Markets Daily
The Fed paused as expected but signalled further hikes ahead. Bonds, equities and currencies were volatile. AUD trimmed gains to near 0.6800. Today’s crowded calendar includes Australia May employment, China May industrial production and retail sales, the ECB policy decision and US May retail sales.
Yesterday
In May, Australia’s overseas arrivals and departures were little changed, easing only modestly to 1.30mn and 1.37mn respectively. However, the above figures largely capture the stagnation in short-term travel (i.e. intending to stay/leave for less than 12 months), which constitutes roughly 90-95% of total travel. The permanent and long-term category of travel is continuing to exhibit clear strength. AUD/USD traded a very tight 0.6763 to 0.6783 range. Regional equity sentiment was quite mixed ahead of the FOMC decision, the ASX 200 somewhere in the middle with a 0.3% gain.
Currencies/Macro
The US dollar index is down 0.3% on the day, having fallen ahead of the FOMC and partially recovering afterwards. EUR/USD rose from under 1.0800 to 1.0864 – a one-month high – before giving up some ground on the Fed, steadying around 1.0830. GBP/USD followed a similar path, reaching a high of 1.2699 then consolidating up half a cent at 1.2660. USD/JPY fell to 139.29 pre-FOMC, then recovered to around 140.00. AUD/USD initially followed the broad US$ decline to 0.6836 (a four-month high) ahead of the FOMC, fell to 0.6756 in response, then steadied around 0.6795. NZD similarly fluctuated for a net gain of 1% or 60 pips at 0.6210. AUD/NZD fell 55 pips to 1.0950.
The FOMC left rates unchanged in a 5.00% to 5.25% band, as was widely expected, with a unanimous vote. Guidance was hawkish: "In determining the extent of additional policy firming that may be appropriate", signalling at least one more hike is possible. The funds rate dot plot projection rose by around 50bp from the March version i.e. end-2023 at 5.63%. In his press conference, Chair Powell said they paused to assess conditions, but they will have to "keep at it", and July is a live meeting.
US PPI inflation in May was softer than expected, at 1.1%y/y (est. 1.5%, prior 2.3%).
Interest rates
US 2yr treasury yields rose from 4.63% to 4.80% in response to the FOMC, later easing to 4.69%, while the 10yr yield was very volatile on the Fed headlines but ultimately -3bp on the day at 3.79%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 15bp higher at the next meeting on 27 July, with a peak of 5.29% 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 10bp higher at the next meeting on 4 July, with a peak of 4.51% in December.
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 5.65% in October.
Credit spreads matched the moves across broader markets with Main flat at 77, however CDX was more volatile, closing a bp wider at 71 after initially giving up 1.5bp (to 72) post the Fed. Cash spreads were little changed and US primary was effectively closed ahead of the Fed, however Europe saw 5 issuers price ~EUR3.1bn (now EUR11.5bn wtd) with all supply coming from financials. That included NatWest Markets with a GBP500M 3yr deal at UKT+183 and Danske with a EUR1bn 7nc6yr green SNP deal at MS+170.
Commodities
Crude reversed the previous day’s gains with a huge rise in crude inventory and a hawkish skip from the Fed weighing on sentiment. The July WTI contract is down 75c at $68.67 while the August Brent contract is down 71c at $73.58. The EIA reported a whopping 7.9mb rise in crude inventory with production unchanged at a post-Covid record 12.4mbpd and exports rising by 795kb to a still low by recent standards 3.27mb. Gasoline inventory rose by 2.1mb and distillate also rose by 2.1mb. Crude and fuel stocks are now at the highest levels since August 2021, and Cushing stocks hit the highest since June 2021. The SPR released another 1.9mb with 19.9mb of the 26mb sold in the most recent tender now released. JP Morgan became the latest to throw the towel on its bullish call, cutting the 2023 Brent forecast to $81 from $90, noting that “it is becoming increasingly clear that high oil prices over the past two years did exactly what they were supposed to do - incentivise supply”. However, the IEA argued that world oil markets may tighten “significantly” over the next few months as China’s fuel consumption rebounds from the pandemic and OPEC+ reduces production.
Meanwhile, gas markets tightened further, prompted by Norwegian facilities prolonging maintenance until mid-July. The July UK NBP contract is up 53% over the last week while the European equivalent is up 45%. The Hammerfest LNG plant is on track to restart today though other plants are extending planned works despite above-normal temperatures lingering across northwest Europe. Finally, China’s coal output is running almost 5% ahead of last year’s record and imports are up about 90% on last year with Indonesia followed by Russia the main suppliers.
Metals bounced further with copper up another 0.8% at $8,526, nickel up 3.2% to $22,650 and zinc up 3.6% to $2,467. Helping zinc was an announcement from Boliden AB that it will shutter Europe’s largest mine in Ireland, the Tara mine, due to a sharp deterioration in demand conditions. Global copper inventory continued its recent plunge, down 21% so far this quarter, largely driven by a 50% plunge in Shanghai warehouses. That’s helping to drive the copper premium for the spot to three-month contract to a 2-month high.
Iron ore sentiment remained positive, helped by PBoC rate cuts earlier in the week, hopes for a benchmark rate cut today plus expectations of a broad stimulus package in the weeks ahead. The July SGX contract is up $1.95 at $113.35 while the 62% Mysteel index is up $1.30 to $114.85. The Sep Dalian contract is at a fresh 10-week high and is up almost 16% so far this month. Bloomberg reported that Chinese officials have held “at least six consultations in recent weeks with [business leaders and economists]” and “leaders pressed those assembled for ideas on ways to stimulate the economy, restore confidence in the private sector and revive the real estate industry”. The State Council is due to meet tomorrow to discuss plans. China will release a batch of May activity data today and the PBoC will likely announce a cut in the medium-term lending facility rate (MLF) and the benchmark loan prime rate (LPR).
Day ahead
Australia (11:30am Syd): Following April’s surprise decline in jobs growth, likely due to a seasonal anomaly, Westpac expects employment to post a moderate bounce back in May (Westpac f/c: +40k, market +18k). With participation set to lift, the unemployment rate should remain at 3.7%.
The June Melbourne Institute survey of Australia inflation expectations is due at 11am Syd. The May reading was 5.2%.
At 12pm Syd, China’s May activity data seems set to provide a mixed read on the economy’s underlying performance given post-reopening volatility. Consensus is 13.7%yr on retail sales after 18.4%yr in April, with the monthly change worth watching given the lockdown impact on May 2022 boosting annual comparisons. Industrial production is seen up a muted 3.5%yr after 5.6% in April. A slight easing in fixed asset investment (market f/c: 4.4%yr ytd) is anticipated.
The PBOC is expected to cut its one-year medium term lending facility rate by 10 bps to 2.65%. The decision on its benchmark policy rates is next week.
The European Central Bank is set to deliver another 25bp rate hike, taking the deposit rate to 3.5%. Quarterly forecasts of GDP and CPI may be revised slightly lower. Markets will be keenly focused on the Governing Council’s views on further tightening, so President Lagarde’s press conference could be the main market driver.
The Eurozone trade balance should remain in surplus as trade patterns continue to normalise after energy price-driven deficits in 2022 (market f/c: €17.5bn).
US: A modest decline in retail sales is anticipated in May as households grapple with cost-of-living pressures (market f/c: -0.2%). With demand set to ease, industrial production will remain under stress (market f/c: 0.1%). Indeed, the Philly Fed and NY Fed Empire State indexes will continue to highlight downside risks on this front (market f/c: -14.0 and -15.1 respectively). Initial jobless claims should meanwhile ease modestly (market f/c: 245k).
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