Markets Daily
The outline of a US debt limit deal was announced over the weekend. US April inflation data printed on the firm side, boosting bond yields. AUD is slightly higher at 0.6530. Today’s data calendar is quiet and both the US and UK are closed for a holiday.
Friday
Australia retail sales was unchanged in April, following a 0.4% rise in March and 0.2% rise in Feb. The key message continues to be of a material slowing in momentum since late last year, centred on discretionary goods and reflecting the combination of cost of living and rising interest rate pressures. Sales have posted softer gains in April, March and February, following a sharp 3.9% drop in the December month. In annual terms, sales growth slowed to 4.2%yr in April, a 20-month low but still above the pace immediately prior to the COVID outbreak. Notably, sales have now been flat over the last six months. Regional equities were mixed, Taiwan outperforming as US tech stocks surged. The ASX 200 managed a 0.2% gain. AUD/USD extended its multi-day slide to 0.6491, a fresh low since November 2022, but then ground back to 0.6525. A sharp rebound in the Chinese yuan would have helped (+0.4%), with reports of state-owned banks selling dollars.
Currencies/Macro
The US dollar was mixed against major currencies on Friday. EUR/USD ranged between 1.0702 and 1.0759. GBP/USD rose a net 20 pips to 1.2345. USD/JPY bounced from 139.70 before the US prices data to 140.65, printing fresh six-month highs. AUD/USD rose 25 pips overall to 0.6530. NZD/USD fell to 0.6033 - a seven-month low. AUD/NZD rose half a cent to 1.0780.
White House and Republican negotiators reached a deal “in principle” late on Saturday to raise the US debt ceiling for 2 years and avoid a default. A vote could occur on Wednesday. There are likely to be dissenting votes on both sides. The US Treasury reported a $39bn cash balance on Thursday, down from $50bn on Wednesday and $77bn on Tuesday, and the lowest level since September 2017. Secretary Yellen updated the estimated X-date to 5 June.
US personal income in April rose 0.4%, as expected, while spending rose 0.8% (est. 0.4%). The core PCE deflator rose 0.4%m/m and 4.7%y/y (est. 0.3% and 4.6%, prior 4.6%y/y). Consumer sentiment (University of Michigan) for May was finalised higher at 59.2 (est. 58.0, prior 57.7), both current conditions and expectations rising. Inflation expectations for 1-year ahead fell from 4.5% to 4.2%, and the 5-10yr ahead measure fell from 3.2% to 3.1% (as expected).
Interest rates
US 2yr treasury yields rose from 4.48% to 4.64% - a three-month high, before retracing to 4.56%, while the 10yr yield rose from 3.78% to 3.86% - a three-month high, closing for the weekend at 3.80%. Markets currently price the Fed funds rate, currently 5.125% (mid), to be 16bp higher at the next meeting on 15 June, with a peak of 5.35% in July.
Australian 3yr government bond yields (futures) ranged between 3.41% and 3.48%, while the 10yr yield fell from 3.75% to 3.70%. 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 5.50%, to be 6bp higher at the next meeting on 12 July and to peak at 5.66% in October.
Credit spreads were firmer with Main in 2.5bp to 80 (-3.5bp for the week) and CDX 2bp tighter at 75.5 (-4bp for the week), however cash spreads were more subdued into the long weekend and US IG primary markets were quiet. Europe saw another 4 issuers in the market pricing EUR2.2bn with Allianz completing the largest deal with its EUR1.25bn Tier 2 30nc10yr transaction.
Commodities
Crude markets finished the week with modest gains as a debt ceiling deal appeared likely and a sharp drop in US inventory supported sentiment. The July WTI contract rose 84c to $72.67 Friday while the July Brent contract was up 69c to $76.95. The focus will turn to the OPEC+ meeting in Vienna June 3-4 this week with Russian Deputy PM last week quoted as saying that “we do not have the task of inflating oil prices” but “there is the task of balancing” prices. That contrasted with an apparent warning from the Saudi Energy Minister Abdulaziz bin Salman that speculators should “watch out”. Meanwhile Russian crude exports are showing few signs of slowing according to Bloomberg analysis of Kpler data. Shipments were 480kbpd higher in the 4 weeks to May 21 versus the 4 weeks to Feb 26. The WSJ reported that Saudi Arabia and Russian ties were “under strain” over oil production cuts. Saudi officials were reported as complaining to Russian officials and had “asked them to respect the cuts”. Saudi Arabia is “snapping up” Russian diesel and sending its own to Europe according to Bloomberg shipping data. The Kingdom imported 174kbpd of diesel and gasoil in April and simultaneously became Europe’s top supplier. Meanwhile natural gas prices in Europe fell for the eight straight week last week, the longest string of losses since 2007. The June European TTF contract fell 19% last week, bringing losses for the year to date to 68%.
Metals recovered some ground Friday, helped by signs of a debt deal forming, with copper up 2.2% to $8,139 and zinc up 2.9% to $2,338. However, zinc still finished the week down almost 6% while copper fell 1.4% on the week. Chinese President Xi met DRC president Felix Tshisekedi Friday for talks to relaunch a partnership worth tens of billions of dollars. We noted last week that traders were watching for signs that copper that has been hoarded at the CMOC Group’s Tenke mine in the DRC due to a royalty dispute is hitting the market. The copper hoard could amount to 200kt with circa 50kt a month being shipped through the end of 2023 according to sources. The two countries signed six cooperation agreements during the meeting and the DRC President is expected to travel to China soon.
Finally note that iron ore markets surged back above $100 into the end of the week, helped by signs of state-owned banks selling US$. The June SGX contract is up $6.20 from the same time Friday to $101.30 while the 62% Mysteel index is up $4.35 to $102.55. Over the weekend China reported profits at industrial firms fell 20.6% in the January to April period from the same time last year.
Day ahead
Australia’s calendar is quiet and there are no major global data releases. The text of the US debt limit legislation should be released sometime today, with many Congress members reserving judgment for now. US markets are closed for Memorial Day, UK markets are closed for the spring bank holiday.
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