Markets Daily
The US S&P 500 rallied to a 14-month high, encouraged by a benign inflation update. Bond markets were volatile. Sterling jumped on strong labour data while AUD edged up to 0.6765. The FOMC decision dominates the global calendar. Also on the slate are UK May GDP and NZ Q1 balance of payments.
Yesterday
The Australia June Westpac-MI consumer sentiment index rose 0.2%mth to 79.2 after May’s -7.9% tumble. The survey was taken over the period 5-9 June. That period covered the announcement of the decision by the Reserve Bank to lift the cash rate by 0.25% from 3.85% to 4.1%. While the full survey showed little net change in sentiment, responses within the survey week show a big rate rise impact. Prior to the announcement of the rate hike decision confidence had lifted sharply from 79.0 in May to 89.0. But following the announcement it tumbled to an extremely low 72.6. The Australia May NAB business survey was soft – confidence dropped to -4 from 0 while business conditions weakened to +8 from +15. AUD dipped slightly to under 0.6740 as China’s central bank unexpectedly trimmed a 7-day interest rate, prompting a dip in the Chinese yuan. Later AUD steadied around 0.6770 for a net gain of 20 pips, with a high of 0.6783 (high since 11 May) after a Bloomberg story claiming that “China is considering a broad package of stimulus measures.” Regional equity markets were mostly very upbeat, the ASX 200 lagging with a +0.2% close.
Currencies/Macro
The US dollar weakened against most G10 currencies on the day despite higher US yields. EUR/USD reached 1.0824 on the CPI data, eventually steadying up 0.3% at 1.0790. GBP/USD surged 1 cent or 0.8% to 1.2615, aided by strong UK labour data. USD/JPY followed Treasury yields, dipping to 139.01 then rebounding to 140.20, net +0.5%. AUD/USD rose a net 0.3% over the day to 0.6765, with a brief high of 0.6807, its first trade above 0.6800 since 10 May. NZD/USD rose 0.5% to 0.6155. AUD/NZD fell from 1.1049 (a three-month high) to 1.1000.
US CPI in May moderated as expected given energy price declines, rising 0.1%m/m and 4.0%y/y (est. 0.1% and 4.1%, prior 0.4% and 4.9%). However, core (ex-food and energy) remained sticky, rising 0.4%m/m and 5.3%y/y (est. 0.4% and 5.2%, prior 0.4% and 5.5%).
China released May lending data. New loans rose to CNY1360bn from CNY719bn and aggregate financing to CNY1560bn from CNY1217bn in April but both were below consensus.
The key data release in UK was April/May labour report. It was strong in virtually all aspects. The headline April unemployment rate dipped to 3.8% (est. 4.0%, prior 3.9%) and April Weekly Average Earnings were high at 6.5%y/y (est. 6.1%y/y, prior revised to 6.1%y/y from 5.8%y/y) and ex-bonus rose to 7.2%y/y (est. 6.9%y/y, prior revised to 6.8%y/y from 6.7%y/y). One of the factors that surprised in the last report was a fall in April payrolls of a bumper -136k (est. was for a rise of +28k). That surprise fall was revised to a rise of +7k and May payrolls were as expected at +23k. The 3m/3m change in employment for April was also strong at 250k (est. 150k) to round off the strong report.
BoE nominee Green delivered a hawkish commentary, noting that there is some evidence that companies have more pricing power and inflation may prove persistent as corporates continue to rebuild margins.
NFIB Small Business Optimism continues to stutter at extreme lows. Although May headline ticked up to 89.4 (est. 88.5, prior 89.0) it was still seen as a weak report and appeared to show a squeezing of margins as price pressures eased but wage pressures were sustained.
Interest rates
US 2yr treasury yields initially fell from 4.58% to 4.49% in response to the US CPI data, but then reversed to 4.67%, while the 10yr yield similarly rose overall from 3.73% to 3.81% via 3.68%. Markets are pricing only 4bp risk of a hike at today’s meeting, with a peak of 5.28% in September.
Australian 3yr government bond yields (futures) rose from 3.83% to 3.92% via 3.80%, while the 10yr yield rose from 3.92% to 4.00% via 3.89%. Markets are pricing the RBA cash rate, currently 4.10%, to be 9bp higher at the next meeting on 4 July, with a peak of 4.45% in October.
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 5.62% in October.
Credit saw a positive session with indices half a bp tighter (Main at 77, CDX at 70) and US cash 1-3bp tighter across the various sectors as the CPI print continued to point to a pause from the Fed this evening, however US primary was quiet ahead of the CPI/Fed double. Euro primary remained active with 8 issuers pricing EUR5.7bn (ex-SSA, EUR8.4bn WTD) as UK issuers (Anglian Water / BT) completed GBP deals in the corporate space, however supply was driven by the banks including ABN which printed a EUR1bn 3.5yr SenPref deal at MS+65 and a 10.25nc5.25yr Tier 2 offering at MS+245. We also saw the first AT1 supply in Europe post CS (a day after UBS completed the takeover) with BBVA (EUR1bn MS+554) and Bank of Cyprus (EUR220M to yield 12.23%) both completing PerpNC5.5yr deals.
Commodities
Crude markets recovered much of the previous day’s slump, helped by a surprise China rate cut and hopes that the Fed will pause rate hikes this week. The July WTI contract is up $2.05 to $69.17 while the August Brent contract is up $2.19 to $74.03. The PBoC announced a 10bp cut in the 7-day reverse repo, the first cut in 9 months and the government announced 22 measures to lower costs for companies this year including tax breaks and measures to channel loans to key sectors according to the FT. News that the US government is planning to purchase about 12mb of crude this year also helped. However, API reported late in the day that US crude inventory rose 1mb last week while gasoline rose 2mb and distillate rose 1.4mb. Major oil and container ports have closed in India as severe cyclone Biparjoy is expected to make landfall between Gujarat and Karachi in Pakistan on Thursday with wind gusts expected to reach 150kph.
Meanwhile in gas markets, prices across Europe extended their gains due to hot weather, forecasts of more to come and extended outages at European fields. The July TTF contract has jumped 34% so far this month to the equivalent of $11.40/MMBtu while the UK equivalent has risen 42% to the equivalent of $11.41/MMBtu. Shipments from Norway are not expected to resume until the middle of July.
Metals jumped on the China rate cut announcement and stimulus news. Zinc is up 1.3% to $2,379, copper up 1.6% at $8,441 and nickel surged 6.5% to $22,110, a 1 month high. Aluminium lagged however as rainfall in the Yunnan district raised speculation that about 1.1mt of the circa 2mt of idled capacity would be brought back online. Operations at the Escondida mine in Chile were not impacted by a fire on a conveyor belt according to BHP.
Iron ore markets jumped on the surprise rate cut and stimulus news with the July SGX contract up 90c from the same time yesterday at $111.40 while the 62% Mysteel index is up $2.40 at $113.55. Bloomberg reported that a key part of the stimulus package involves supporting the real estate market though the plan “has yet to be finalised and may be subject to change”. The State Council may discuss the plans this Friday. Following the 10bp cut in the 7-day reverse repo, the PBoC is expected to cut the medium-term lending facility rate (MLF) and the benchmark loan prime rate (LPR) Thursday. China will report key activity data for May on Thursday too.
Day ahead
Australia: Overseas arrivals for May are likely to continue their ascent.
NZ: The first quarter current account deficit is expected to remain unsustainably large (Westpac f/c: -9% of GDP).
Eurozone/UK: Europe’s industrial production in April will reflect broad-based weakness. The UK’s April GDP is likely to have bounced back from March’s decline (market f/c: 0.2%mth). April’s trade deficit is expected to narrow as consumer weakness lowers demand for imports (market f/c: GBP3.7bil).
Key Federal Reserve officials have made clear that they plan to hold the federal funds rate at the current range of 5.00-5.25% at today’s meeting (4am Thursday Syd). Despite inflation risks persisting, many members have argued for a pause to assess the impact of monetary tightening so far. Labour market data has been mixed and a couple more months’ data will be necessary to make an assessment on whether emerging slack is here to stay. Along with Chair Powell’s press conference, there will be close attention on the quarterly forecasts, especially FOMC members’ median projection of the likely path of the funds rate.
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