Markets Daily
The USD fell after a hawkish hike from the ECB and some lacklustre US data. European bond yields jumped but US yields rolled over. AUD rose to 0.6880. Today’s calendar features the Bank of Japan policy decision, final May Eurozone CPI and US June consumer sentiment.
Yesterday
Australian total employment jumped 75.9k from –4k in April. The unemployment rate was 3.6% from 3.7%; participation rate: 66.9% from 66.7%. The timing of Easter seems to have depressed April jobs and boosted May. Still, average monthly employment gains remain robust and the unemployment rate is holding near historic lows, suggesting that if the labour market is softening, it is only doing so to a marginal degree. Pricing for further RBA tightening rose but AUD price action was muddied by CNH weakness. The Ausie dipped as low as 0.6768 but later recovered to gain a net 20 pips at 0.6815. The ASX 200 managed its fourth straight small gain, 0.2%.
Currencies/Macro
The US dollar was weak against all G10 FX on the day except JPY (flat). EUR rose from 1.0820 to 1.0953 - a fresh one-month high, with most gains coming after the ECB decision. GBP/USD rallied 1.2 cents or 1% to 1.2785, printing highs since April 2022. USD/JPY round-tripped from 140.20 to 141.50 (a 7-month high) to 140.20. AUD/USD rose from 0.6800 early NY to 0.6893 (a fresh 4-month high). NZD fell to 0.6160 then rebounded to 0.6230 for a 25 pip net gain. AUD/NZD rose from 1.0940 prior to the soft NZ Q1 GDP data to 1.1045.
The ECB raised its policy rates by 25bp, as was widely expected, and delivered hawkish guidance: “more work to do”. The deposit rate is now at 3.50%, the main refinancing rate at 4.00%. The statement emphasised that underlying price pressures remain strong, while acknowledging some signs of softening. Inflation forecasts for 2024 and 2025 were increased slightly, while 2023 was increased to 5.1% from 4.6%. The central bank expects inflation could remain “too high for too long”.
US retail sales in May rose 0.3%m/m (est. -0.2%m/m), but the core control group was as expected at +0.2%m/m. Import prices in May were soft, down -0.6%m/m (est. -0.5%m/m), with export prices down -1.9%m/m (est. -0.1%m/m). Initial jobless claims were again higher than expected, at 262k (est. 245k, prior 262k) with continuing claims rising to 1.775m (est. 1.768m, prior 1.755m).
The NY Fed (Empire State) manufacturing activity survey, which has been volatile, rose to +6.6 in June (est. -15.1, prior -31.8). The Philadelphia Fed survey fell to -13.7 in June (est. -14.0, prior -10.4). Industrial production in May was soft, slipping -0.2%m/m (est. +0.1%m/m), driven by lower electricity production.
Interest rates
US 2yr treasury yields rose to 4.78% then tumbled to 4.63% after the US data, while the 10yr yield fell from 3.83% pre-data to 3.72%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 18bp higher at the next meeting on 27 July, with a peak of 5.29% in September. German 2yr bonds at 3.13% are 3bp higher than pre-ECB, and 13bp higher than the previous close.
Australian 3yr government bond yields (futures) are little changed at 3.91%, the 10yr yield at 3.97%. Markets are pricing the RBA cash rate, currently 4.10%, to be 16bp higher at the next meeting on 4 July, with a peak of 4.63% in November.
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 reflected the transition in sentiment with Main half a bp wider at 77.5 (2bp below its session high) however CDX was a bp tighter at 70.5 and US cash credit was 1-3bp better. US primary markets sat out the session post the Fed and appears likely to remain quiet this evening ahead of a Monday holiday. Europe was also quiet with just 2 GBP issuers in the market ahead of the ECB. Volvo priced a GBP500M 5yr and SocGen a GBP500M 10yr SenPref deal at UKT+190 (BBSW+236).
Commodities
Crude recovered the previous day’s losses and more as China issued larger import quotas for non-state-owned refiners and the general risk-on tone lifted sentiment. The July WTI contract is up $2.35 to $70.62 while the August Brent contract is up $2.38 to $5.58. The authorities in China allocated the third batch of import quotas at 62.28mt of crude, bringing the total for the year to 194.1mt, up 18% from last year according to Bloomberg. And China’s apparent oil demand (processed oil plus net imports of refined products) for May rose 17.1%yy to 14.58mb, though that was down from the circa 25%yy rise in April. The premium for Dubai oil to WTI has hit the highest level since late March, making WTI more attractive in Asia too. However, rising crude inventories are forcing the front ends into contango with the 1st 2nd WTI time spread hitting lows back to mid-March. A Turkish delegate will arrive in Baghdad to discuss Iraqi flows to the port of Ceyhan. The pipeline was closed late March with flows through Turkey normally running at 400kbpd. The US and Iran are also said to be “inching towards an agreement” under which Iran would release American prisoners while the US would release payments that were frozen by sanctions.
Gas markets soared as the Dutch government accelerated the closure of the Groningen field to October 1 after 60 years of production. This wasn’t exactly new news – the state secretary for mining had said back in January that Europe’s largest gas field would close October 1 if there was no shortage of gas in Europe. The July TTF contract at one point was up 30% on the news though it closed up 7.4% on the day. The contract is up 88% so far this month following outages at Norwegian facilities and hot weather across Europe.
Metals continued the bullish move with little fresh news. Copper is up 0.6% at $8,563 while nickel is up 1.3% to $23,025 and tin is up 1.7% to $27,225. The LMEX index is at 5-week highs. Of note, the spread between spot and 3-month tin jumped to the highest level seen since November 2021. Production in Northern Myanmar was ordered to a halt in April though producers with valid permits were allowed to continue to August 1. Chinese tin producers in the region including Yinman Mining and Guangxi China Tin have announced maintenance and outages in recent days, adding to the tightness in tin markets. And in industry news, First Quantum was said to rebuff an informal approach from Barrick.
Iron ore was mixed, with the PBoC announcing a well telegraphed 10bps cut in the 1yr MLF to 2.65% largely offsetting weaker than expected May steel production at 90.17mt, down 7.3%yy. The July SGX contract is down $1.45 from the same time yesterday to $111.90 while the 62% Mysteel index is up 75c to $115.60. After yesterday’s PBoC cut, the focus turns to today’s State Council meeting and any signs of stimulus announcement.
Day ahead
The Bank of Japan announces its policy decision followed by a press conference by Governor Ueda. There is no set time for the announcement, but the usual ‘window’ opens 12:30pm Syd (11:30am Tokyo). Expectations are for no change in the basic policy settings, notably the -0.50% to +0.50% range for the 10-year Japanese government bond. A more likely time for any policy tweak such as widening the yield target range is 28 July, when quarterly forecasts will be published. Still, USD/JPY has been skittish every meeting since the surprise December 2022 decision to widen the band from +/-0.25%.
Eurozone: The final estimate to May’s CPI will provide crucial detail around the momentum and structure of services inflation (market f/c: 6.1%yr).
US: As University of Michigan consumer sentiment struggles to move significantly above historic lows, the focus in the preliminary June survey will remain centred on household’s inflation expectations. Consensus is 60 for the sentiment index, 4.1% on the 1-year inflation expectation and 3.0% for the 5-10-year expectation.
The Fed’s Bullard, Waller and Barkin are also due to speak. Bullard and Waller are consistently hawkish.
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