Markets Daily
Strong US retail sales data sparked a rise in bond yields and the US dollar. AUD was also hurt by soft China data, falling to 0.6655. Today’s calendar includes Australia Q1 wages, Japan Q1 GDP and US April housing starts.
Yesterday
The May Australia Westpac-Melbourne Institute Consumer Sentiment Index dropped -7.9% to just above the dismal levels seen back in March, which recorded the lowest monthly read since the COVID outbreak in 2020 and, before that, since the deep recession of the early 1990s. The key events over the month were the surprise RBA rate hike and mildly disappointing budget. The minutes to the RBA May Board meeting described the decision between holding steady and raising 25bp as “finely balanced.” They chose to “emphasise the implications of the recent data releases as well as the updated set of forecasts and the evolving nature of the risks, including from weak productivity growth.” China’s April activity data fell short of expectations, industrial production -0.5%mth, retail sales +0.5%mth, though both of course still well up on lockdown-affected April 2020, +5.6%yr and +18.4%yr respectively. AUD/USD was fairly stable through the local headlines but slipped from 0.6700 to around 0.6680 on the China data and later slipped a little further as Chinese equities weakened. The ASX 200 closed -0.5%.
Currencies/Macro
The US dollar was either flat or stronger against G10 currencies on the day. EUR/USD probed up to 1.0905 then slipped back to 1.0865, barely changed net. GBP/USD fell sharply on the jobs data, recovered then weakened again, overall -0.4% at 1.2480. USD/JPY rose a net 0.2% to 136.40. AUD/USD extended its local session decline to 0.6655, -0.6%. NZD/USD fell only 10 pips to 0.6230. The twice-monthly GDT dairy auction resulted in an overall price fall of -0.9%, with whole milk powder up 0.3%. AUD/NZD declined steadily over the day, down about half a cent to 1.0685.
US industrial production in April was stronger than expected, up 0.5%m/m (est. flat), with manufacturing up 1.0%m/m (est. +0.1%m/m), although March was revised downwards. April retail sales rose 0.4%m/m (est. +0.8%m.m), while the core control group rose 0.7%m/m (est. +0.3%m/m), with upward revisions to March. NAHB homebuilder confidence rose to 50 in May (est. unchanged at 45), helped by low inventories fuelling new construction.
New York Fed president Williams said the economy is facing unacceptably high inflation, but it is moving in the right direction. Demand and supply are also moving back into balance. He expects the economy to continue to grow this year. Richmond Fed president Barkin said he likes the option to hike or to pause in June, reiterating they are willing to raise rates again if necessary. The lesson from the 1970s is not to quit too soon. Firms still have pricing power, and his business contacts have indicated an unwillingness to let workers go. Cleveland Fed president Mester said she doubts the Fed can hold rates steady yet, saying the funds rate is still not sufficiently restrictive.
Fed governor Barr testified that community banks are "sound and resilient." He said tougher rules on banks with assets over $100bn are being considered, and there are plans to improve the "speed, force, and agility of supervision."
Canadian CPI inflation in April was stronger than expected at 4.4%y/y (est. 4.1% y/y, prior 4.3%y/y), although the average of core measures (trim 4.2%y/y, median 4.2%y/y) was in line with consensus.
Germany’s May ZEW investor/analyst survey was weaker than expected. Expectations fell to -10.7 (est. -5.0, prior +4.1), and current conditions fell to -34.8 (est. -37.0, prior -32.5). Eurozone expectations fell to -9.4 from prior +6.4.
UK labour data for March was weaker than expected. Unemployment rose to 3.9% (est. unchanged at 3.8%), with average weekly earnings ex-bonus at 6.7%y/y (est. 6.8%y/y, prior 6.7%y/y). Although the 3m/3m employment change in March was firm at 182k (est. 160k), April payrolls fell -136k (est. +25k, prior +42k).
ECB hawk Holzmann (Austria) said that he wanted the deposit rates to rise to 4% and preferred a 50bp hike at their last meeting. He does not expect core inflation to ease much this year. In contrast, dove Stournaras (Greece) suggested that they were now close to ending their tightening cycle.
Interest rates
US 2yr treasury yields rose from 3.96% to 4.08%, while the 10yr yield rose from 3.46% to 3.53%. Markets currently price the Fed funds rate, currently 5.125% (mid), to be 4bp higher at the next meeting on 15 June, but around 60bp lower by year end.
Australian 3yr government bond yields (futures) rose from 3.08% to 3.15%, the 10yr yield from 3.40% to 3.49%. Markets currently price the RBA cash rate, currently 3.85%, to be 5bp higher at the next meeting on 6 June, with a peak of 3.96% priced for August.
New Zealand markets were yesterday pricing the RBNZ OCR, currently 5.25%, to be 24bp higher at the next meeting on 24 May and to peak at 5.60% in August 2023.
Credit indices have mirrored sentiment with main unchanged at 86.5 but CDX is 2.5bp wider at 83.5 including a late move wider as equity sold off into the close. Cash credit was more subdued to be 1-2bp wider as primary gained most of the attention led by the Pfizer deal. Pfizer’s jumbo deal has proven anything but a fizzer, pricing USD31bn (on books of USD85bn) across 8 tranches from 2-40yr on a deal that includes special mandatory redemption if the Seagen acquisition is not completed (10yr & 30yr notes excluded).
Commodities
Crude gave back some of the previous day’s SPR refill inspired gains after weaker than expected China data plus a surprise API crude build weighed on sentiment. The June WTI contract is down 25c at $70.86 while the July Brent contract is down 63c at $74.60. However, the IEA did raise its global demand outlook by 200kbpd to 102mbpd and projected the market will shift into a supply deficit in the months ahead. China will account for 60% of global demand growth in 2023, offsetting sluggish demand in developed countries according to the IEA monthly. The IEA also noted that Russian exports in April rose to 8.3 million barrels per day, the highest since Moscow’s invasion of Ukraine. Josep Borrell, the EU’s high representative for foreign policy told the FT that Brussels was aware that Indian refiners were buying large amounts of Russian crude before processing it and selling fuels to Europe. Borrell said that the EU should act to stop it, warning that “if diesel or gasoline is entering Europe coming from India and being produced with Russian oil that is certainly a circumvention of sanctions and member states have to take measures”. Finally note that the slide in thermal energy markets continued with the July Japan Korea marker falling below $10/MMBtu for the first time since November 2021 and the July Rotterdam thermal coal contract falling below $100 for the first time since January 2022.
Metals saw another sharp lurch to multi year lows as weak China data added to battered sentiment. Zinc fell 1.3% to $2,498; copper is down 1.8% to $8,120 and nickel fell 2.85% to $21,005. That’s a low back to November for copper; back to September for nickel and to December 2020 for zinc. LME copper inventory rose to the highest since November after 17 straight days of increases. The premium for spot copper versus the 3-month contract fell to the lowest since March 2022.
Iron ore markets erased earlier gains as weaker than expected China IP, retail sales and FAI data weighed on sentiment. The June SGX contract is up 60c versus the same time yesterday at $104.80 while the 62% Mysteel index is unchanged at $107.85. China’s crude steel output fell 1.5%yy to 92.64mt in April while ytd production rose 4.1% to 354.39mt.
Day ahead
Australia's Wage Price Index was surprisingly soft in Q4 22, the 0.8% gain a step down from 1.1% in Q3 22. Still, the ABS noted that the 0.8% increase was the largest result out of all the December quarters in the past decade, following on from Q2 and Q3 increases which were also higher than their comparable quarters back to 2012. The share of wages negotiated via individual bargaining arrangements continued to grow, lifting from 36% in 2017 to 43% in 2022 which has made wages more responsive to changes on economic conditions. Our forecast 0.8% increase in the March quarter will lift the annual rate from 3.3%yr to 3.5%yr. Consensus is 0.9%qtr (11:30am Syd).
Japan: Only a modest increase in GDP is expected in Q1 given prominent cost-of-living pressures and its associated drag on consumption (market f/c: 0.2%).
Eurozone: The final estimate to April’s CPI will provide important detail around discretionary services and food inflation (market f/c: 7.0%yr).
US: A sustained up-trend in housing starts and building permits will be difficult to achieve in the near-term, but conditions are likely off their lows (market f/c: -1.4% and 0.2% respectively). Regional Fed presidents Bostic and Goolsbee will discuss the outlook at an Atlanta Fed event.
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