Markets Daily
A setback in debt ceiling negotiations and Fed Chair Powell’s less hawkish comments generated volatility on Friday. The US dollar was mostly weaker, AUD pushing up to 0.6650. Today’s data calendar is light, leaving attention on the resumption of US debt talks.
Friday
After three consecutive daily gains, the US dollar faltered in Sydney trade. AUD recaptured some lost ground, rising from 0.6620 to 0.6650. Regional equities were mostly positive in the wake of Wall Street’s sharp gains (China and HK soft), the ASX 200 among the winners, +0.6%. Australia’s data calendar is quiet for some days. Japan April CPI was very close to expectations, 3.5%yr overall, 3.4% ex-fresh food (the official inflation target) and 4.1%yr ex-food and energy.
Currencies/Macro
The US dollar closed lower against most major currencies on Friday. EUR/USD rose 45 pips to 1.0815. GBP/USD also rose 45 pips, to 1.2455. USD/JPY fell to a session low 137.43 on the Powell comments and starts the week around 137.85, about -0.6% overall. AUD/USD rose 30 pips to 0.6650. NZD/USD rose 45 pips or 0.7% to 0.6270, as the RBNZ decision looms this week. AUD/NZD fell from 1.0640 to 1.0584 – lowest since December – and starts the week just above 1.0600.
The US debt ceiling talks stalled. GOP negotiators said White House representatives were being "unreasonable" and left the meeting. This follows signs of progress the previous day, when Speaker McCarthy thought a bill could go to the House in the coming week. However, talks resumed Sunday US time (early Monday Sydney).
Fed Chair Powell said they can now afford to look at data to determine whether more hikes are appropriate. While he reiterated that inflation is still well above the 2% objective, recent stresses in the banking sector mean that rates may not need to rise as high as they otherwise would, although the effects of that credit tightening are highly uncertain.
Interest rates
US 2yr treasury yields initially rose from 4.25% to 4.35% on debt ceiling angst, but then fell to 4.20% following Powell’s comments. The 10yr yield rose from 3.62% to 3.72% before falling to 3.64%, ending higher on the day. Markets currently price the Fed funds rate, currently 5.125% (mid), to be 6bp higher at the next meeting on 15 June, but around 50bp lower by year end.
Australian 3yr government bond yields (futures) ranged between 3.28% and 3.39%, the 10yr yield between 3.42% and 3.67%. 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 4.00% priced for August.
New Zealand markets were pricing the RBNZ OCR, currently 5.25%, to be 37bp higher at the next meeting on 24 May and to peak at 5.91% in October 2023.
Credit spreads reflected the shift in sentiment with Main a bp tighter at 82.5, CDX gave up early gains to close unchanged at 79.5, after being close to 78 early and cash spreads had also been positive early to close 1-2bp better. There was no primary activity in either the US or Europe to close the week after we saw USD57bn and ~EUR31.6bn of IG supply respectively over the first 3 days.
Commodities
Crude markets softened Friday but gained on the week helped by the plunge in US rig count and optimism that a US debt ceiling agreement would be reached. The June WTI contract fell 31c Friday to $71.55 while the July Brent contract fell 28c to $75.58. Both contracts rose circa 2% on the week. The US rig count fell by 11 to 575 last week – that’s the largest drop since September 2021, with declines in the Permian Basin and New Mexico leading the decline. And wildfires raged for a second week in Alberta, Canada, with Rystad estimating between 240kbpd and 300kbpd of crude has been shut in. Oil usage is setting records around the world according to the IEA, with demand set to eclipse supply by almost 2mbpd in the second half of 2023. However, diesel demand remains weak with the US 4-week average of implied demand dropping to the lowest seasonal level in a decade (bar 2020). Bloomberg notes that diesel consumption in several European countries including Spain and Portugal also saw marked declines in April. Finally note that gas prices in the US rose 14% last week with the sharp decline in rig count adding to the strength in the market. The May Henry Hub contract hit a 2-month high on Friday at $2.68/mmbtu.
Metals saw a modest bounce Friday with zinc up 0.7% at 2,476, copper up circa 1% at $8,242 and nickel up 2.5% at $21,470. Lawmakers in Chile approved a tax hike on copper producers mid last week, sending the bill to President Gabriel Boric. The new tax rate will be set at 46.5% of operating profits for large copper producers with an effective rate at 45%. That’s versus 41% to 44% for Chile’s major rivals.
Iron ore markets stabilised around $105 as steel mills are expected to increase production given infrastructure and construction projects will ramp up into the early summer months. The June SGX contract closed up 85c at $105.00 though the 62% Mysteel index fell $1.5 to $107.75. ANZ warned that iron ore may drop below $100 amid uncertainty about China’s property sector, lowering its short-term target to $95.
Day ahead
Australia's data calendar is very quiet this week, with little of note until April retail sales on Friday.
Japan: Capital spending has been supportive of late, as evinced by the growth in machinery orders.
Eurozone: Despite ongoing cost-of-living pressures, consumer confidence has remained resilient. ECB speakers include Lane, Villeroy, and De Cos.
Regional Fed presidents Bullard, Bostic and Barkin are all due to speak.
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