Markets Daily
AUD preserved much of its post-RBA reaction, steadying around 0.6670. The US dollar, US bonds and equities closed with modest changes. Today’s calendar features Australia Q1 GDP, China May trade data and the Bank of Canada rates decision.
Yesterday
The RBA raised the cash rate 25bp to 4.10%, a move forecast by 10 of 30 economists and about 35% priced into money markets. Governor Lowe said that “Recent data indicate that the upside risks to the inflation outlook have increased” and repeated familiar language that “Some further tightening of monetary policy may be required.” AUD/USD jumped from 0.6628 to a high of 0.6673 before consolidating. The Aussie also gained sharply on crosses including AUD/NZD which jumped from below 1.0900 to above 1.0950, reaching highs since February. The ASX 200 turned a -0.5% fall into -1.0% within 30 minutes and closed -1.2%.
Currencies/Macro
The US dollar was mixed on the day. EUR/USD fell just 20 pips net to 1.0695, GBP/USD -0.1% to 1.2425. USD/JPY rose to a telling high of 139.99 then retreated to 139.65, net flat on the day. AUD was unsurprisingly strongest in the G10 following the RBA’s rate hike, consolidating a 55 pip or 0.8% gain at 0.6670. NZD/USD was net flat at 0.6075, driving AUD/NZD up 75 pips to 1.0975, with a high of 1.0992, its strongest point since 22 February.
Eurozone retail sales in April were flat (est. +0.2%m/m) but March was revised slightly higher.
The ECB’s consumer expectations survey saw 1-year ahead inflation expectations fall to 4.1%y/y from 5.0%, the 3-year ahead measure falling to 2.5% from 2.9%.
ECB hawk Knot pointed to persistent underlying inflation pressures and concerns around second round effects – notably wage growth and embedding expectations. He did, however, note risks relating to financial conditions tightening and lagged effects of tightening to date.
Interest rates
US 2yr treasury yields traded 4.43% to 4.54%, ending around 4.48%, while the 10yr yield probed up to 3.73% but then slid back to 3.66%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 7bp higher at the next meeting on 15 June, with a peak of 5.29% in July.
Australian 3yr government bond yields (futures) jumped from 3.55% to 3.69% after the RBA, later settling around 3.65%, while the 10yr yield is at 3.80% (vs 3.77% pre-RBA). Markets are pricing the RBA cash rate, currently 4.10%, to be 7bp higher at the next meeting on 4 July, with a peak of 4.31% in September.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be 4bp higher at the next meeting on 12 July and to peak at 5.63% in October.
As with the broader market, credit spreads were little changed with CDX half a bp tighter at 76.5 and US cash spreads flat to a bp wider as newsflow takes a breather and supply remains firm. Last night Europe saw 11 issuers price ~10.3bn (ex SSA, EUR23bn over 2 days) with Schneider Electric (EUR1bn, 5/10yr) and Universal (EUR750M 8yr) notable in the corporate space. The US saw another 7 issuers price USD7.6bn (USD27.65bn week to date) with Bacardi’s USD1.5bn 3 tranche deal (5/10/20yr) the largest on the day as it looked to fund its D’Usse stake buy. On the local front, NAB followed ANZ and MQG into the US market pricing USD2.5bn across a short 2yr (May-25, USD1.5bn fixed/FRN at T+70/SOFR+76, BBSW+76) and a USD1bn 5yr fixed deal at T+110 (BBSW+139).
Commodities
Crude markets gave back the rest of the Saudi production cut gains as weaker demand forecasts weighed on sentiment. The July WTI contract is down 68c at $71.47 while the August Brent contract is down 72c at $75.99. The EIA again cut its total US petroleum consumption by 100kbpd to 20.4mbpd and increased its US crude oil production forecast by 720kbpd to 12.61mbpd. The drop in demand comes largely from diesel consumption which is projected to fall below pre-pandemic averages. The API reported that US crude inventories fell by 1.5mb last week though gasoline rose by 2.4mb and distillate by 4.5mb. And Citi warned that “it would take surprisingly better coordinated action among OPEC+ producers to tighten markets if that is their wish”. Bloomberg reported that Russian crude flows were within 100kbpd of a record just as OPEC “assessed and sought clarification” from Russia on its crude production.
Energy markets in Europe gave back half of the previous day’s gains as gas inventories hit the 70% full mark meaning that outages at Norway’s Hammerfest LNG plant are seen as less of an issue. The July TTF contract fell almost 13% having jumped 20% the day before. And Qatar was said to be offering looser LNG contract terms to entice Asian buyers. Bangladesh was reported signing a deal with QatarEnergy for 15yrs at a roughly 12.6% link to Brent plus US$0.50 per MMBtu.
Metals were mixed with copper largely unchanged at $8,325, zinc up 2.4% at $2,343 but aluminium down 1.7% at $2,205. Bloomberg noted that China was “firing up its copper smelters just as demand is weakening” according to Savant/ Marex Group geospatial data. SMM reported that the Yunnan province would grant 2mkw to local aluminium producers to resume production. An SMM survey showed that rainfall in the region had increased allowing hydropower generation to pick up.
Iron ore markets recorded their 5th consecutive day of gains driven by rumours which started circulating at the end of May that China was preparing a package of measures to support housing and construction. The July SGX contract is up 70c from the same time yesterday to $106.50 while the 62% Mysteel index is up 15c to $108.70. The SGX contract is up almost 9% so far this month while the Sep Dalian contract is up 10%. Meanwhile in a sign that steel demand is picking up, inventory levels at major steel mills fell 4% from mid-May levels. Joining Goldman however, Citi lowered its price forecast for iron ore for the rest of the year, now expecting $110/t for the second quarter, $100/t for the third and $90 for the fourth quarter.
Day ahead
At 11:30am Syd, Westpac expects Australia Q1 GDP to have risen 0.3%q/q, 2.4%yr, in line with consensus. Strength in investment across both government and business should be a key driver of growth in the quarter, partially offset by soft net exports. Importantly, consumption is expected to hold flat as households respond to ongoing cost-of-living pressures and spending patterns continue to normalise.
Hopefully providing more colour around yesterday’s surprise decision to raise the cash rate, RBA Governor Lowe is due to deliver a speech titled ‘A Narrow Path’ at 9:20am Syd. Deputy Governor Bullock will participate in a panel discussion.
China: The trade surplus is expected to have widened in May (market f/c: US$95.5), as regional partners continue to provide underlying support.
US: The trade deficit likely widened in April as exports come under pressure from weaker manufacturing outcomes (market f/c: -$75.8bn).
Markets are divided on whether the Bank of Canada keeps rates steady at 4.5% or hikes by 25bp (40% priced in). It last hiked in January, and then paused to assess the cumulative impact on the economy.
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