Markets Daily
A strong US jobs report helped push bond yields, the USD, and equities higher on Friday. AUD remained an outperformer after the minimum wage decision, at 0.6605. Today’s calendar includes Australia Q1 company profits and inventories and May services PMIs in China and the US.
Friday
Australia’s Fair Work Commission decided on a 5.75% increase for the minimum wage and for awards but with changes to the alignment with the minimum wage and awards lifts it to 5.9%. The decision is a material upside surprise for Treasury but more in line with what our aggregate wage growth forecasts were already implying. Markets viewed the decision as bolstering the chances of a hike on 6 June, adding 4bp to +14bp priced. Encouraged by a hawkish AFR column, AUD/USD rallied from 0.6580 to a high of 0.6618. The Aussie was strongest in the G10 in the session. Australia April housing finance was a lot weaker than consensus, -2.9%, with owner-occupiers -3.8%, investors -0.9%. Regional equity sentiment was upbeat, Japan’s Topix +1.6%, China’s CSI 300 +1.4% and Hong Kong’s Hang Seng rebounding +4.0%.
Currencies/Macro
The US dollar was mixed against G10 FX on Friday. EUR/USD fell from 1.0770 to 1.0710. GBP/USD dropped about 80 pips to 1.2450. USD/JPY correlated tightly with US Treasury yields, rallying from 138.80 to 140.00. AUD was easily strongest in the G10, extending its local session rally to a high of 0.6638, then easing back to 0.6605 amid the USD revival. NZD rallied for a while in London but then returned to 0.6060. AUD/NZD thus rose 75 pips to just above 1.0900, printing highs since 24 April.
US non-farm payrolls in May easily beat expectations, rising 339k (est. 195k, prior revised from 253k to 294k). However, details were mixed. The unemployment rate rose from 3.4% to 3.7% (est. 3.5%), and the weekly hours worked slipped from 34.4 to 34.3 (est. 34.4). Participation remained at 62.6%.
Following the US Senate’s vote (63 to 36) late on Thursday to suspend the US debt ceiling, President Biden on Friday evening signed the legislation which averts a debt default. The measure limits federal spending for two years and suspends the debt ceiling until January 2025.
Interest rates
US 2yr treasury yields rose from 4.35% to 4.50%, while the 10yr yield rose from 3.60% to 3.69%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 9bp higher at the next meeting on 15 June, with a peak of 5.31% in July.
Australian 3yr government bond yields (futures) rose from 3.45% to 3.50%, while the 10yr yield rose from 3.65% to 3.75%. Markets are pricing the RBA cash rate, currently 3.85%, to be 14bp higher at the next meeting on 6 June, with a peak of 4.23% 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 followed the improved sentiment with Main another 2.5bp tighter to 77 as it pushed into its range lows for the year (75-80, absolute low 72.5bp in early Feb) and CDX was similar, in 2.5bp to 71.5 and back towards its lows. Cash spreads are also tighter however the bulk of this reflected the move in swap. Primary activity was quiet as we would expect on a payrolls Friday with Europe seeing 3 issuers price a bit over EUR1bn in total and nothing to report in the US.
Commodities
Crude markets rallied into the end of the week, helped by China stimulus rumours, some expectations that OPEC+ might adjust crude production and the positive debt ceiling news. The July WTI contract was up $1.64 to $71.74 while the August Brent contract was up $1.85 to $76.13. And over the weekend OPEC+ meeting in Vienna, Saudi Arabia announced a further 1mbpd cut for July which could be extended while the group announced a review of Russia’s production targets, and an adjustment to UAE plus African production that will be formalised and extended out to 2024. The Saudi Energy Minister said “we want to just ice the cake with what we have done” and “we will do whatever is necessary to bring stability to this market”. A Bloomberg survey of analysts reported that OPEC production dropped by 500kbpd in May. Meanwhile, US rig counts fell by a further 24 last week, taking the total down to 728, the lowest back to May last year. Vitol’s head of Asia noted that “mobility data in China is good, even strong I would say” though “diesel use is a little more disappointing”.
Metals consolidated the mid-week jump on Friday with copper largely unchanged at $8,247, zinc up 1.5% to $2,301 but aluminium down 0.66% to $2,267 and nickel down 1.44% to $21,010. The better-than-expected China Caixin manufacturing PMI Thursday plus rumours that China was preparing a property package lifted sentiment through the week, with copper touching an almost 4-week high at $$8,380. In industry news, Codelco announced a further drop in copper production in April to 101.3kt, down from both the previous month and on a year-on-year basis. ERG announced that it halted production at its Boss copper and cobalt project in the DRC due to waste leakage. Hedge fund net bearish (short) Comex copper bets hit 11-month highs.
Iron ore markets continued the better price performance Friday on China stimulus rumours with the July SGX contract up another $2.15 to $104.90 while the 62% Mysteel index rose $1.40 to $105.15. The September Dalian contract closed at an almost 7-week high. China will report the first batch of trade data for May on Wednesday including steel exports and iron ore imports plus CPI and PPI on Friday.
Day ahead
At 11:30am Syd we see partial data to help shape forecasts for Australia’s Q1 GDP report due Wednesday. Westpac expects company profits will decline in Q1, particularly as lower commodity prices weigh on the mining sector (Westpac f/c: –3.0%, consensus +2%). With domestic demand weak, non-farm inventories will likely remain soft in the quarter (Westpac f/c: +0.3%).
The May Melbourne Institute Australia inflation gauge is due; April was 0.2%mth, 6.1%yr. ANZ job ads are meanwhile in a gradual downtrend from an elevated level.
New Zealand markets will be closed for the King’s Birthday.
China: Amid growing uncertainty around the near-term outlook, the Caixin services PMI is signalling clear strength in the sector (market f/c: 55.2, due 11:45am Syd).
Eurozone: The recovery in Sentix investor confidence has been stalling given lingering uncertainty.
US: While the ISM services PMI should receive some support from solid demand in May, the outlook remains downbeat (market f/c: 52.4 versus 51.9 in April). The underlying weakness in factory and durable goods orders highlights the growing risk around near-term capex spending (market f/c: 0.8% and 1.1% respectively).
The final estimates of May S&P Global services PMIs are due for Japan, Europe, the UK and US.
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