Markets Daily
During a thinned session, with US markets closed, European equities fell and bond yields rose amid hawkish ECB comments. The defensive USD outperformed, AUD/USD slipping to 0.6850. Today’s calendar includes RBA June meeting minutes plus speech by Deputy Governor Bullock, then US May housing construction data.
Yesterday
AUD/USD has risen all but 2 days so far in June. As of late Sydney trade Monday, it was slightly down on the day at 0.6870, with a low of 0.6834 as regional equity sentiment turned sour. This excluded the ASX 200, whose 0.6% gain was strongest in Asia-Pacific. There was a slight improvement in sentiment on news that US Secretary of State Antony Blinken would meet with China President Xi Jinping.
Currencies/Macro
The US dollar was generally stronger despite a quiet data calendar and the US holiday. EUR/USD edged down 15 pips to 1.0920, GBP/USD down 20 pips to 1.2790. USD/JPY rose from 141.75 to 142.00 – a 7-month high. AUD/USD fell 25 pips over the day to 0.6850. Underperformer Kiwi fell 40 pips or -0.6% to 0.6200. AUD/NZD rose 0.2% to 1.1050, printing marginal new highs since 21 February.
The US NAHB homebuilder sentiment survey surprised to the upside in June with a reading of 55 (est. 51, prior 50) – the sixth consecutive monthly gain. All the sub-indices rose. The NAHB noted that expectations that the FOMC is nearing the end of its rate hiking cycle was seen as supportive, and builders were cutting home prices to help boost sales.
The ECB's Kazimir supported further tightening, saying that elevated inflation is a greater threat to the economy than rising loan costs. He said last week's decision to hike was a "no-brainer", and a rate hike in July is also necessary, but the September meeting "is open and it remains to be seen what will be done". Schnabel said: ““We need to remain highly data-dependent and err on the side of doing too much rather than too little.” Lane was more moderate: ”It looks like another hike in July will be appropriate. And then basically we will see in September, that’s months away in terms of all the data we’re going to learn about between now and September, we’ll also have a full scale forecasting round.”
Interest rates
European bond yields closed higher on the day, German 10yr +4bp to 2.51, France +6bp to 3.03%. UK gilt yields continue to jag higher in the wake of the strong labour market data last week and with the Bank of England MPC decision this week, the 2yr +14bp to 5.06%, the 10yr +8bp to 4.48%.
Australian 3yr government bond yields (futures) rose from 3.95% to 4.02%, while the 10yr yield rose from 3.97% to 4.06%. Markets are pricing the RBA cash rate, currently 4.10%, to be 17bp higher at the next meeting on 4 July, and another 40bp higher by November. New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be only 3bp higher at the next meeting on 12 July and to peak at 5.61% in October.
A subdued session for credit saw Main close half a bp wider at 76, however EUR cash spreads extended Friday’s gains to be another 1-2bp tighter. Primary activity remained in place with 9 issuers pricing ~EUR5.7bn. There were 7 financials in the mix with most high grade (ie covered) or short dated, however Achmea completed a 20.5nc10.5yr Tier 2 deal, and utilities were the theme in corporates with EDP (green) and United Utilities Water (Sust) both pricing deals under sustainable frameworks.
Commodities
Crude markets fell in thin US holiday trade with disappointment surrounding the China stimulus package and additional supply concerns weighing on sentiment. The July WTI contract is down 49c at $71.29 while the August Brent contract is down 52c at $76.09. Bloomberg reported that the last tanker that had been waiting for 3 months to load Kurdish crude has left the port of Ceyhan without a cargo just as officials met yesterday to discuss reopening the 400kbpd+ pipeline which was closed March 25. Over the weekend, Saudi Arabia reopened an embassy in Tehran and the Iranian and Saudi foreign ministers met to discuss trade and regional security on Sunday. There is more chatter about a prisoner swap for payments being unfrozen deal between the US and Iran with Oman acting as an intermediary too. As noted yesterday, Iran’s crude exports have more than doubled since late last year to 1.6mbpd despite US sanctions. EU imports of Russian crude and products decreased to 1.4mt in March from 15.2mt on average over the 2019-22 period. Total imports are not quite zero due to exceptions to the import ban. In fuel markets, China’s May gasoline output rose 14.8%yy to 13.4mt and diesel output rose 26.9%yy to 18.505mt though diesel exports shrank to a 10m low of 600kt, and gasoline exports hit a low back to December as waning global demand impacted.
Metals were quiet given the US holiday but lower with copper down 0.3% at $8,542. Zinc did fall 2% on disappointment surrounding the China stimulus package and aluminium is down 1.6% at $2,235 as China’s Yunnan province scrapped power curbs, allowing idled capacity in the region to be restarted helped by recent rains lifting hydro production.
Iron ore markets softened on a reminder that the regulator in China could begin to weigh down on the market again. The July SGX contract is down $1 at $113 while the 62% Mysteel index is unchanged at $116. Bloomberg reported the CSRC fining Shanghai Esteel for ‘fabricating news’ that caused iron ore prices to spike back in late January.
Day ahead
At 11:30am Syd, the RBA will release the minutes of the June Board meeting, adding colour to the surprise rate hike, especially around any discussion of hiking versus holding steady. Deputy Governor Bullock and Assistant Governor (Financial Markets) Kent will also be speaking in the day. Bullock’s speech (1:15pm Syd) seems noteworthy, titled ‘Achieving Full Employment.’
US: For May, housing starts will reflect a diminishing pipeline (market f/c: -0.1%mth) while permits remain weak due to ongoing pessimism and tight credit conditions (market f/c: 0.6%mth). St. Louis Fed president Bullard (hawk) and New York Fed president Williams will speak, the latter providing details on the recent pause in rate hikes.
Japan: The April industrial production figures could show a modest pickup according to preliminary surveys
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