Markets Daily
Comments from the global central bank forum caused only a brief spike in bond yields which mostly trended lower. The US dollar was firm, AUD slipping to 0.6600. Today’s calendar features Australia May retail sales and Q2 job vacancies plus more from Fed Chair Powell.
Yesterday
Australia’s May CPI ‘indicator’ slowed to 5.6%yr from 6.8%yr in April, well below 6.1%yr consensus. The ABS highlighted that the CPI ex-volatile items was little changed, easing to 6.4%yr from 6.5% in April. They appear to have less confidence in the trimmed mean measure, which was not published for four months due to concerns over its usefulness. It printed at 6.1%yr, versus 6.7%yr in April and 6.5% in March. Markets immediately sold the A$ and marked down yields. AUD/USD was already under some pressure, slipping from 0.6680 to 0.6665 pre-data, then quickly sliding to a low of 0.6619 before stabilizing around 0.6640. Regional equities were quite mixed, Japan rising sharply, Korea sliding back and the ASX on the firm side, closing up +1.1%, versus +0.5% pre-CPI.
Currencies/Macro
The US dollar was stronger against most major currencies on the day. EUR/USD fell -0.4% to 1.0915. GBP/USD dropped 1.1 cents or -0.9% over the day to 1.2640. USD/JPY rose from 144.00 to 144.62 – highest since November. AUD/USD extended its CPI-driven losses to a low of 0.6650 to 0.6597. Underperformer NZD fell from 0.6160 to 0.6070, with no apparent news or data behind the move. AUD/NZD dipped from 1.0845 to 1.0799 on CPI but eventually steadied up 20 pips on the day at 1.0870.
In comments from the central bank forum in Portugal, all three bank chiefs, Lagarde, Powell, and Bailey stressed that their work is not yet done, given the persistence of inflation, with future policy paths data dependent. Notably, Powell said he did not believe core inflation would get back to 2% until 2025 and reiterated that the FOMC is "a long way" from rate cuts.
Interest rates
US 2yr treasury yields fell from 4.75% to 4.71% via a brief spike to 4.78% during the central bank comments, the 10yr yield down from 3.76% to 3.71%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 21bp higher at the next meeting on 27 July, and another 10bp higher in November.
Australian 3yr government bond yields (futures) fell from 3.84% to 3.79%, while the 10yr yield fell from 3.90% to 3.83%. Markets are pricing the RBA cash rate, currently 4.10%, to be 9bp higher at the next meeting on 4 July, and another 30bp 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 5.64% in October.
Credit indices were firmer again with Main a bp tighter at 77 and CDX in another 1.5bp to 69.5 (4.5bp over 2 days), however cash spreads have lagged that move closing flat to a bp tighter again, however remain around the lows of recent months. Primary activity is on its summer rhythm with Europe seeing 4 issuers price EUR2.6bn (EUR13.1bn wtd) while the US saw just the 2 issuers (USD3bn, USD11.8bn wtd) including StanChart which priced USD2.5bn including USD1.5bn of 4nc3yr at T+185, SOFR+193 and USD1bn of 11nc10yr at T+258.
Commodities
Crude markets gained as the EIA reported a larger than expected draw on reserves and analysts warned of a sharp swing into deficits later in the year. The August WTI contract is up $1.47 to $69.17 while the August Brent contract is up $1.35 to $73.61. The EIA reported a huge 9.6mb draw in crude reserves though this was significantly driven by a surprise rise in exports to 5.33mbpd. Gasoline and distillate saw modest builds at 603kbpd and 124kbpd respectively. The 4-week average of gasoline demand rose to the highest level since Dec 2021 though Cushing inventory rose to the highest since 2021 as the contango in the front end encouraged storage there. The SPR delivered 1.35mb last week meaning net draw from public and private stocks was a massive 10.95mb. The SPR has delivered 23mb of the 26mb sold. Stan Chart warned that money manager positions in crude are “far too short” given the scale of upside price risk given that crude markets are set for a “sharp swing” to deficits in July and August.
In a worrying sign of what an El Nino summer might look like in Europe, the Rhine water level at the Kaub chokepoint is the lowest for this time of year on record in 30 years of data. That’s leaving inland Europe short of fuel and pushing ARA crude inventories to the highest since Jan 2021. Natural gas prices in the US slipped 4.3% and are down nearly 10% from the recent 3-month highs as forecasts for Texas point to excessive heat easing over the weekend. The Bruegel thinktank argued that Europe “has a toxic addiction to Russian LNG, which must be promptly treated”. Bruegel estimates that Spain and Portugal would be hardest hit on any Russian LNG sanctions.
Metals were hit hard as central bankers warned of more monetary policy tightening in the months ahead. Aluminium is down 0.8% at $2,176, copper is down 1.5% at $8,239 and nickel reversed the previous day’s gains, down 3.65% to $20,030. There was little fresh news though ERG warned the World Economic Forum in Tianjin of a looming ‘super-cycle’ for copper given “you have this demand coming and you have all these challenges in building out more mines”. BNEF estimates demand for refined copper will grow 53% by 2040 while mine supply will climb only 16%.
Iron ore markets softened as industrial profits data highlighted the extent to which the property downturn has hammered the steel industry in China so far this year. The July SGX contract is down $1.20 to $112.00 while the 62% Mysteel index is down 85c at $113.90. Ferrous metals profits are down 41.9%ytd, driven by ferrous smelting. China will report the official PMIs for June on Friday and Caixin on Monday.
Day ahead
Australia (11:30am Syd): the consumer slowdown is set to become clearer with further weakness in nominal retail sales anticipated in May (Westpac f/c: –0.2%mth, median 0.1%, April 0.0%).
Australian job vacancies have only been gradually easing from an elevated level, reflecting strong labour demand. Vacancies slipped -1.5%qtr in the February quarter, with May data due today.
NZ: While off its recent lows, ANZ business confidence remains in weak territory.
Eurozone/UK: As European consumer confidence struggles to make headway and a pessimistic mood emerges among businesses, broader economic confidence will remain fragile (market f/c: 95.8). Another decline in net mortgage lending is also likely in the UK (market f/c: –£0.5bn).
US: Growth in pending home sales is expected to remain weak in May given the lack of available inventory (market f/c: –0.5%). A small upward revision is anticipated in the final estimate to Q1 GDP (market f/c: 1.4% annualised). Initial jobless claims should meanwhile remain broadly unchanged in the week to 24 June (market f/c: 265k). Fed Chair Powell is due to speak at a Bank of Spain event.
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