Markets Daily
US bond yields and the US dollar rose after surveyed US inflation expectations were stronger than expected. AUD slipped to 0.6645. Today’s low-key calendar includes the NY Fed Empire State manufacturing survey and various Fedspeak.
Friday
Australia’s data calendar was empty again ahead of a busy week. There were further conciliatory headlines stemming from Australian trade minister Farrell’s visit to Beijing, HK press claiming that China foreign minister Qin Gang would visit Australia in July. AUD traded a very tight 0.6686-0.6706 range. Regional equity sentiment was very mixed, Japan’s Nikkei 225 up 0.9%, China’s CSI 300 down -1.3% and the ASX 200 in the middle, +0.1%.
Currencies/Macro
The US dollar rose against most major currencies on Friday. EUR/USD fell from 1.0920 to 1.0848 – a one-month low. GBP/USD dropped 60 pips to 1.2455. USD/JPY jumped in line with US yields, from 134.60 to 135.70. AUD/USD fell 55 pips to 0.6645. Underperformer NZD fell from 0.6300 to 0.6195, earlier hurt by the fall in NZ surveyed inflation expectations. AUD/NZD rallied 85 pips to 1.0730.
In the US, the University of Michigan’s preliminary May consumer sentiment survey fuelled concerns over lower growth and higher inflation. The main index fell to 57.7 (est. 63.0, prior 63.5), with current conditions (64.5, est. 67.5, prior 68.2) and expectations (53.4, est. 60.8, prior 60.5) declining.
Inflation expectations were higher than expected, though, with the 1-year ahead measure at 4.5% (est. 4.4%, prior 4.6%), and the 5-10 year ahead measure rising to 3.2% (est. 2.9%, prior 3.0%) – the highest in 12 years.
UK Q1 GDP rose 0.1%q/q and 0.2%y/y (prior +0.1%q/q). March GDP fell 0.3%m/m (est. flat) with industrial production +0.7%m/m (est. +0.1%m/m) and -1.3%y/y (est. -2.5%y/y, prior revised to -1.9%y/y from -2.4%y/y). The drag on headline GDP came from a 0.5%m/m fall in services (est. flat).
Interest rates
US bond yields rose on Friday, after hawkish Fedspeak shifted market sentiment despite soft inflation and labour data. 2yr government bond yields rose 9bps to 3.99%, and 10yr government bond yields rose 8bps to 3.46%.
Australian bond yields took its trend from US price action. 3yr government bond yields (futures) rose 7bps to 3.07%, and 10yr government bond yields (futures) rose 7bps to 3.39%. The AU-US 10yr bond spread narrowed, currently at -6bps.
Credit spreads were little changed with Main a bp tighter on the open and holding gains to close at 86, with CDX unchanged at 81, cash spreads also remaining +/- a bp and primary activity limited. Honeywell was the only major IG issuer on Friday, completing both EUR (EUR1.15bn across 4/9yr) and USD (USD1.75bn across log 5/10yr) deals in conjunction with its investor day.
Commodities
Concerns about waning demand in Asia, a rising US$, possible US debt default and rising US recession risks all weighed on crude markets which saw their fourth weekly decline last week. The June WTI contract fell 83c Friday to $70.04 while the July Brent contract fell 81c to $74.17. However, signals that the US could consider starting to refill the SPR after a congressionally mandated drawdown in June is completed limited the weakness through the week. Citi cut its forecast for Brent crude from an average of $84 to $82 on Friday due to demand continuing to underperform expectations. Reuters reported that Iraq does not expect to make further cuts to output at the June 3-4 meeting in an interview with the oil minister. Rising temperatures over the weekend put Canada’s main oil producing region in Alberta more at risk. Meanwhile in gas markets, Baker Hughes reported the sharpest drop in natural gas rigs since February 2016 following the circa 75% drop in prices since August last year. Gas prices in Europe plunged 6.4% Friday to just above $10/MMBtu equivalent, bringing losses month to date to 15%.
Metals saw a modest recovery Friday though fell sharply on the week as a weaker than expected China inflation read plus a stronger US$ weighed on sentiment. Copper rose 1% on Friday to $8,243 though fell 3% on the week. Aluminium fell 2% on the week to $2,244 while nickel fell a hefty 7% on the week to $22,210. Thursday saw a low back to December last year for copper, to November last year for aluminium, to October last year for nickel and to November 2020 for zinc. In industry news, workers at Chile’s Minera Centinela approved a vote to start a strike on May 17. The premium for prompt copper versus the 3-month contract hit lows back to December last year.
Finally note that iron ore markets stabilised just above $100 as port inventory fell to the lowest level since July last year. The June SGX contract rose $3.40 to $102.10 though the 62% Mysteel index fell $4.45 to $102.25. The sharp drop in iron ore and plunge in coking coal prices has helped restore steel margins, however, rebar prices have continued falling with spot prices hitting the lowest level in 2 ¾ years on Friday. Signs of weakness in the Chinese property market added to pressure in steel prices. New home purchases in the 40 cities tracked by China Index Holdings were 22% below pre-pandemic levels.
Day ahead
Eurozone: A partial reversal in industrial production is anticipated in March, though energy-related industries are beginning to show promise (market f/c: -1.3%).
The New York Fed’s Empire State manufacturing survey is set to reflect subdued conditions in May (market f/c: -4). The FOMC’s Bostic, Kashkari and Cook are also all due to speak.
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