Markets Daily
US bond yields rose as debt ceiling negotiations resumed. FX markets were muted with a quiet data calendar, AUD returning to 0.6650. Today’s data slate is dominated by flash May S&P Global PMIs in various jurisdictions, notably the Eurozone, UK and US.
Yesterday
Asia-Pacific sentiment was mostly upbeat, perhaps aided by the resumption of US debt ceiling negotiations, after markets were rattled by Friday’s standoff. Japan, China, Hong Kong and South Korea all posted sharp gains. The ASX 200 was a clear laggard, closing -0.2%. Australia’s data calendar is mostly empty until Friday. AUD/USD traded a tight range, flickering up to a 0.6668 high then finishing nearer 0.6635, net -0.2%.
Currencies/Macro
The US dollar was mostly little changed against G10 FX. EUR/USD ranged sideways, mostly just above 1.0800. GBP/USD was net flat around 1.2435. USD/JPY was most lively, +0.4% to 138.60. AUD/USD slipped to 0.6628 then returned to 0.6650, net unchanged. NZD/USD returned to 0.6285. AUD/NZD bounced off 1.0560 (lowest since December) to 1.0580.
As President Biden and Speaker McCarthy resumed negotiations, Treasury Secretary Yellen said it is now “highly likely” that Treasury will run out of cash in early June.
Minneapolis Fed president Kashkari repeated prior comments that the Fed’s job not yet done, but also stated that pausing or hiking in June will be a close call. St. Louis Fed president Bullard said that at least two more 25bp hikes are needed to contain inflation, which remains too high. He also saw no reason to be concerned that US was on the verge of recession, and that markets were overpricing that risk.
Atlanta Fed president Bostic preferred to hold interest rates steady in June: “Our policy works with a lag. And we’re just at the very beginning of this time when that lag is starting to play out and you’re starting to see tightness emerge…Right now, absent a big change, I think I will be comfortable saying let’s just look and see how things play out.” San Francisco’s Daly said that tighter credit conditions may be equivalent to “a couple of rate hikes.”
Eurozone consumer confidence for May was close to its prior reading and consensus at -17.4 (prior -17.5, est. -16.8).
ECB centrist Villeroy struck a more hawkish tone on inflation which he expects to remain high into the end of the year. He supported three more hikes, peaking in September.
Interest rates
US bond yields rose slightly across the curve, as hawkish Fedspeak and the debt ceiling debates continue. 2yr government bond yields rose 5bps to 4.32%, and 10yr government bond yields rose 4bps to 3.71%. Markets are pricing in a 25% chance of a 25bp hike at the June FOMC meeting.
Australian bond yields will be guided by global price action as markets will continue to look at key economic data for clues on the RBA’s stance towards further rate hikes. 3yr government bond yields rose 3bps to 3.33%, and 10yr government bond yields rose 2bps to 3.61%. The AU-US 10yr bond spread narrowed on the back of AU outperformance, currently at -10bps.
Credit outperformed other risk markets with Main a bp tighter at 81.5, CDX rallying 2.5bp to 77 and cash spreads were also 2-3bp tighter despite solid primary volumes including Tier 2 bank deals in both Europe and the US. Europe saw 9 issuers price ~EUR6.9bn with Mercedes the largest corporate issuer, adding to the autos supply we have seen over the last week with its EUR2bn green deal split evenly over 3/8yr. In the Fins space BPCE priced a EUR500M 10nc5yr T2 social deal at MS+255 (BBSW+326), Lloyds Bank Corporate Markets completed a EUR750M 4yr at MS+95 (BBSW+153) and Swedbank sold EUR750M of 3nc2yr SNP at MS+110. The US also saw 9 issuers in play for USD9.5bn led Citi’s USD3.2bn 11nc10yr Tier 2 deal (another 1yr call structure) which priced at T+245 (BBSW+285) and provides a pricing point for Tier 2 in the USD market.
Commodities
Crude markets were little changed as traders focused on debt ceiling developments in Washington and listened to Fed speakers. The July WTI contract is up 36c at $72.05 while the July Brent contract is up $35c at $75.93. Echoing the IEA warning that global crude markets will flip into deficit in the second half of 2023, Goldman noted that they “view the market as too pessimistic and expect sustained deficits from June as OPEC+ production cuts fully realise, and demand rises further”. And the crippling heatwave across the likes of Vietnam, Myanmar and India has sent demand for Russian thermal coal and fuel oil soaring according to Bloomberg analysis of Kpler data. Asian imports of thermal coal jumped to 7.46mt in April, about a third higher than the same month last year and imports of fuel oil had the two highest months on record in March and April. Even China became a net importer of fuel oil in April for the first time since May 2013. Reflecting weak retail and transportation demand however, the US retail diesel price fell below $4/ gallon for the first time since February 2022. US natural gas prices slumped on cooler weather with the June Henry Hub contract down 7.1% to $2.4/MMBtu.
Metals saw yet another wave of selling with copper down 1.3% to $8,142 and zinc down 2.2% to $2,425. That’s a fresh low back to October 2020 for zinc with concerns about the US debt ceiling, rising US recession risks and disappointment over the China reopening recovery all playing a role in sliding prices. The IAI reported global aluminium production rose 0.3% in April with Asia ex China up 2.1% and Western Europe down 8.2%yy. The mood at the annual LME flagship Asian event in Hong Kong was said to be downbeat with Bloomberg reporting a “number of construction subcontractors [in China] slowing work from April as they waited for payments to clear, then reducing subsequent purchases of raw materials”.
Iron ore slid on signs that construction activity in China was slowing. The June SGX contract is down $3 to $102 while the 62% Mysteel index is down $3.90 to $103.85. Steel operating rates have been declining in Tangshan and Mysteel reported that producers are continuing to cut prices. The Tangshan billet price was reported at a fresh low back to July 2020 at 元3,400.
Day ahead
The RBA's Jacobs (Head of Domestic Markets) is due to speak at the Australian Government Fixed Income Forum in Tokyo at 5:10pm AEST.
Japan: Easing supply disruptions has provided some support to the Nikkei manufacturing PMI while the rebound in demand is a clear positive for the services PMI.
Eurozone/UK: In both Europe and the UK, the S&P Global manufacturing PMI is under intense pressure from weakening demand (market f/c: 46.0 and 48.0 respectively); meanwhile, tourism is buoying the services PMI (market f/c: 55.5 and 55.3 respectively).
US: A further softening across both the S&P Global manufacturing and services PMIs are anticipated in May as the growth slowdown continues to materialise (market f/c: 50.0 and 52.5 respectively). A decline in new home sales is expected in April after March's surge (market f/c: -2.9%) and the Richmond Fed index will likely remain in weak territory (market f/c: -8). Dallas Fed president Logan is also due to speak.
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