Markets Daily
Bond yields rose following rate hikes in the UK, Norway and Switzerland, though in FX markets, sterling weakness hinted at concerns about recessions. AUD slipped to 0.6755. Today’s data calendar is dominated by flash June S&P Global manufacturing and services PMIs in a number of countries.
Yesterday
AUD/USD was only slightly lower net at 0.6785, recovering from a dip to 0.6757. Regional trade was thinned by public holidays in China, Taiwan and Hong Kong. Australia’s news flow was light but the ASX 200 was weakest in Asia-Pacific, -1.6%.
Currencies/Macro
The US dollar rose against most major currencies on the day. EUR/USD rose to 1.1012 – a one-month high – before falling to 1.0955. GBP/USD only briefly spiked by about 50 pips, to 1.2837, following the BoE hike, falling to 1.2745 as the economic implications were absorbed. USD/JPY surged from 141.80 to 143.22 (a high since November), the yen underperforming. AUD/USD was choppy but ultimately down 40 pips on the day at 0.6755. NZD/USD fell 25 pips to 0.6180, leaving AUD/NZD down -0.2% at 1.0935.
The Bank of England hiked by 50bp to 5.00% (larger than the 25bp expected and taking the policy rate to the highest in 15 years), and left the door open for more. The vote was 7-2. The MPC cited a stronger than expected economy, surprisingly persistent inflationary pressures, and concerns about tight labour markets, wage growth and services inflation.
Norges Bank (Norway) also hiked by 50bp, to 3.75%, as it cited a stronger economy, tight labour markets and persistent inflationary pressures. It indicated that its policy rate could reach 4.25% in Q4.
The Swiss National Bank hiked by 25bp to 1.75%, as economists had expected, disappointing markets expecting a larger move. The SNB said that it could hike again and that they would intervene to support the CHF if necessary.
Turkey’s central bank raised its key rate from 8.5% to 15.0%, the huge move still well short of the 20% median forecast and still a long way below the inflation rate. The Turkish lira dropped a further -5.4%.
Interest rates
US 2yr treasury yields were volatile around the various central bank hikes, overall rising from 4.72% to 4.79%. The 10yr yield rose from 3.72% to 3.80%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 21bp higher at the next meeting on 27 July, but only another 7bp higher in November.
Australian 3yr government bond yields (futures) rose from 3.90% to 3.97%, while the 10yr yield rose from 3.96% to 4.02%. Markets currently price the RBA cash rate, currently 4.10%, to be 11bp higher at the next meeting on 4 July, and a cumulative 39bp 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 5.63% in November.
Credit spreads were little changed despite the news flow with Main giving up early gains to close unchanged at 77, CDX was 71 and US cash spreads flat to a bp tighter as supply volumes remain light despite Nasdaq completing its expected dual currency deal to help fund the USD10.5bn Adenza acquisition. Nasdaq priced EUR750M of a long 8yr at MS+145 (orders of EUR3.2bn) together with a USD4.25bn 5 part offering with tenors from 2-5yr. USD supply is now sitting at USD15.4bn for the week (in line with expectations) with June now at USD76.8bn with a week to go.
Commodities
Crude markets tumbled with hawkish central bank moves and warnings of more to come weighing heavily despite a larger than expected fall in EIA crude stockpiles. The August WTI contract is down $3.02 to $69.51 while the August Brent contract is down $2.87 to $74.25. Crude inventory fell by 3.8mb according to the EIA while gasoline rose by 478kb and diesel by 434kb. Crude production fell 200kb to 12.2mb but exports rose by a hefty 1.27mb to 4.5mb. Total oil product supplied, (a measure of demand) hit the highest since December last year.
The Dallas Fed quarterly survey reported that nearly half of the 152 energy companies survey reported a more unpredictable outlook, pointing to higher drilling costs, tightened bank lending and weaker commodity prices. And Kpler reported that crude held in tankers off Singapore hit four-month highs. Finally note that EU and Iranian envoys met to discuss the way forward on the JCPOA. Of note, Deputy Secretary General Enrique Mora, the main envoy for negotiations with Iran, represented Europe, emphasising the advanced nature of the talks.
In gas markets, European prices closed lower in volatile trade despite news from the FT that “Russian gas flows through Ukraine could stop next year”. The July TTF contract fell 7.2% despite the news that could leave the TurkStream pipeline as the last operating gas route to Europe from Russia. The Ukrainian pipeline accounted for 95% of Slovakia’s gas imports in May and almost 50% of Austrian gas. Germany also announced it had signed another long-term gas deal with the US with SEFE (Securing Energy for Europe) announcing it will purchase 2.25mtpa from Venture Global LNG. The deal would account for circa 5% of Germany’s gas needs.
Copper languished just below $8,600, down 0.3% on the day at $8,579 despite global inventory levels approaching decade lows. Bloomberg noted that at 30,125 tons, on-warrant stocks would satisfy global consumption for less than half a day. Meanwhile aluminium fell another 0.9% to $2,204. Aluminium has barely traded below $2,200 back to Sep/ Oct last year. Morgan Stanley downgraded aluminium giant Alcoa to a sell. And gold fell 1% as it slumped below recent lows in the $1,920/40 region on higher central bank rates.
Iron ore markets marked time due to the China holidays with the July SGX contract up just 5c from the same time yesterday at $111.05.
Day ahead
Japan May CPI (9:30am Syd) should show each measure remaining well above the 2% BoJ target, with overall CPI seen easing to 3.2%yr, CPI ex-fresh food at 3.1%yr (down from 3.4%) and CPI ex-fresh food and energy at 4.2%yr (was 4.1%). BoJ officials continue to insist that this wave of inflation will not be sustained, forecasting sub-2% inflation over the next year or two.
Japan’s manufacturing PMI (Nikkei/S&P Global) is expected to be only slightly optimistic in May while the services sector will maintain its upswing.
Mainland China and Taiwan markets remain closed for holidays but Hong Kong reopens.
Europe’s May S&P Global/HCOB PMI readings will reflect pessimism in manufacturing and an emerging pullback in demand for services (market f/c: 44.8pts, 54.5pts respectively).
In the UK, declining sentiment will likely feed through to May’s S&P Global manufacturing PMI while the upswing in services continues (market f/c: 46.8pts, 54.8pts respectively). Consumer sentiment is likely to remain pessimistic (market f/c: -26pts). Retail sales for May are expected to fall moderately as rate hikes feed through to a pullback in discretionary spending (market f/c: -0.2%mth).
Regional Fed presidents Bullard and Mester will speak. May’s S&P Global manufacturing PMI is susceptible to several downside risks while services should remain upbeat despite emerging downside risks (market f/c: 48.5pts, 54pts respectively).
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