Markets Daily
US equities fell amid mixed headlines from the debt ceiling talks. AUD slipped to 0.6610. May PMIs in the US and Europe showed resilient services and soft manufacturing. Today’s calendar features the RBNZ policy decision, UK April CPI and FOMC May meeting minutes.
Yesterday
Australia’s official data calendar was empty again though we did see the flash May Judo Bank/S&P Global PMIs, which showed manufacturing steady at 48.0 and the services index slipping to 51.8 from 53.7. AUD/USD traded a very tight range, 0.6641-62. Regional equity markets were mixed but mostly negative. The ASX 200 was about in the middle of the pack, closing -0.1%.
Currencies/Macro
The US dollar firmed against most major currencies on the day. EUR/USD fell from 1.0810 to 1.0775. GBP/USD trimmed losses to just -0.2%, at 1.2415. USD/JPY ranged between 138.24 and 138.91 (a six-month high). AUD/USD fell about 40 pips or -0.6% over the day to 0.6610, with a low of 0.6607. NZD/USD fell 40 pips to 0.6245. AUD/NZD is net unchanged at 1.0580.
Flash May S&P Global US PMIs overall were solid: manufacturing did fall to 48.5 (est. 50, prior 50.2), but services rose to 55.1 (est. 52.5, prior 53.6) to lift the composite PMI to 54.5 (est. 53.0, prior 53.4). The report highlighted service sector pricing pressures and labour tightness.
New home sales in April remained firm at 683k (est. 665k), attributed to a lack of existing housing stock. The Richmond Fed manufacturing survey index fell to -15 in May (est. -8, prior -10), with a further decline in new orders (to -29 from -20), although business conditions came in at -17 (prior -27).
Flash May S&P Global/HCOB Eurozone PMIs continued to indicate contraction in manufacturing but expansion in services. Manufacturing fell to 44.6 (est. 46.0, prior 45.8), while services were at 55.9 (est. 55.5, prior 56.2), the Composite at 53.9 (est. 53.6, prior 54.1).
Flash May S&P Global/CIPS UK PMIs indicated underperformance in manufacturing (46.9, est. 48.0, prior 47.8). Services continued to expand at 55.1 (est. 55.3, prior 55.9), the composite at 53.9 (est. 54.6, prior 54.9).
Interest rates
US 2yr treasury yields roundtripped from 4.32% to 4.41% and back, the 10yr yield from 3.71% to 3.76% to 3.69%. Markets currently price the Fed funds rate, currently 5.125% (mid), to be 9bp higher at the next meeting on 15 June, with a peak of 5.23% in July.
Australian 3yr government bond yields (futures) roundtripped from 3.36% to 3.43% and back, the 10yr yield from 3.65% to 3.70% and back. 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 4.01% in September.
New Zealand markets are pricing the RBNZ OCR, currently 5.25%, to be 37bp higher after today’s meeting and to peak at 5.95% in October.
Credit reflected the weaker sentiment with Main unchanged at 81.5, however CDX was 1.5 wider at 78.5 and while cash spreads saw little movement, primary activity in the US slowed. Europe was more active with 11 issuers pricing ~EUR9.65bn with corporates led by Bayer’s EUR3bn 3 tranche (3/6/10yr) deal ahead of CEO transition in June, and another 7 fins issuers were in play across the capital structure from Tier 2 (Caixa) to covered (3 deals). The US saw the just the 2 issuers led by Lockheed Martin’s USD2bn 3 part deal (5/10/30yr).
Commodities
Crude markets bucked the general risk off trend as a warning for short sellers from the Saudi Energy Minister Abdulaziz bin Salman hit the headlines. The July WTI contract is up $1.71 to $77.71 while the July Brent contract is up $1.72 to $77.71. The Saudi Energy Minister told the Qatar Economic Forum that “I keep advising them that they [short sellers in crude] will be ouching – they did ouch in April” referring to the surprise April 2 OPEC+ output cut. Stan Chart warned that the build-up of speculative shorts was so extreme that it could “make a response from key OPEC members likely”. However, several OPEC delegates have commented that there is no need to orchestrate further cuts as the April cuts are just coming into effect. API reported a hefty 6.8mb US crude inventory draw plus a 6.4mb gasoline and 1.77mb distillate draw. Bloomberg reported that Kazakhstan’s second largest oil field, the Kashagan field, cut output by 100kbpd after an issue was detected with the gas reinjection plant. ZeroHedge reported there were “few signs of restarting” exports of oil from the Iraq-Turkey pipeline through the Ceyhan port after circa 450kbpd of exports were halted back on March 25. France announced it had restocked 70% of the oil released during the strikes. And in gas markets, the bearishness in European prices extended later in the year with the October TTF futures trading around €38/mwh, a decline of circa 20% since the start of the month. Inventories in Europe are now 66% full, well above average levels with flows to northwest Europe at historically high levels.
Meanwhile metals markets dropped to fresh multi year lows with copper down 0.6% to $8,080, aluminium down 1.9% to $2,220, nickel down 2.4% to $20,910 and zinc down 3.2% to $2,354. That’s a fresh low back to November last year for copper and a low back to October 2020 for zinc. The spot copper market is pointing to a collapse in demand with the discount versus the 3-month contract at the widest back to 2000. Meanwhile, LME copper stockpiles have expanded in each of the past 21 days, the longest run since 2013. And supervisors at Antofagasta’s Centinela mine in Chile were reported as voting on an improved offer and a scheduled strike was suspended. Aluminium on warrant stockpiles rose by the most in a month. Argentina was said to be nearing an Inflation Reduction Act exemption to supply lithium to the US. The EU is also working on deals with both Argentina and Chile that will widen access to critical minerals used in EV batteries etc.
Iron ore markets slumped back to and through $100 on increasing signs of waning steel production and demand in China. The June SGX contract is down $3 to $99.00 while the 62% Mysteel index fell $1.75 to $102.10. Steel production at major mills on a rolling month basis to mid-May is now down 1% versus the average over the last 3 years having been as much as 9.4% above the average at the end of March according to CISA data.
Day ahead
Australia: The Westpac-MI Leading Index is pointing to an extended period of below-trend growth.
At 12pm Syd, the RBNZ is widely expected by economists to raise the overnight cash rate by 25bp to 5.50%, but with some risk of a 50bp hike. This is clear in market pricing which sits around 37bp. There will also be interest in guidance via the OCR forecast regarding the expected peak rate.
The German IFO business climate survey is expected to moderate slightly in May as expectations on the outlook ease (market f/c: 93.1).
The FOMC minutes to the May meeting will provide critical insight into the Committee’s views on the near-term path for policy. Despite the lag between the meeting and release date, the minutes often move markets.
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