Markets Daily
The US dollar rose for a fourth straight day with help from higher bond yields as US GDP and jobless data printed firm. AUD extended its decline to 0.6500. Debt ceiling negotiations continued. Today’s data includes Australia and UK April retail sales and US April income and spending plus May consumer inflation expectations.
Yesterday
Australia’s data calendar was empty again and there was little of note in the region, leaving the focus on the US debt ceiling negotiations, which included Fitch Ratings changing its US rating to AAA negative watch. This prompted USD/JPY to slide from 139.40 to 138.83, but it fully recovered a few hours later. AUD/USD remained heavy, extending Wednesday’s slide a further 20 pips or so to a low of 0.6522, its weakest level since 10 November 2022. The surge in Nasdaq futures on tech earnings seems to help Taiwan equities, +0.8%, but otherwise sentiment was quite poor, the ASX 200 among the losers on the day, -1.1%.
Currencies/Macro
The US dollar rose for a fourth straight day. EUR/USD fell 25 pips to 1.0725, including a two-month low at 1.0707. GBP/USD fell 45 pips or -0.4% to 1.2320. USD/JPY rose above 140.00 for the first time since November 2022, +0.4% on the day. AUD/USD fell another 40 pips over the day to around 0.6500, printing fresh lows since 10 November 2022. NZD/USD fell half a cent to 0.6060. AUD/NZD rose 20 pips to 1.0730.
Debt ceiling negotiating teams for President Biden and Speaker McCarthy communicated from their offices during the morning. McHenry, one of the Republican negotiators, emerged to tell reporters that the list of issues dividing the two camps had grown shorter. McCarthy later said that while there was no agreement, they would remain at the Capitol over the weekend.
The second estimate of US Q1 GDP was raised to +1.3% annualised from +1.1%, on firmer personal consumption. The PCE deflator was increased to 5.0%y/y from the initial reading of 4.9%y/y.
Weekly jobless claims again showed labour market resilience. Initial claims of 229k were below consensus (est. unchanged at 245k), and the prior week’s gain was revised down to 225k. Continuing claims were 1.794m (est. 1.800m). Pending home sales in April were unchanged (est. +1.0%m/m). NAR cited a lack of inventory. The May Kansas Fed activity survey fell to -1 (est. -9, prior -10).
German GDP in Q1 was revised to -0.3%q/q (from flat), which follows a -0.5% result in Q4. ECB centrist Villeroy echoed the hawks in saying that they could tighten at their next three meetings.
Interest rates
US bond yields rose sharply and the curve flattened, following stronger than expected US GDP data, PCE inflation and US jobless claims. 2yr government bond yields rose 16bps to 4.53%, and 10yr government bond yields rose 8bps to 3.82%. Markets are fully priced for a 25bp rate hike by the July FOMC meeting.
Australian bond yields continue to take its trend from US price action, but outperformed their US counterparts. 3yr government bond yields (futures) rose 8bps to 3.49%, and 10yr government bond yields (futures) rose 5bps to 3.75%. The AU-US 10yr bond spread widened slightly, currently at -6bps.
Credit spreads were firmer with both Main and CDX 2bp tighter at 83 and 77.5 respectively, while cash spreads were also 1-3bp tighter as supply remained subdued in the US. Europe remained more active with 7 issuers pricing ~7.4bn led by German parts maker Robert Bosch which priced EUR4.5bn across 4/7/12/20yr, and in the banks space BMO completed a post earnings GBP750M 4.5yr covered deal at SONIA+65 (BBSW+88)
Commodities
Crude snapped a three-day rally as US yields surged, the US$ rose and Russia appeared to push back on the potential for further supply cuts. The July WTI contract is down $2.51 at $71.83 while the July Brent contract is down $2.20 to $76.16. Russian Deputy PM Novak said “we do not have the task of inflating oil prices” but rather “there is the task of balancing” prices. This appeared to contradict warnings from the Saudi Energy Minister Abdulaziz bin Salman earlier in the week. Novak also sounded confident that “the Russian energy industry turned out to be ready for Western sanctions”. The Oxford Institute for Energy Studies issued a report which confirmed that 90% of Russia’s exports now go to India and China. Data from the IEA has showed that Russia’s oil exports in March were at the highest since Covid outbreak though revenue was down by nearly 50%. Meanwhile in gas markets, the plunge in prices in Europe accelerated with the June TTF contract down another 8.4% bringing losses for the month to an incredible 34%. An internal European Commission document reported by the FT showed that gas saving measures undertaken by the EU 27 are estimated to have cut consumption in 2023 by 60bcm compared to the bloc’s average over the past 5yrs. That's more than the 15% voluntary gas consumption reduction agreed by the EU.
Metals managed a modest bounce after the previous day’s slump. Copper is up 1.1% to $7,990 while nickel is up 1.7% to $21,090 though zinc fell again by 2.4% to $2,257. Month to date zinc is down by 12% and year to date it’s down 24% to a fresh low back to July 2020. The collapse in gas prices is driving power prices down across Europe, bringing back smelting capacity that was idled last year. On warrant LME zinc stockpiles hit the highest level in 13 months.
Finally note that iron ore slipped slightly further towards $95 with the June SGX contract down another $1.15 to $95.10 though the 62% Mysteel index rose 90c to $98.20. The Singapore International Ferrous Week concludes today and Bloomberg reports it’s been a ‘sombre’ affair given markets face a “gruelling summer as Chinese demand falters”.
Day ahead
At 11:30am Syd a quiet period for official Australian data ends with retail sales. Given the underlying weakness within the consumer sector, further weakening in retail sales seems likely in April though there are risks to either side (Westpac f/c: -0.2%, market +0.3%). Sales volumes are weak but inflation and population growth lend support to nominal turnover.
UK: Lasting headwinds around the cost-of-living should continue to act as a drag on retail sales volumes (market f/c: +0.3%mth, -0.9%yr).
US: Slowing personal income growth and elevated inflation will likely keep pressure on personal spending capacity for the time being (market f/c: 0.4% and 0.5% respectively). Meanwhile, underlying weakness in durable goods orders and stagnation in wholesale inventory accrual should remain present in April (market f/c: -1.0% and 0.0% respectively). Signs of easing services inflation will be the key focus of April’s PCE deflator (market f/c: 0.3%mth; 4.3%yr).
The final estimate of May’s University of Michigan consumer sentiment is also due. This will be of more interest than usual, given that US$ and bond yields rose in response to the preliminary survey which showed 5-10 year inflation expectations rising from 3.0% to 3.2%, a high since 2011, even as the 1-year expectation ticked down to 4.5% from 4.6%.
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