Markets Daily
Stronger US economic data boosted bond yields and the US dollar though AUD held its ground above 0.6600. Today’s busy data calendar includes Australia May credit, China June official PMIs, Eurozone June CPI and US May personal income and spending and the Fed’s preferred prices measure.
Yesterday
Australia May retail sales rose 0.7%mth, 4.2%yr, well above 0.1%mth consensus. Led by ‘small ticket’ discretionary segments with others mixed. By store-type, the May gain centred on ‘small ticket’ discretionary categories, ‘other retail’ up 2.2% and cafés & restaurants up 1.4%mth – accounting for 80% of the headline rise in sales. Australia job vacancies fell -2.0% between February and May, from 440.6k to 431.6k, another relatively modest fall from an extremely elevated level which continues to reflect a tight labour market. AUD/USD chopped up 20 pips to 0.6620. The ASX 200 closed about flat while Asia-Pacific equities were quite mixed again, sizeable gains and losses.
Currencies/Macro
The US dollar firmed against European currencies and the yen. EUR/USD rose to 1.0940 then slid to 1.0865 after firm US data. GBP/USD was also choppy, overall down 25 pips to 1.2610. USD/JPY bounced from 144.20 to 144.90 – a fresh high since November. Outperformer AUD was resilient given the USD’s rise, up 0.3% on the day at 0.6615. NZD/USD is a touch lower at 0.6065. AUD/NZD rose 0.4% to 1.0905.
The third revision of US GDP for Q1 was much larger than expected, taking it to 2.0% annualised (from 1.4%), due to stronger personal consumption (4.2% annualised, from 3.8%) and stronger exports. The core PCE deflator for Q1 was revised to 4.9%y/y from 5.0%. Weekly jobless claims data indicated a solid labour market, initial claims falling to 239k (est. 265k, prior 265k) and continuing claims falling to 1.742m (est. 1.765m, prior 1.761m). US pending home sales in May fell -2.7%m/m (est. -0.5%m/m), NAR citing a lack of housing supply.
German CPI in June rose 0.3%m/m and 6.4%y/y (est. +0.2%m/m and 6.3%y/y), with the EU harmonised level in line at 6.8%y/y.
FOMC members Powell and Bostic (still in Europe) both said that Fed policy has only been restrictive for a limited period, and more effects will be seen. Bostic repeated his view that a further pause is appropriate, while Powell repeated the majority view that there could be two more hikes this year.
Interest rates
US 2yr treasury yields rose from 4.71% to 4.86%, with trade at 4.89% the highest since March, boosted by the US data surprises. The 10yr treasury yield rose from 3.71% to 3.84% over the day, including a 12bp rise on the data. The 2-10yr curve inverted slightly further to within 6bp of the cycle low seen in March. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 23bp higher at the next meeting on 27 July, and another 14bp higher in November.
Australian 3yr government bond yields (futures) rose from 3.90% to 3.98%, while the 10yr yield rose from 3.92% to 4.00%. Markets are pricing the RBA cash rate, currently 4.10%, to be 12bp higher at the next meeting on 4 July, and a cumulative 31bp 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 5.64% in November.
Credit indices were firmer again with Main a bp tighter at 76 and CDX half a bp tighter to 69 (5bp over 3 days), however last night we also saw traction in cash spreads which are 2-4bp tighter across the various sectors. Primary activity remained light with Mizuho’s USD2.5bn deal the largest on the day, including USD1.4bn of a 6nc5yr green tranche at T+165 and a USD1.1bn 11nc10yr at T+190.
Commodities
Crude markets saw modest gains as the previous session’s massive 10.95mb EIA plus SPR crude draw plus stronger Q1 PCE and jobs data lifted sentiment. The August WTI contract is up 30c at $69.86 while the August Brent contract is up 28c at $74.31. OPEC again cancelled press accreditation for Bloomberg, Reuters and the WSJ at an upcoming oil conference in Vienna that will feature the head of BP and the EU’s top energy Kadri Simson official on July 5-6. Norway averted a rig strike as shipowners and unions reached a pay deal. Gasoil stockpiles fell in Europe as water levels on the Rhine hit the lowest level on record for this time of year and the cost of moving diesel on barges hit a seasonal high.
European gas markets saw modest gains as prolonged outages in Norway added to the uncertain outlook. A record number of TTF contracts have traded through the month according to exchange data, driven by developments in Russia plus the extended outage at the Nyhamna processing plant which is yet to provide a restart date.
Metals were lower with copper down 1% at $8,173 and aluminium down 0.6% to $2,161. Hawkish Fed commentary and higher yields hit sentiment even as copper inventory at SHFE warehouses dropped closer to record lows, driving physical premiums higher in China. In industry news, Newcrest CEO Sherry Duhe noted that gold and copper deposits at the Red Chris project in Canada are large enough to open an entirely new section that could lead to “decades of production”. Newmont announced the acquisition of Newcrest back on the 15th of May and the deal is expected to be completed by the end of the year. Also note that gold dipped below $1,900 on the sharp drop in initial jobless claims but managed to rebound.
Iron ore markets saw modest gains into the end of the week despite the surge in the US$ and weak Chinese industrial profits data. The July SGX contract is up $1.40 from the same time yesterday to $113.40 while the 62% Mysteel index is up 55c at $114.45. China will report the official June PMI today and the Caixin version Monday.
Day ahead
Australia: Growth in private sector credit should hold at a subdued level in May (Westpac f/c: 0.4%mth).
At 9:30am Syd, Japan releases June Tokyo CPI, with consensus 3.4%yr overall, 4.0%yr ex-fresh food and energy. The Bank of Japan continues to insist that underlying inflation is below 2%.
At 11:30am Syd, China’s official manufacturing PMI is expected to remain in contractionary territory in June, forecast 49.0 versus 48.8 in May. The services PMI is expected to remain consistent with expansion, forecast 53.5 versus 54.5 in May.
Eurozone: The deceleration in energy inflation will likely see headline inflation ease further in June (market f/c: 5.6%yr from 6.1%yr in May); however, stickiness in services will likely see core inflation rise (market f/c: 5.5%yr, up from 5.3%yr).
US: A slower pace of personal income growth should be associated with a pull-back in personal spending capacity in May (market f/c: 0.3% and 0.2% respectively). Meanwhile, the PCE deflator will underscore the persistence of underlying price pressures (market f/c: 3.8%yr headline; 4.7%yr core). The Chicago PMI is likely to show the downside risks to growth as a consequence of the above (market f/c: 43.9 in June).
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