time.”
Fed Governor (and potential Vice Chair) Philip Jefferson reiterated that the banking system is sound and resilient, and “we have the data showing that banks have started to raise lending standards and that has contracted the availability of credit…That is typical for where we are in the economic cycle.”
There was a flurry of ECB speakers throughout the day. The hawks said inflation remains too high, while the centrists said it was appropriate to reduce the pace of tightening, All reiterated the need for further tightening.
Interest rates
US bond yields rose slightly on Tuesday, as markets consolidate following last week’s strong payrolls data. 2yr government bond yields rose 2bps to 4.02%, and 10yr government bond yields rose 1bp to 3.52%.
Australian bond yields took their lead from US rates markets, as the government delivered its federal budget last night. 3yr government bond yields (futures) rose 2bps to 3.10%, and 10yr government bond yields (futures) rose 2bps to 3.47%. The AU-US 10yr bond spread narrowed slightly on the back of AU outperformance during the day session, currently at -5bps.
Credit indices reflected the cautious stance with Main out 2bp to 88.5 as it played catch up post the long weekend and CDX another bp wider at 82.5, however cash spreads were more contained (flat to a bp wider) as the market remained focused on supply. Europe returned post the London holiday with 18 issuers pricing ~EUR15.2bn. Supply included 9 corporate deals with Ford Motor pricing a EUR600M 5yr and BP completing a dual currency offering including EUR 1.5bn (7/12yr) and USD (10yr) tranches. There were also 9 financial deals with NatWest Group pricing a EUR1bn 4.75yr callable at MS+175bp (BBSW+235) and NAB’s completing a GBP1.25bn long 3yr at SONIA+60 (BBSW+76). The volume of US supply slowed from Monday as 4 issuers came to market to price USD4.9bn with talk that other potential issuers had opted not to proceed with deals last night. Estee Lauder was the largest deal on the night, pricing USD2bn across 3 tranches (5-30yr) with energy players (BP’s USD leg and ConocoPhillips USD1.1bn 30yr) also in the mix.
Commodities
Crude markets saw a further modest leg higher helped by talk of plans to refill the US SPR. The June WTI contract is up 36c at $73.52 while the July Brent contract rose 26c to $77.27. The US Energy Department released a statement confirming that the administration “remains committed to refilling the SPR in a manner that will deliver the best value for American taxpayers and protect the US national security interests”. However, any moves to refill will have to wait until later in the year when maintenance is completed. Russia’s oil ministry suggested it had almost hit the pledged crude cuts in April, with calculations pointing to output at 9.67mbpd, down by 433kbpd from February. Meanwhile in Canada, rain is being forecast for areas in Western Canada impacted by a spate of wildfires which would allow production to return quickly. About 15% of Canada’s gas output and at least 234kbpd of crude production has been impacted by the raging fires. Meanwhile gas prices rose in the US with the June Henry Hub contract up 1.3% helped by the Canadian wildfires. Prices in Asia continue falling though despite a brutal heatwave in southern Asia as an emerging El Nino pushes temperatures to records. Vietnam recorded its hottest ever temperatures over the weekend while Laos also broke records.
Metals were mixed with copper up 0.39% to $8,615 though zinc fell 0.67% to $2,668. Aluminium was largely unchanged at $2,315 though nickel fell 4.3% to $23,475. Chinese commodity imports cast a pall over sentiment with copper imports down 13%ytd and the total for April the weakest since October. The Chongqing region in China announced it would implement tiered electricity prices for steel, aluminium and other high polluting plants if they failed to meet mandatory pollution and efficiency standards.
Finally note that iron ore markets softened on weak Chinese iron ore import data. The June SGX contract is down 85c at $103.55 while the 62% Mysteel index is down $4.05 to $105.10. China imported 90.44mt of iron ore in April, down 9.8%mm but up 8.6%ytdyy. Chinese steel exports have been running hot though, helping to offset weak domestic demand and in April they rose to the highest level since September 2016.
Day ahead
US: The April CPI report will provide a crucial update on shelter and discretionary services inflation. Consensus is for headline inflation to remain at 5.0%y/y, with CPI ex-food and energy 5.5%y/y versus 5.6% in March.
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