Markets Daily
Sentiment was slightly downbeat as US markets resumed after the long weekend. Equities, bond yields and risk-sensitive currencies fell, AUD down to 0.6785. Today’s calendar features UK May CPI and the first leg of Fed Chair Powell’s semi-annual testimony to Congress.
Yesterday
The minutes from the Reserve Bank Board’s meeting in June provide a more balanced approach to the outlook for rates than we saw in the governor’s statement following the decision to raise the cash rate by 25 basis points. Markets focused on the description of the tightening decision as “finely balanced”. Westpac Economics notes that this is a fairly common description of decisions when we are nearing the end of the tightening cycle but it seemed to drive a slide in AUD/USD from near 0.6850 to around 0.6800. Pricing for a July RBA hike dropped from about 67% to 50%. Later, RBA Deputy Governor Bullock spoke on the labour market. She noted the RBA’s forecast for the unemployment rate to rise to 4.5% by late 2024, when she suggested “the economy would be closer to a sustainable balance point.” Regional equity markets were mostly lower, leaving the ASX 200 again outperforming with a 0.9% gain.
Currencies/Macro
The US dollar rose against most major currencies over the day. EUR/USD is net unchanged at 1.0920, after some volatility. GBP/USD trimmed losses to -0.2% at 1.2765. USD/JPY fell from 142.25 (a 7-month high) to 141.40, the defensive yen outperforming. Underperformer AUD extended the earlier reaction to the RBA minutes, hitting a low of 0.6753 before steadying around 0.6785.
NZD/USD fell from 0.6200 to 0.6165. AUD/NZD fell about 45 pips over the day, thanks to the RBA minutes, steadying at 1.1000. The twice-monthly GDT dairy auction resulted in the overall price index unchanged, with whole milk powder also unchanged, skimmed milk powder down 2.3%, butter up 5.5%, and cheddar down 3.3%.
US housing starts in May were larger than expected at an annualised 1.631m (est. 1.400m, prior 1.340m). Housing permits rose to 1.491m (est. 1.425m, prior 1.417m). German PPI in May fell 1.4%m/m, +1.0%y/y (est. -0.7%m/m and +1.7%y/y).
Interest rates
US 2yr treasury yields opened higher after the long weekend at 4.75% but then chopped down to 4.68%, while the 10yr yield fell from 3.82% to 3.72%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 20bp higher at the next meeting on 27 July, and only another 4bp higher in September.
Australian 3yr government bond yields (futures) fell from 3.95% to 3.84%, while the 10yr yield fell from 4.04% to 3.91%. Markets are pricing the RBA cash rate, currently 4.10%, to be 12bp higher at the next meeting on 4 July, and a cumulative 35bp higher by November.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be only 2bp higher at the next meeting on 12 July and to peak at 5.61% in October.
Credit spreads were little changed with Main locked at 76, CDX half a bp wider at 70 and US cash within a bp as primary markets got underway. Europe saw 7 issuers (ex-SSA) price ~EUR3.8bn with financials heavy in the mix once again including BNZ which completed a EUR750M 5.5yr covered deal at MS+53 (BBSW+113, BKBM+109). In the US, 5 issuers priced USD6.1bn to open the week as the market looks ahead toward a new mandate from Nasdaq which is expected to issue USD (5-40yr) & EUR transaction that will help fund the Adenza acquisition. Last night’s transactions included GM which priced USD1.85bn across 5yr (T+185, BBSW+) and a tap of its 6.4% 33s, and Barclays with a USD1.5bn 11nc10yr at T+340 (BBSW+)
Commodities
Crude markets fell on Tuesday as China stimulus fatigue set in and supply concerns weighed on sentiment. The August WTI contract is down 97c at $70.96 while the August Brent contract is down 50c at $75.59. The PBoC cut the 1yr and 5yr lending rates by 10bps, in line with forecasts, though some had forecast a 15bps cut in the 5yr mortgage reference rate. Traders reported that Rongsheng Petrochemical has bought at least 12mb of Middle Eastern grades for Aug-Sep delivery according to Bloomberg though CNPC cut its forecast for Chinese oil demand to increase in 2023 by 3.5%yy increase versus an earlier forecast of 5.1% in March. However, Chinese crude imports are set to climb to 540mt this year, close to the 2020 record. China’s imports of Russian fuel oil also hit a record in May. Bloomberg reported that margins for producing naphtha, commonly used as a petrochemical feedstock, have tumbled by 65% so far this month to the lowest level since November due to increased Russian supply and sluggish demand in China.
Metals were generally lower with aluminium down 0.4% to $2,232, nickel down 2.4% to 21,960 and zinc down 2.8% to $2,368. However, copper bucked the trend, rising 0.3% to $8,566 helped by stronger than expected US housing starts. There was little significant industry news though Rio announced it will invest $920m at its Kennecott copper operations in Utah over the next decade. The Australian Government unveiled a critical minerals strategy, adding $500mn to the Northern Australia Infrastructure Fund, topping up the A$2.3bn already allocated. The strategy will also establish the National Reconstruction Fund, which includes $1bn for value-add in resources and $3bn for renewables and low emissions technologies. Lithium will be an important focus of the critical minerals plan. The CME announced it will launch a lithium carbonate futures contract on July 17. The IAI announced that global aluminium production rose 0.5%yy. Indonesia will ban copper concentrate exports as soon as Freeport Indonesia and Amman Mineral finish building smelters next year. The country banned bauxite exports from June this year.
Iron ore markets softened as China stimulus fatigue set in. The July SGX contract is down $1.20 to $111.20 while the 62% Mysteel index fell $1.10 to $114.90. A flurry of economist China GDP downgrades have also hit sentiment with UBS last week cutting its 2023 growth forecast from 5.7% to 5.2%, JP Morgan from 5.9% to 5.5% and over the weekend Goldman cutting 2023 from 6% to 5.4% and 2024 from 4.6% to 4.5%.
Day ahead
The Westpac-MI Leading Index will likely point to an extended period of below-trend growth in Australia.
Fed Chair Powell begins his semi-annual congressional testimony with a lengthy appearance before the House Financial Services Committee. Chicago Fed president Goolsbee (dove) will speak at another event.
UK May headline CPI should show a further deceleration in inflation due to base effects, from 8.7%yr to 8.4% (having peaked at 11.1%yr in October 2022). However, core inflation is seen holding at 6.8%yr, reinforcing expectations for the Bank of England to raise rates again on Thursday.
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