Markets Daily
In a risk-averse session Friday, bond yields and equities fell, and the defensive US dollar rose, amid PMI data indicating major economies are slowing. AUD slipped to 0.6680. Today’s light calendar includes Germany June IFO business sentiment. China markets reopen from holiday.
Friday
The Aussie traded quietly around 0.6760 for several hours until Hong Kong markets reopened after a holiday in a very bearish mood. CNH and HK equities dropped sharply, sparking a slide in AUD/USD to just under 0.6700 before stabilising. HK’s Hang Seng closed -1.7% but Japan was also weak, around -1.5% and the ASX 200 made it three consecutive daily declines, -1.3%.
Currencies/Macro
The US dollar rose against all G10 currencies on Friday. EUR/USD sank from 1.0925 to 1.0855 on the soft German PMIs, later trimming losses to half a cent or -0.5% at 1.0900. GBP/USD slipped -0.3% to 1.2715. USD/JPY rose from 142.80 to 143.87 (a 7-month high). AUD/USD extended its local session decline to 0.6680, net -1.1%. NZD/USD starts the week around 0.6145, net -0.5%, leaving AUD/NZD down 70 pips at 1.0870.
Friday’s data slate was dominated by flash June PMIs from S&P Global/Markit. The US manufacturing PMI disappointed expectations, falling to 46.3 in June (est. 48.5, prior 48.4), although services were more resilient at 54.1 (est. 54.0, prior 54.9). Notable was continued tightness in labour markets and wages, and higher costs.
The Eurozone flash June manufacturing PMI fell to 43.6 (est. unch. at 44.8) and services fell to 52.4 (est. 54.5, prior 55.1). The UK manufacturing PMI fell to 46.2 (est. 46.8, prior 47.1), with services at 53.7 (est. 54.8, prior 55.2).
In terms of official data, UK May retail sales volumes rose +0.3%m/m and ex-fuel +0.1%m/m vs estimates of -0.2%m/m and -0.3%m/m respectively. The details continue to show soft activity. The May gain was due to a 2.7% rise in online outdoor/garden-related items. Brick and mortar sales fell with food -0.5%m/m and non-food sales fell -0.2%m/m and so were more in line with market estimates.
Atlanta Fed president Bostic repeated that he favours no more rate hikes this year. He acknowledged inflation is still too high, but he sees tighter financial standards limiting growth.
Interest rates
US bonds were volatile. 2yr treasury yields fell from 4.80% to 4.74% via 4.67%. The 10yr yield fell from 3.79% to 3.74% via 3.69%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 20bp higher at the next meeting on 27 July, but only another 7bp higher in November.
Australian 3yr government bond yields (futures) fell from 3.99% to 3.91%, while the 10yr yield fell from 4.00% to 3.94%. Markets are pricing the RBA cash rate, currently 4.10%, to be 11bp higher at the next meeting on 4 July, and a cumulative 41bp 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 5.66% in November.
Credit spreads reacted to the growth concerns with Main and CDX each 1.5bp wider at 78.5 and 72.5 respectively, with cash spreads also 1-2bp wider. Primary markets were very quiet in both Europe and the US and Bloomberg is pointing to a fairly subdued week ahead with expectations of less than USD15bn of supply.
Commodities
Crude markets notched up their largest weekly fall since May as higher global central bank rates, risks of increased supply and global recession risks all hit sentiment. The August WTI contract fell 35c Friday to close the week at $69.16 while the August Brent contract fell 29c to $73.85. Brent fell 3.6% on the week. Platts noted over the weekend that the “failed uprising by Prigozhin could herald a period of political turmoil within Russia with Putin’s position and those who of his political allies in the Kremlin potentially damaged by the attempted coup”. IEA Director Fatih Birol warned that the oil market will be tight in the second half due to OPEC+ production cuts even if China continues to show “sluggish” economic growth. Meanwhile the Ceyhan pipeline remained closed despite talks between Turkish PM Erdogan and the Kurdish PM Barzani though the IEA noted that “despite tough financial restrictions, Iran managed to increase crude oil output by about 130kbpd in 2022 to an average of 2.55mbpd and by 350kbpd since the beginning of this year”. The IEA noted that the ramp up had “pushed Iranian crude production up to around 2.9mbpd in May 2023”. Bloomberg reported last week that Iran has been shipping the highest amount of crude in almost 5 years. Argus noted that China’s imports of Iranian crude reached a record 1.34mbpd in May.
Gas markets in the US jumped to a 16-week high on Friday on a further drop in production, hot weather and pipeline maintenance. Reuters noted the US became the world’s largest LNG producer by installed capacity in 2022 and exports are poised to reach 12.1bcfd this year and 12.7bcfd next year. A record since 2014 of 5.1bcfd of gas projects have been approved so far this year in the US with 4 LNG plants under construction which are due to enter service between 2024 and 2028, lifting export capacity to 22.3bcfd. Current LNG capacity in Qatar is 10.1bcfd while Australia has 11.5bcfd. Qatar is expanding production which will take it to 14.3 in 2025 while Australia will hit 12.2 in 2026 on the Pluto expansion.
Metals slumped Friday with copper down 1.8% to $8,419 and zinc down 4% to $2,358. Aggressive rate hikes by central banks and rapidly weakening PMIs weighed on copper sentiment through the week despite global measures of copper inventory hitting 20yr lows. Copper inventory at SHFE warehouses has fallen 61% so far this quarter. Codelco also announced over the weekend it had halted some copper operations in Chile due to heavy rain with work at the Andina mine suspended.
Iron ore markets softened Friday in light volume with Chinese markets again closed for the Dragon Boat holiday. The July SGX contract is down $1.55 from the same time Friday to $109.50. Beijing saw three consecutive days of temperatures above 40C over the holiday weekend, adding to concerns about the impact that El Nino will have on construction activity in 2023. Chinese markets reopen today. China will report May industrial profits on Wednesday and the official June PMI on Friday.
Day ahead
China markets reopen after two days of Dragon Boat festival holidays.
In Germany, the IFO business climate survey is expected to soften to 90.6 from 91.7 in May, still inside the range of the past couple of years, roughly 85 to 100.
US durable goods orders in May are estimated to have fallen by 0.9%. The June Dallas Fed manufacturing survey is expected to rebound to -20.0 but remain weak. We will also see April housing prices, from CoreLogic and FHFA.
The global central banking forum, hosted by the ECB in Cintra, commences.
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