Markets Daily
US bond yields dipped briefly on a soft US manufacturing survey, but otherwise the mood was moderately upbeat. The US dollar gave up some of its recent gains, AUD back above 0.6700. Today’s busy calendar includes Australia May Westpac consumer sentiment, RBA May minutes, China April activity data, UK March unemployment and US April retail sales.
Yesterday
AUD/USD recovered some of the ground lost on Friday, rallying from 0.6645 to 0.6685, perhaps drawing inspiration from the sharp bounce in China and Hong Kong equities. Australia’s data calendar was quiet, ahead of a busy slate Tue-Thu. The Thai baht bounced 0.75% as pro-democracy groups dominated weekend parliamentary elections, ahead of military-backed parties. Turkish equities sank about -6% in early trade after President Erdogan won the most votes in Sunday’s presidential election, albeit not enough to avoid a runoff. The Turkish central bank reportedly stood by to limit damage to the lira.
Currencies/Macro
The US dollar fell against almost all G10 FX on the day. EUR/USD chopped up 0.2% to 1.0875. GBP/USD rallied 70 pips or 0.6% to 1.2530. USD/JPY edged up with US yields, +0.25% to 136.00. The Aussie outperformed, extending its local session gains to 55 pips or 0.9% at 0.6700. NZD/USD rose 0.8% to 0.6240, still down 60 pips on Friday morning. AUD/NZD is net little changed at 1.0740.
The New York Fed’s Empire State manufacturing survey slumped to -31.8 in May (est. -3.9, prior +10.8) in the largest decline since April 2022. The fall was driven by new orders (to -38.0 from +25.1). Shipments also fell sharply (to -16.4 from +23.9). Prices paid, though, rose to 34.9 (prior 33.0). The headline index is prone to volatility, sliding to -32.9 in January then bounding to -5.8 in February.
Atlanta Fed president Bostic said he is inclined to vote for a pause, saying they’ve made good progress on inflation. He is hearing less about businesses able to pass on costs, but also cautioned that inflation is still too high and the Fed must bring it down to 2%. Chicago’s Goolsbee said his rate vote in May was a "close call", ultimately voting with the consensus to hike by 25bp. Prior rate increases are still in the system so it will be important to monitor the data for policy implications. Additionally, he does not believe the impact from the bank stresses will be small. Minneapolis Fed president Kashkari said the FOMC needs to "finish the job" and get inflation down to 2%, and there is a long way to go, with inflation too high and the labour market still too hot (less so than nine months ago).
Eurozone industrial production in March exceeded fell 4.1%m/m and -1.4%y/y (est. -2.7%m/m and +0.1%y/y).
Interest rates
US bond yields rose slightly across the term structure, as markets consolidate around the US debt ceiling impasse. 2yr government bond yields rose 2bps to 4.01%, and 10yr government bond yields rose 4bps to 3.50%.
Australian bond yields rose, and the curve flattened as markets price in more probability of rate increases from the RBA. 3yr government bond yields (futures) rose 7bps to 3.16%, and 10yr government bond yields (futures) rose 4bps to 3.48%. The AU-US 10yr bond spread widened on the back of AU underperformance, currently at -2bps.
Credit indices were little changed to open the week with Main and CDX locked at 86.5 and 81 respectively, while cash spreads were 2-3bp wider as the focus moved to primary activity with strong volumes printing in both Europe and the US. Europe saw a large session for both corporates and banks with 14 issuers pricing over EUR14bn. Autos were in play including VW (GBP300M 6yr), GM (EUR600M 4.5yr) and BMW (EUR2bn 3.5/7/12yr) while on the local front, MELAIR priced EUR500M of 10yr at MS+158 (BBSW+226), a significant pick up to the SYD AUD1bn 10yr that priced at MS+135 a month ago. In the banks space, ING Groep priced EUR3bn across a 6nc5yr and 11nc10yr while Swedbank and BPCE both completed GBP400M 6nc5yr SNP deals at UKT+230 (BBSW+223) and +240 (BBSW+236) respectively. The US also saw strong volumes with 12 issuers pricing USD14.95bn. Florida Power & Light (USD2.5bn 3-10yr) and TMCC (USD2bn 3-7yr) were the largest issuers in the corporate space, with financials also in the mix with State Street completing a USD2bn 2 part deal, and WSTP priced its USD1.75bn covered at SOFR+92 (BBSW+96). The US market is also preparing for Pfizer’s anticipated jumbo deal with an 8 tranche offering in the works to finance the USD43bn Seagen acquisition.
Commodities
Crude markets rose, helped by positive signs on the US debt ceiling plus fresh signs that the US is set to buy crude for the SPR. The June WTI contract is up $1.07 to $71.11 while the July Brent contract is up $1.41 to $75.58. The US Energy Department confirmed that it will solicit bids for deliveries into the SPR in August with awards to be announced in June. The proposal is for up to 3mb. Bloomberg calculations showed that Russian crude flowing into international markets is up 10% since the first week of April. Meanwhile gas markets in the US continued rising on slowing US production though prices in Europe fell further, with the June TTF contract down 12% in the last week.
Metals were mixed with copper up 0.3% to $8,275 while aluminium rose 1.7% to $2,269. However, zinc fell 0.6% to fresh 30-month lows while nickel fell 1.45% to $21,895, a fresh low back to October last year. A PBoC liquidity add helped the mood in the copper market given it was seen as adding to efforts to stabilise the Chinese economy. China will report IP, retail sales, FAI and property sales for April later today.
Finally note that iron ore markets recovered, helped by the PBoC liquidity injection. The June SGX contract is up $2.10 from the same time yesterday to $104.20 while the 62% Mysteel index is up $5.60 to $107.85. Iron ore inventory fell for the 11th straight week while steel stockpiles at major steel mills fell 2.8% in early May from late April.
Day ahead
At 11:30am Syd, the minutes of the May RBA Board meeting will provide further detail around the surprise 25bp rate hike, with particular interest in any discussion of hiking versus holding steady.
At 10:30am Syd we see the Westpac-Melbourne Institute Consumer Sentiment survey for May. Consumer sentiment surged 9.4% in April, buoyed by the RBA decision to pause the sequence of interest rate hikes that began in May last year. Despite the bounce, the index remained in deeply pessimistic territory at 85.8. The April story does not augur well for May given the RBA resumed hikes with a surprise 25bp increase. The latest survey will also capture reactions to the federal budget, although even a positive reception here may not be enough to counter a rate rise shock.
At 12pm Syd, China’s April activity data will highlight continued momentum across retail sales, industrial production and fixed asset investment, though favourable base effects will likely also be at play in the month, given that April 2022 was heavily affected by Covid lockdowns. Consensus is 10.9%yr on industrial production, a striking 21.9%yr on retail sales and 5.7% year-to-date on investment.
In line with a gradual pace of easing, the UK’s ILO unemployment rate is expected to remain at its current level (market f/c: 3.8%). Average weekly earnings ex-bonuses are seen ticking up to 6.8%yr.
The European trade balance should return to surplus in March given easing energy prices, a factor that has supported the recovery in the ZEW survey of investor/analyst expectations (May survey due). No change is anticipated in the second estimate to Q1 GDP for the region, 0.1%qtr, 1.3%yr.
US: Spending across autos and gas likely saw headline retail sales bounce in April, though underlying weakness will likely remain present (market f/c: 0.8%mth overall, +0.3%mth core “control group” sales). Meanwhile, industrial production and business inventory growth is set to remain subdued (market f/c: 0.0% for both). Similarly, the NAHB housing market index will likely hold at its current level, reflecting a hard-going recovery in sentiment (market f/c: 45). The FOMC’s Mester, Barr, Williams, Goolsbee and Logan are all due to speak.
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