Markets Daily
Risk sentiment rose further on Friday, the S&P500 closing at a fourteen-month high. The defensive US dollar fell, AUD up to 0.6660. US inflation data softened slightly. Today’s calendar includes Australia official May housing data, and June manufacturing PMIs in China and the US.
Friday
Australian credit growth slowed appreciably during 2022. Over the past seven months to May 2023, credit growth has broadly stabilised (mirroring recent developments in the housing market) at a subdued pace, averaging 0.4% - including a 0.4% outcome for May, 6.2%yr. China’s official PMIs for June were very close to expectations, the manufacturing index up to 49.0 from 48.8 in May and services slipping to 53.2 from 54.5. AUD/USD tested lower initially, to 0.6605, then chopped a little higher, to 0.6630, on a quiet session for FX markets. The ASX 200 ticked up 0.1% while Asian equities were mixed again.
Currencies/Macro
The US dollar index closed down 0.4% on the day. EUR rose from 1.0835 to 1.0922. USD/JPY fell from 144.90 to 144.21. AUD rose from 0.6620 to 0.6672, steadying at 0.6660. Outperformer NZD rose from 0.6080 to 0.6142. AUD/NZD fell from 1.0893 to 1.0845.
US May personal income rose 0.4% (est. 0.3%, prior 0.3%) and spending rose 0.1% (est. 0.2%, prior 0.6%). The core PCE deflator rose 0.3%m/m and 4.6%y/y (est. 0.3% and 4.7%, prior 4.7%y/y). The June MNI Chicago PMI rose to only 41.5 (est. 43.8, prior 40.4). Consumer sentiment (Univ. Michigan) in June was finalised at 64.4 (est. 63.9, prior 63.9). Inflation expectations remained unchanged at 3.3% for the 1-year ahead measure and 3.0% for the 5-10 year ahead.
Chicago Fed president Goolsbee (dove) said he has not made a decision yet for the July meeting, with much data to come ahead of that. He said that if the labour market remains strong, the Fed will struggle to tame prices.
Eurozone CPI in June rose 0.3%m/m and 5.5%y/y (est. 0.3% and 5.6%, prior 6.1%y/y). Core increased to 5.4%y/y (est. 5.5%, prior 5.3%).
Interest rates
US 2yr treasury yields eked a slightly higher range of 4.83% to 4.92%, while the 10yr yield fell from 3.89% to 3.80%. The 2-10yr curve inverted slightly further to within 2bp 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 12bp higher by November.
Australian 3yr government bond yields (futures) rose from 3.96% to 3.99%, while the 10yr yield fell from 4.05% to 3.99%. Markets are pricing the RBA cash rate, currently 4.10%, to be 13bp higher at the next meeting on 4 July, and another 39bp higher by December.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be only 4bp higher at the next meeting on 12 July and to peak at 5.65% in November.
Credit also saw a strong session to close the month with indices tighter again as Main closed in another 2.5bp at 73.5 to be 5bp tighter on the week and at levels not seen since February, while CDX was 3bp tighter to 66.5, a new tight YTD. US cash spreads were also strong for a second session, closing 2-4bp tighter and now approaching pre-SVB levels for the first time since early March. Primary activity was absent in both Europe and the US on Friday and the US will see a quiet open this week with the Independence Day holiday on Tuesday and a half session on Monday. The US saw weekly primary IG volumes of USD14.3bn, in line with expectations of ~USD15bn, which saw June end on USD91bn (also in line with expectations) taking the YTD to USD701bn.
Commodities
Crude markets rose into the end of a difficult month and quarter as the slightly weaker than expected US core deflator helped bond yields ease. The August WTI contract closed up 78c at $70.64 while the September Brent contract closed up 90c at $75.41. However, both markets closed down again on the quarter, with Bloomberg noting that Brent has seen its 4th consecutive quarterly loss, the longest quarterly loosing run-in history going back to over more than thirty years. And the outlook for Q3 was downgraded by another research team with HSBC noting that “the outlook has been driven less by fundamentals and more by macroeconomic concerns” as they cut Brent forecasts from $93.50 to $80 for H2 and longer-term forecasts from $85 to $75. RBC noted that the next 6 weeks will dictate the next 6 months as a number of factors may spur increased tightness including Saudi supply cuts, end of season refinery maintenance in the US and Chinese crude imports.
Russia’s deputy prime minister was reported as ordering officials to ‘consider’ the introduction of a quota system for the export of oil products and to “respect the supply of gasoline to the domestic market”. The 8th OPEC International Seminar takes place Wednesday and Thursday this week in Hofburb Palace, Vienna. OPEC again cancelled press accreditation for Bloomberg, Reuters and the WSJ at the upcoming event that may see the Saudi Energy Minister Prince Abdulaziz bin Salman announce an extension of the unilateral cut to 9mbpd which the Kingdom revealed at the June 4 OPEC meeting.
In gas markets, prices saw gains through the week with rising demand from Asia lifting sentiment. The August TTF contract rose 14% on the week and 31% on the quarter. Bloomberg reported that “China is buying gas like there’s still an energy crisis”. China is on track to be the world’s largest importer of LNG in 2023 and looking to sign long term contracts at a much faster pace. In June, CNPC sealed a 27yr deal with Qatar and took a stake in the country’s massive expansion project while late last month China’s ENN announced a deal with Cheniere in the US to import 1.8mt for at least 20yrs. CNOOC, Sinopec, Zhejiang Provincial Gas and Beijing Gas were all said to be searching for deals. And the Australian Government forecast that coal exports will rise for at least the next 3 years as China adds coal plant capacity. Thermal coal exports are forecast to rise the most by volume, up 7.3%. China has around 250 gigawatts of planned coal capacity increases versus 36 gigawatts for the rest of the world according to independent think tank E3G.
Day ahead
At 11:30am Syd we see Australian housing data. The broader recovery in the housing market should continue to forge ahead, with dwelling approvals and housing finance approvals set to post gains in May (Westpac f/c: 3.0% and 4.0% respectively)
Meanwhile, the moderation in ANZ job ads will likely remain at a gradual pace.
Japan: The Tankan large manufacturers index should continue to reflect a downbeat business sentiment as global headwinds build.
China: Further cooling in the Caixin manufacturing PMI is expected in June as reopening momentum begins to shift.
The US ISM manufacturing PMI will likely remain under pressure in June given the weakening in demand, f/c 47.2 versus 46.9 in May. US markets trade a shortened day ahead of Tuesday’s Independence Day holiday, the NYSE closing at 1pm local time, bonds at 2pm.
Global: The final estimate to June’s S&P Global manufacturing PMI is due for Japan, the Eurozone, the UK and the US.
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