Markets Daily
The US dollar fell, despite Fed Chair Powell’s testimony indicating higher rates to come. Bond yields were volatile for little net change, as was sterling despite high UK inflation data. AUD recovered to 0.6800. Today’s calendar includes policy decisions in the UK, Switzerland and Turkey. China markets are closed for a holiday.
Yesterday
Australia’s official data calendar remains quiet until May CPI on 28 June. AUD/USD chopped around mostly 0.6780-95 for a number of hours before a late session slip to 0.6765. This weakness roughly correlated with a slide in China equities, the CSI 300 down -1.5% , in contrast to Japan which rallied. The ASX 200 snapped a 7-session winning streak, closing -0.6%.
Currencies/Macro
The US dollar was softer against most major currencies on the day, JPY and (surprisingly) GBP exceptions. EUR/USD rose 0.6% to 1.0985, including a one-month high of 1.0990. GBP/USD spiked above 1.2800 on the UK inflation headlines but later slid under 1.2700 before finishing flat on the day at 1.2770. USD/JPY rose a net 0.2% to 141.80, with a high of 142.36 (a 7-month high). AUD/USD dipped as low as 0.6741 in volatile London trade, later recovering to 0.6780, net +0.2% over the day. NZD/USD rose 0.6% to 0.6205. AUD/NZD fell 45 pips to 1.0955.
UK CPI in May rose 0.7%m/m and 8.7%y/y (est. +0.5%m/m and 8.4%y/y, prior 8.4%y/y). Core CPI rose 7.1%y/y - a new cycle high (est. 6.9%y/y). The ONS noted that services inflation continued to rise, with gains in recreation and culture at thirty-year highs.
Fed Chair Powell delivered his semi-annual testimony to the House, which largely repeated last week’s monetary policy statement. The Q&A section indicated two more hikes are likely, but signalled a more moderate pace of tightening, as well as no acceleration in balance sheet reduction.
Atlanta Fed president Raphael Bostic was more dovish, saying that his baseline view is that rates remain on hold for the rest of the year, to let previous tightening take effect.
Interest rates
US 2yr treasury yields were volatile, initially jumping from 4.69% to 4.74% following strong UK CPI data, later reaching 4.75% during Fed Chair Powell’s testimony, but then retracing to 4.72%. The 10yr yield roundtripped from 3.73% to 3.79% and down to 3.72%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 21bp higher at the next meeting on 27 July, but only a further 4bp higher in November.
Australian 3yr government bond yields (futures) ranged between 3.86% and 3.90%, while the 10yr yield fell from 3.98% to 3.92%. Markets are pricing the RBA cash rate, currently 4.10%, to be 12bp higher at the next meeting on 4 July, and another 35bp higher in 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 November.
Credit spreads reflected the broader market with Main and CDX each out a bp to 77 and 71 respectively with cash spreads also 1-2bp wider as primary markets remained relatively sluggish ahead of UK inflation and the Powell testimony. Europe saw 7 issuers price ~EUR3.5bn while the US saw 3 issuers in play with Hyundai’s USD3bn four part deal (2-7yr) the largest deal on the day. Nasdaq’s USD/EUR deal continues to be expected this week.
Commodities
Crude markets gained further ground helped by soothing comments from the Chinese vice premier and signs of strengthening demand in Asia. The August WTI contract is up $1.34 to $72.53 while the August Brent contract is up $1 to $76.90. Chinese VP He Lifeng was reported by Xinhua as having told Temasek chairman Lim Boon Heng that China’s economy has been improving with stable growth in manufacturing industries and recovering in the services sector. And in the physical market, Bloomberg reported a flurry of buying by refiners in China and Japan, driving the widest backwardation of prompt Dubai swaps since May 11 according to Bloomberg data. As noted yesterday, Rongsheng Petrochemical has bought at least 12mb of Middle Eastern grades for Aug-Sep delivery according to traders. Meanwhile API reported US crude inventories fell 1.2mb but gasoline rose by 2.9mb. Distillate fell 301kb. Natural gas prices in the US rose another 4% as the Texas heat wave continued with forecasts pointing to baking temperatures for another week.
Metals were mixed with copper up 0.5% at $8,591, zinc up 2.4% at $2,415 but nickel down 3.6% at $21,420. The copper market in China is flashing warning signs driven by inventory in SHFE warehouses dropping by 50% so far this quarter. Premiums for immediate delivery hit in China their highest since October while the rolling 1st/ 2nd copper spread on the SHFE was approaching 1yr highs.
Iron ore markets were modestly softer as stimulus fatigue continued in China. The July SGX contract is down another 20c from the same time yesterday at $111.00 while the 62% Mysteel index fell $2.55 to $112.35. Wetter weather in eastern China added to the slightly more pessimistic outlook though local securities press in China clearly flagged that further rate cuts are expected later this year to shore up the economic recovery. The Hang Seng mainland property index jumped 23% over the first half of June as rumours of impending stimulus lifted construction names. However, since the State Council met on Friday, the index has given back roughly 50% of those gains with the likes of Country Garden down 14% so far this week. Markets in China, Hong Kong and Taiwan are closed Thursday and Friday for Dragon Boat holidays.
Day ahead
Australia’s official data calendar is effectively empty until May CPI on 28 June. Markets in China, Hong Kong and Taiwan are closed (dragon boat festival).
After the Bank of England raised its bank rate by 25 basis points to 4.50 on 11 May, pricing for the terminal rate was 4.82% by September. Since then, UK labour market and inflation data has surprised on the strong side. Heading into today’s announcement, markets price a terminal rate around 5.97% (Feb 2024), with an awkward 34bp priced for today, suggesting plenty of scope for volatility.
The Swiss National Bank is expected to raise its benchmark rate 25bp to 1.75%, extending the tightening cycle from -0.75% in March 2022.
Turkey’s central bank reviews monetary policy in what is expected to be a dramatic post-election reversal. Core inflation was 47%yr in May yet the benchmark interest rate is 8.5%. Economists forecast a massive rate increase, with the Bloomberg survey ranging from 14% to 40% (!).
Fed Chair Powell completes his semi-annual congressional testimony, appearing before the Senate Committee on Banking, Housing, and Urban Affairs. His prepared text will be the same but there is another lengthy Q&A session. Fed governors Waller and Bowman plus regional Fed presidents Mester and Barkin are also speaking.
US initial jobless claims should trend higher but recent months’ volatility will keep pundits on their toes (market f/c: 259k). Home sales for May will show some weakness following a lack of inventory (market f/c: -0.7%mth). May’s leading index and the Chicago Fed activity index (market f/c: -0.1pt) will show downside risks.
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