Markets Daily
Dovish Fedspeak outweighed strong US labour data to push bond yields lower. Equities fell and AUD trimmed losses to 0.6500. Today’s crowded calendar includes Australia Q1 capex, Eurozone May CPI, US May ADP payrolls and US May manufacturing ISM.
Yesterday
Australia April inflation indicator rose 0.8%mth, 6.8%yr above consensus. Key contributors included housing and holidays and accommodation, both domestic and international. The seasonally adjusted index rose a less worrying 0.3%mth. Earlier, RBA Governor Lowe answered questions in the Senate. He repeated his concern over low productivity and said the federal budget would reduce inflation pressures in the year ahead. Q1 construction work rose a healthy 1.8%qtr after an upwardly revised 1.0% gain in Q4. April private credit was also on the firm side, +0.6%mth, the largest gain since September, driven by business credit. AUD/USD spiked about 25 pips to 0.6538 in apparent reaction to CPI, but the simultaneous release of below-expectations China PMIs won the day. The official May manufacturing PMI weakened to 48.8 from 49.2, the services PMI down to 54.5 from 56.4. The Aussie extended its decline to 0.6480 in late trade, fresh lows since November 2022. Regional equities were a sea of red, including the ASX 200 -1.6%.
Currencies/Macro
The US dollar was mixed against major currencies over the day. EUR/USD fell as far as 1.0635 – a two-month low – softer German inflation data weighing, then trimmed losses to -0.4% at 1.0685. GBP/USD recovered to finish up 0.2% at 1.2440. USD/JPY spiked to 140.38 on the strong US job openings data but eventually settled down -0.3% on the day at 139.30. AUD/USD fell as far as 0.6458, another low since November before recovering to 0.6500. NZD/USD similarly roundtripped from 0.6015 to 0.5985 (a seven-month low) and back. AUD/NZD gained a net 25 pips to 1.0810.
US JOLTS job openings data for April was surprisingly strong, openings rising to 10.103m (est. 9.400m, prior 9.745m). However, other components were mixed, such as the quit rate which slipped from 2.5% to 2.4%. The May Chicago PMI fell to 40.4 (est. 47.2, prior 48.6), with notable declines in new orders, production, prices paid and employment.
The Fed’s Beige Book of regional economic conditions reported economic activity was "little changed overall." Four districts reported a small increase in activity, two reported moderate declines, and six reported no change.
Fed Governor Jefferson said skipping a June hike would give the policymakers more data to be able to assess current conditions. However, he did say that "should not be interpreted to mean that we have reached the peak rate for this cycle." He expects spending and the economy's growth pace to remain "quite slow over the rest of 2023, due to tight financial conditions, low consumer sentiment, heightened uncertainty, and a decline in household savings that had built up" after the pandemic. While "inflation has come down substantially since last summer, it is still too high, and by some measures progress has been decelerating recently, particularly in the core services sector.” Philadelphia’s Harker said the FOMC should skip a rate hike on 14 June. However, he did emphasise the difference between a skip and a pause.
German CPI in May was softer than expected, headline at +0.1%m/m and +6.1%y/y (est. +0.3%m/m and +6.5%y/y).
Interest rates
US 2yr treasury yields fell from 4.45% to 4.41%, while the 10yr yield fell from 3.69% to 3.64% (low of 3.61%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 8bp higher at the next meeting on 15 June, with a peak of 5.28% in July. Influential WSJ reporter Nick Timiraos wrote that the FOMC is indicating it will pause in June but is inclined to hike at a later date.
Australian 3yr government bond yields (futures) fell from 3.40% to 3.35%, while the 10yr yield fell from 3.64% to 3.58%. Markets are pricing the RBA cash rate, currently 3.85%, to be 10bp higher at the next meeting on 6 June, with a peak of 4.10% 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 5.61% in October.
Credit spreads were a touch weaker on the final day of the month with both Main and CDX out 1.5bp to 82 and 75.5 respectively and cash spreads also 1-2bp wider. Primary activity was largely restricted to Europe where 6 financials were in the mix (no corps) including Rabo with a EUR750M 10yr covered deal at MS+18 and Nationwide priced a EUR500M short dated (2yr) Sen Pref FRN at E+50.
Commodities
Crude markets extended their decline dropping to 4-week lows as manufacturing activity in China contracted at a faster pace than expected and most traders appear to expect no change from OPEC+ at the weekend meeting. The July WTI is down $1.37 to $68.09 while the August Brent contract is down $1.56 to $72.15. API reported a 5.2mb crude build, with gasoline rising 1.89mb and distillate 1.85mb. In a sign of increasing sensitivity around the upcoming OPEC meeting, reporters from Reuters, Bloomberg and the WSJ were denied invitations to OPEC’s headquarters in Vienna for Sunday. FT reporters were invited. The FT suggested the move was instigated by the Saudi Energy Minister Abdulaziz bin Salman who has “come under growing pressure to raise the price of crude” … “to finance Crown Prince Mohammed’s ambitious social and economic reform programme including a number of giga-projects such as the creation of the hyper modern Neom city on the Red Sea”. Meanwhile the July/ August Brent contango hit -17c on Tuesday, the weakest for a prompt contango back to April 28. Normally upbeat Goldman noted that “recessionary weakness” in the petrochemical sector is set to weigh on overall oil consumption with the bank estimating that 0.4mbpd to 0.7mbpd is at risk from a slower recovery in China, also impacting distillate demand. The July NY Harbor diesel contract fell 1.8% and is down 15.5% so far this quarter. Finally in gas markets, European prices jumped by 10% after Equinor ASA halted production at the Hammerfest LNG plant in Norway due to a leak.
Metals extended the heavy losses into the end of the month with copper down 0.2% to $8,110, nickel down 1.9% to $20,625 and zinc down 2.2% to $2,252. The weaker than expected China PMI added to the negative sentiment though Chile did report copper production down 5% in April on a mm basis and down 1%yy basis. Meanwhile zinc inventories at LME warehouses hit the highest in nearly a year, after a sharp increase in deliveries into Port Klang in Malaysia. The LME launched two new consultations with market participants, one of which would compel all stock stored in LME registered warehouses that is ‘eligible’ for delivery against contracts to be reported, even if the owner does not intend to do so. The other was to extend the use of volume weighted averages to determine daily closing prices for cash contracts and the first 4 third Wednesday contracts.
The slump in the China manufacturing PMI and cratering in the steel PMI had little obvious impact on iron ore markets with the July SGX contract up $2.70 from the same time yesterday to $98.90 while the 62% Mysteel index rose $1.35 to $103.65. The May China steel PMI output measure slumped to 27.5 while the new orders index hit 27.4. However, in a glimmer of optimism, physical steel inventory at major steel mills dropped for a second 10-day period mid-May according to CISA data while operating rates at steel mills climbed last week for the first time since mid-April according to CUSteel. The September Dalian iron ore contract closed at an almost two week high, helped by some chatter of imminent stimulus from the Chinese Government.
Day ahead
At 11:30am Syd we see an update on Australia business investment. A lift in private new capital expenditure is anticipated in Q1, supported by gains across both equipment spending and building and structures (Westpac f/c: 1.0%). On the outlook, Estimate 2 for 2023/24 capex plans is still unlikely to fully factor in the weakness that is expected to emerge over the coming months.
After the sharply negative market reaction to China’s official PMIs yesterday, there will be further interest in the Caixin/S&P Global manufacturing PMI, which tends to capture smaller businesses (1145am Syd). With reopening momentum and external demand easing, the manufacturing PMI will likely remain in soft territory in May (market f/c: steady at 49.5).
Eurozone/UK: Moderating energy prices will continue to drive a deceleration in headline consumer inflation in May (market f/c: 6.3%yr). Risks around services remains critical, especially given the historically low unemployment rate (market f/c: 6.5%). Meanwhile, net mortgage lending in the UK should remain soft in April (market f/c: £0.6bn).
US: As evidence of slowing activity growth continues to emerge, the ISM manufacturing PMI will likely remain sluggish (market f/c: 47.0). While jobs growth, such as ADP employment, continues to slow (market f/c: 170k), initial jobless claims are showing little evidence of significant job shedding (market f/c: 235k). Construction spending should meanwhile remain subdued in April (market f/c: 0.2%). Philadelphia Fed president Harker is also due to speak.
Global: The final estimate to the May S&P Global manufacturing PMIs are due.
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