Markets Daily
US bond yields and the US dollar briefly dipped following a weak US June manufacturing ISM survey. AUD returned to 0.6670. The calendar is dominated by the RBA policy decision. US markets will be closed for Independence Day.
Yesterday
The CoreLogic home value index, covering the eight major capital cities, rose 1.2% in June, following on from a 1.4%mth gain in May, and milder 0.7-0.8% gains in April and March. The cumulative 4.1% lift since Feb comes after a 9.7% decline over the previous ten months. The annual pace of price declines moderated from –6.8%yr to –4.8%yr. The total value of Australia housing approvals (ex refi) in May rose +4.8%mth, –20.5%yr. It was a broad-based monthly gain but from a weak starting point. Australia dwelling approvals posted a much bigger than expected 20.6% jump in May (consensus forecast was +4%). The main driver was a 60% spike in the volatile ‘units’ category, centred on NSW. Private detached house approvals posted a more muted 0.9% rise that is probably a better reflection of underlying trend. AUD/USD was quite choppy, trading 0.6637 to 0.6675, overall a little softer at 0.6650. Following Wall Street’s strong end to the week, Asia-Pacific equities were a sea of green, the ASX 200’s 0.6% rise more muted than most.
Currencies/Macro
The US dollar was mixed against G10 FX on the day. EUR/USD is little changed at 1.0915, having fluctuated between 1.0871 and 1.0934. GBP/USD is about flat at 1.2690. USD/JPY dipped as low as 143.99 on the US manufacturing ISM but later recovered to 144.65, up 0.2% on the day. AUD/USD is about steady overall at 0.6670, having flickered to 0.6692 on the US data. Outperformer NZD rose from 0.6125 to 0.6150. AUD/NZD edged down 30 pips to 1.0845.
US manufacturing (ISM) in June disappointed at 46.0 (est. 47.2, prior 46.9) - the lowest level since May 2020. The prices paid component fell to 41.8 (est. 44.0, prior 44.2) and employment fell to 48.1 from 51.4. New orders rose to a still weak 45.6 (from 42.6).
Eurozone manufacturing PMI for June was finalised lower from 43.6 to 43.4 (was 44.9 in May). Germany’s index fell to 40.6 (was 41.6), the report citing the weakest profiles since the height of the pandemic.
Interest rates
US treasuries were volatile in the shortened pre-holiday trading session. The 2yr yield roundtripped from 4.95% to 4.85% (following ISM data) and back, while the 10yr yield similarly roundtripped from 3.86% to 3.77% and back. The 2-10yr curve reached -110bp, matching the cycle low seen in March, and the most inverted since 1980. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 22bp higher at the next meeting on 27 July, and another 13bp higher by November.
Australian 3yr government bond yields (futures) rose from 3.93% to 3.97%, while the 10yr yield rose from 3.95% to 4.00% via 3.92%. Markets currently price the RBA cash rate, currently 4.10%, to be 9bp higher after today’s decision, and another 34bp 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 5.66% in November.
Credit indices were little changed with Main half a bp tighter to 73.5 as it consolidated recent gains while CDX was half a bp wider at 66.5 but remains around its ytd lows. Cash spreads were firmer again on both sides fo the pond with US cash another 1-2bp tighter. Primary activity was largely restricted to SSAs in Europe with Aeroporti di Roma the only corporate with its EUR400M 10yr SLB and the US was in holiday mode as expected.
Commodities
Crude markets were softer in light partial holiday trade despite both Saudi and Russia announcing further restrictions on crude supply with weak US and EU data hitting sentiment. The August WTI contract is down 52c at $70.12 while the September WTI contract is down 46c at $74.95. The state-run Saudi Press Agency reported that the Kingdom will maintain the 1mbpd unilateral cut it announced in June through to August and ‘could extend it further’. Russian Deputy Prime Minister Novak also announced that Russia which will reduce oil exports by 500kbpd in August and will also ‘aim to reduce production by this amount’. Algeria will also reduce output by 20kbpd in August. However, according to a Bloomberg survey, OPEC pumped 28.57mbpd in June, up 80kbpd from May. Reuters reported that Indian refiners have started paying for some oil imports from Russia in Chinese yuan as “Western sanctions force Moscow and its customers to find alternatives to the US$ for settling payments”. Bloomberg reported that “two vessels with US crude have been sitting off the coasts of France and Portugal for roughly a week after initially signalling the Netherlands and UK as destinations”. However, Vortexa reported that crude oil in floating storage declined 23% last week, reversing the previous week’s jump, with Asia Pacific down 25% and the middle east down 57%.
And in fuel markets, the EIA benchmark price of diesel in the US released Monday fell for the 20th week in the last 22, down 3.4cpg to $3,767, the lowest price since Jan 17, 2022. Natural gas prices declined in the US and Europe despite the recent very high temperatures in Texas continuing. Power demand in Texas hit fresh records on June 26 and then again June 27 through energy prices remained modest as wind and solar took the strain off the grid according to BNEF research. The August TTF contract fell 8.6% as supply from Norway rose on the end of seasonal maintenance.
Metals were modestly higher with copper up 0.78% to $8,380 and nickel up 0.7% to $20,660. It felt like a ‘bad news is good news’ session with weaker US and EU data driving reduced interest rate expectations, lifting sentiment in the metals. Bloomberg reported that Chinese copper smelters agreed higher copper treatment charges for some term copper concentrate supplies from Antofagasta for the next year amid ample ore supply. Treatment charges tend to rise when supply is more plentiful and fall when supply is tight. Treatment charges were set at $88/t versus $76 last year. China announced that it will limit the exports of gallium and germanium in an escalation of the US and EU ‘chip-wars’. Gallium is used in compound semiconductors while germanium is used in fibre optic communications and satellite-based solar cells.
Iron ore markets softened below $100 as yesterday’s CISA warnings rattled the market. The August SGX contract is down $1.30 from the same time yesterday while the 62% Mysteel index is down $1.50 to $110.65. We noted yesterday that major steel mills said they were “not optimistic” about the coming 6 months after attending a CISA meeting in a statement noting that “thin margins are particularly prominent”. Mysteel reported that steel production in the Tangshan region will be curbed through the month of July due to air quality deterioration. ‘A rated’ steel mills will cut production by 30% while lower rated mills will cut by 50%.
Day ahead
After today's RBA Board meeting (2:30pm Syd), Westpac anticipates that the RBA will raise the cash rate by 25bps to 4.35%. Following a brief pause in April, the Board raised rates by 25bps in both May and June, citing concerns over the strength of domestic inflation indicators – particularly the stickiness of services inflation – and the risk of a slower return to the top of the 2-3% target range. The recent data flow is reflective of these concerns: jobs growth is still exhibiting strength (+76k in May) and job vacancies are only gradually moderating from a historic high, together pointing to upside risk to services inflation. The monthly CPI indicator also reported that annual trimmed mean inflation held above 6% in May. In our view, there is enough evidence to warrant a move in both July and August, raising the cash rate to a peak of 4.60%.
The Bloomberg survey found 14 economists forecasting no change, 13 looking for +25bp to 4.35%. Market pricing was around 50% chance of a hike late last week but softened to 35% on Monday.
US markets will be closed for Independence Day.
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