Markets Daily
The Bank of Canada’s decision to hike its policy rate rattled markets, bond yields rising and the US dollar rallying while equities mostly fell. AUD reversed from above 0.6700 to 0.6655. Today’s low-key calendar includes Australia April trade data.
Yesterday
Australia Q1 real GDP rose 0.2%qtr, 2.3% yr. The arithmetic of the result was: domestic demand growth of 0.6%; net exports –0.2ppts; total inventories flat; and the statistical discrepancy –0.1ppt (i.e. the income and production estimates of GDP at 0.2% were a fraction softer than the expenditure measure, which printed at 0.3%, meeting expectations). In per capita terms, output contracted by –0.3% in the March quarter, the ABS advise. Outside of the covid lockdown quarters, that is the first decline in per capita output since December 2018, which was –0.1%. The A$ was a bit whippy around the result but overall consolidated Tuesday’s sharp rally, around 0.6675. It found some backing from a further rise in yields in the wake of RBA Governor Lowe’s speech early in the day. Lowe said the RBA’s assessment of inflation risks has changed and included a chart showing a jump in inflation expectations of union officials. Regional equities were quite mixed, the ASX 200 following yesterday’s underperformance with a further -0.2% decline.
Currencies/Macro
The US dollar was mixed against major currencies on the day. USD/CAD fell from 1.3400 to 1.3322 in response to the Bank of Canada hike, later steadying around 1.3370. EUR/USD ranged between 1.0668 and 1.0740, ultimately about flat at 1.0700. GBP/USD followed a similar seesaw pattern, from a low of 1.2395 to 1.2500 then back to 1.2440, net +0.1%.
USD/JPY rose a net 45 pips to 140.10. AUD/USD initially rose to 0.6717 (a one-month high) before falling to 0.6655. NZD/USD similarly peaked at 0.6097 before falling to 0.6040. AUD/NZD rose further, from 1.0975 to 1.1020, printing fresh highs since February.
The Bank of Canada increased its policy rate by 25bp to 4.75%, ending the "conditional pause" it announced in January. The policy statement noted that while inflation is coming down globally, "underlying inflation remains stubbornly high", and "monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target." A minority of economists had forecast the hike, while markets had priced 50% of such.
German industrial production in April appeared soft (+0.3%m/m, est. +0.6%m/m) but the prior sharp fall in March was revised from -3.4%m/m to -2.1%m/m and so was a net more solid number.
ECB’s Schnabel, Knot and other members underscored that they had “more work to do” in order to contain inflation ahead of next week’s policy meeting.
Interest rates
US 2yr treasury yields rose from 4.48% to 4.56%, while the 10yr yield rose from 3.66% to 3.79%. 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 5.30% in July.
Australian 3yr government bond yields (futures) rose from 3.70% to 3.86%, while the 10yr yield rose from 3.84% to 3.97%. Markets are pricing the RBA cash rate, currently 4.10%, to be 8bp higher at the next meeting on 4 July, with a peak of 4.46% in October.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be 5bp higher at the next meeting on 12 July and to peak at 5.68% in October.
Credit spreads reflected the more subdued sentiment post the BOC with indices a bp wider (Main 77.5, CDX 72), however cash held in to be unchanged and primary flow got away ahead of the news. Europe saw 16 issuers price ~EUR8.2bn (ex SSA, EUR31bn wtd), while in the US another 10 issuers priced USD15.6bn (USD43.2bn wtd). Regional banks were notable in the mix in the US again as both PNC (USD3.5bn across 3nc2yr and 6nc5yr) and US Bancorp (USD3.5bn across 6nc5yr and 11nc10yr) completed deals. On the local front, ASB Bank priced a USD650M 3yr at T+115bp (BBSW+128/BKBM+118), and we also saw SWEDA price a USD1.25bn 3yr (fixed/FRN) at T+125/SOFR+138 (BBSW+140).
Commodities
Crude markets saw decent gains as traders reassessed the implications of the Saudi Arabian production cuts and the EIA reported a surprise crude draw. The July WTI contract is up 79c at $72.53 while the August Brent contract is up 51c at $76.80. The EIA reported crude oil inventory fell 453kb though gasoline rose 2.75mb and distillate rose 5.07mb. The rise in distillate inventory was the largest since December 2, 2022, highlighting weak demand for trucking activity in the US. US crude production rose 200kbpd to 12.4mb, the highest since April 2020 while crude exports almost halved to 2.47mbpd. SPR sales continue with 18mb of 26mb from this release. SPR sales are set to continue through June before we start to see the impact of purchases reversing the flow. China’s imports of crude topped 12mbpd in May. IEA Director Fatih Birol noted that “of more than two million barrels a day of growth we expect this year in global oil demand 60% is set to come from China”. Russia’s Energy Ministry released data showing crude production in May was stable at 9.66mbpd compared with 9.67mbpd in April.
Gas markets were generally higher as the Norwegian Hammerfest LNG plant is set to remain offline for another week and hot weather is set to hit the UK. Soaring temperatures across China are also said to be increasing demand for LNG cargoes in the spot market in Asia. China’s imports of LNG topped 10mt for the first time this year as traders took advantage of weaker international prices. China imported 39.58mt of coal in May and Jan to May leaving Jan to May imports up 89.6%.
Metals were mixed with copper down 0.6% to $8,293 but zinc up 2.9% to $2,385. The Harbor Aluminium summit in Chicago cast a shadow over the aluminium market with the second largest US producer, Century Aluminium, noting that demand is “coming up short” of expectations it had for 2023. Hydro Extrusion noted they “don’t think there’s going to be any upside to the balance of the year”. The spread between the spot and 3-month LME aluminium contract slumped to its lowest level since mid-April. Citi was urging clients to think about starting to ‘buy copper soon’ noting that “copper’s unique characteristics mean that it could make oil’s 2008 bull run look like child's play” and “you could easily see it in the $12,000 to $15,000 range”.
Iron ore markets in China extended the run of gains to 6 consecutive sessions helped by strong May Chinese imports at 96.18mt. The July SGX contract is last up $2.90 to $109.40 while the 62% Mysteel index is up $1.4 to $110.10. That brings gains for the SGX contract so far this month to 11% while the onshore Dalian contract is up 12%. China’s steel exports surged to 8.4mt, the highest level seen since 2016.
Day ahead
At 11:30am Syd we see Australia’s April international trade data. Westpac expects the trade surplus to fall to $11.8bn from a massive $15.3bn in March, as exports pull back sharply on both prices and volumes, -6%mth. We look for imports to have edged down -0.5%mth. The median forecast is $13.7bn.
Japan: Q1 GDP is expected to be revised up modestly in its final estimate, from 0.4% to 0.5%.
Eurozone: A slight downward revision to Q1 GDP is anticipated in the final estimate (market f/c: 0.0%).
US: Initial jobless claims are expected to tick up slightly though broader labour market data remains mixed in the US (market f/c: 235k).
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