Markets Daily
US markets resumed trading following a long weekend, bond yields falling sharply as the US debt ceiling legislation looked set to pass. The USD was very mixed, AUD easing to 0.6515. Today’s notable data includes Australia April CPI and Q1 construction work, China May PMIs and US April job openings.
Yesterday
Australia dwelling approvals dropped -8.1% in April. The report points to a significant broad-based downtrend remaining intact. The month saw sizeable falls for both houses (–3.8%) and units (–16.5%) – both segments now plumbing decade lows. AUD/USD probed higher for a while, reaching 0.6559, but rolled over sharply to near 0.6510 as the Chinese yuan began its local session on a weak note. USD/CNH traded above 7.10 for the first time since 30 November. Regional equities were quite mixed, the ASX 200 about in the middle, closing -0.1%.
Currencies/Macro
The USD was quite mixed versus G10 FX over the day. JPY remained firmer (+0.5%) at 139.80, having reversed from 140.93 as Japanese officials announced a meeting on FX markets in the Tokyo afternoon. GBP also gained (+0.5% to 1.2415, high was 1.2446). EUR/USD held above 1.0700 at 1.0735 (+0.25%) after spiking to test 1.0675. AUD/USD was volatile over the day, trading a range of 0.6503 to 0.6559, eventually down 20 pips or -0.3% at 0.6515. NZD/USD slipped back to 0.6045 (-0.2%) after a test of 0.6065.
US May Conference Board consumer confidence slipped to 102.3 (est. 99.0) from an upwardly revised April reading of 103.7 (revised from 101.3). The present situation index fell to 148.6 from revised 151.8 in April (initially 151.1) with the expectations index dipping to 71.5 from a revised 71.7 in April (initially 68.1)
US Dallas Fed manufacturing activity survey slipped to -29.1 in May (est. -18.0) from -23.4 in April. The majority of sub-components slid, including outlook (-22.3 from -15.6), new orders (-16.1 from -9.6) and notably both prices paid (13.8 from 19.5) and prices received (-.4 from 8.4).
US March housing surveys were not as soft as anticipated with FHFA index lifting +0.6%m/m (est. +0.2%m/m) and CoreLogic +0.45%m/m (est. flat).
Richmond Fed president Barkin said rates are in restrictive territory but there is uncertainty about the path. He reiterated that inflation needs to come down by reducing demand and is seeing some evidence of this in parts of the economy, but some sectors remain vibrant.
Eurozone economic confidence fell to 96.5 (est. 98.8, prior 99.0), with industrial confidence at -5.2 (est. -4.0, prior -2.8) and services confidence at 7.0 (est. 10.3, prior 9.9).
Interest rates
US 2yr treasury yields fell from 4.59% to 4.45%, while the 10yr yield fell from 3.80% over the US long weekend to 3.69%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 15bp higher at the next meeting on 15 June, with a peak of 5.33% in July.
Australian 3yr government bond yields (futures) fell from 3.45% to 3.35%, while the 10yr yield fell from 3.70% to 3.66%. Markets are pricing the RBA cash rate, currently 3.85%, to be 5bp higher at the next meeting on 6 June, with a peak of 4.03% in September.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be 3bp higher at the next meeting on 12 July and to peak at 5.59% in October.
Credit spreads were mixed with Main giving up early gains to close unchanged at 80.5, CDX was a bp tighter at 74.5 to be back to pre-SVB levels (but still a couple of bp off ytd tights) while cash spreads were little changed as primary activity re-emerged post the long weekend. Europe saw 12 issuers price EUR12.6bn. The US reopened with 5 issuers pricing USD11.25bn.
Commodities
Crude markets slumped to multi week lows as concerns about physical demand hit sentiment. The July WTI contract is down a hefty $3.21 to $69.46 while the July Brent contract is down $3.38 to $73.69. The WTI front month time spreads dipped deeper into contango, reflecting limited near term demand. Traders expect no change from OPEC+ later this week despite no signs of Russia curbing supply. RBC did warn though that choosing to have a face-to-face meeting in Vienna June 3-4 “raises the likelihood of action”. Bloomberg reported that Russia aims to increase daily diesel exports from key western ports in June by a third from May loadings, having found new demand for their product in the Middle East and Latin America.
Metals markets marked time with copper holding just above $8,000 as the focus remained on the US debt ceiling and China data. Copper is last down 0.25% at $8,115 while aluminium fell 0.4% to $2,228. Nickel is down 0.8% to $21,000 while zinc slid 2.3% to $2,290. Wood Mackenzie reported that Peru is expected to lose its position as the world’s no 2 copper producer to the Democratic Republic of the Congo. Political and social instability in Peru has impacted mine production and development while projects such as Ivanhoe’s Kamoa-Kakula has been ramping up production in the DRC. Chinese President Xi met DRC president Felix Tshisekedi last week for talks to relaunch a partnership worth tens of billions of dollars including investment in mining. Better ore grades are also helping the DRC extract higher volumes.
Iron ore markets slipped again ahead of the China PMIs. The July SGX contract is down $5.20 from the same time yesterday to $96.20 while the 62% Mysteel index is down $2.55 to $104.85. There was little fresh news though press noted that Vale “plans to expand iron ore capacity aggressively” pushing ahead with a $2.7bn investment program to expand output in the Amazon region. Vale held an analyst site visit last week.
Day ahead
RBA Governor Lowe will also appear before the Senate Economics Legislation Committee (Budget Estimates in Canberra from 9:00am Syd.
At 11:30am Syd we see Australia's monthly CPI Indicator. The index gained 0.6%mth/6.3%yr in March. For April we are forecasting a 0.5%mth/6.5%yr increase, composed of a 0.3% increase in food, 0.8% increase in clothing & footwear, a 0.5% increase in housing, 1% increase in furnishings and a 1.2% increase in transport costs with a 3.6% increase in auto fuel. The median forecast is 6.4%yr. There is no core inflation estimate in the monthly series.
Also at 11:30am, the uptrend in Australian public works and private infrastructure should give way to a mild increase in construction work in Q1 (Westpac f/c: 1.2%). This report will help shape forecasts for Q1 GDP due one week from today. The housing market’s recent stabilisation has seen private sector credit growth hold steady at a subdued level (Westpac f/c: 0.3%).
NZ: As headwinds facing the broader economy linger, weakness in ANZ business confidence will likely persist in May (April confidence net balance -44, activity outlook -8).
Japan: Another rise in industrial production is anticipated in April given the ongoing easing in supply-chain disruptions (market f/c: 1.4%).
At 11:30am Syd, China’s official manufacturing and services PMIs will likely provide a mixed update given the varying pressures surrounding the reopening and external demand. Consensus is 49.5 on manufacturing versus 49.2 in April and a healthier 55.2 for services, easing from 56.4.
US: The moderation in JOLTS job openings from elevated levels should persist in April as firms continue to rein in their excess labour demand (market f/c: 9439k). Indeed, with businesses still facing broad-based headwinds, the Chicago PMI will likely remain in weak territory in May (market f/c: 47.2). The Federal Reserve’s Beige Book will provide a thorough update on this front. The FOMC’s Collins, Bowman, Harker and Jefferson are also due to speak.
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