Markets Daily
Strong US services sentiment and private payrolls data boosted bond yields and the US dollar, though there was some retracement over the NY session. AUD trimmed losses to 0.6625. Today’s calendar is dominated by the US June employment report.
Yesterday
In May, Australia’s trade surplus widened as exports lifted despite a sharp fall in commodity prices. The surplus printed $11.8bn for May, broadly in line with the monthly average since the start of 2022, of $12.0bn. The May result was up $1.3bn on that for April, revised lower to $10.5bn from $11.2bn previously. Export earnings rose by 4.4% in the month, up by $2.4bn, outstripping a 2.5% increase in the import bill, +$1.1bn. AUD/USD was quite volatile at times, trading a range from 0.6634 to 0.6687 before steadying around 0.6675, net +0.3%. Regional equities were mostly very negative, especially Hong Kong, -2.9%. The ASX 200 was typical, -1.2%.
Currencies/Macro
The US dollar was mixed on the day. EUR/USD was volatile, between 1.0834 and 1.0900, higher overall at 1.0890. GBP/USD traded about a 1 cent range before steadying at 1.2740, up 0.3% net. USD/JPY fell as low as 143.56 during risk-averse Asian trade, rebounded to 144.66 on the US yield jump then steadied at 144.10. AUD/USD had drifted up to 0.6685 before the US ADP data sparked a descent to as low as 0.6599 post-ISM, later edging back to 0.6625. NZD/USD followed a similar path, net -0.4% at 0.6155. AUD/NZD ground slightly lower, to 1.0760.
US private sector employment (ADP) in June rose 497k (est. 225k, prior 267k), helped by services at 373k and goods production at 124k. Weekly initial jobless claims were solid at 248k (est., 245k, prior 236k), with continuing claims at 1.720m (est. 1.734m). JOLTS job openings in May fell to 9.824m (est. 9.885m, prior 10.320m) but the pace of hiring rose to 4.0% from 3.9%.
The ISM services PMI rose to 53.9 in June (est. 51.2, prior 50.3), with a notable rebound in employment (to 53.1 from 49.3) and new orders (to 55.5 from 52.9).
The Atlanta Fed's model prediction for Q2 GDP was revised higher to 2.13% from 1.94% following today's data.
Dallas Fed president Lorie Logan reiterated that the Fed had more work to do, adding that she was a dissenter in the vote to leave policy unchanged in June, advocating that the Fed needs to sustain the tightening to reach its goals. She saw no signs of easing in the labour market, and was concerned that a housing sector rebound could require even further policy action.
German factory orders in May rose +6.4%m/m to -4.3%y/y (est. +1.0%m/m and -9.7%y/y).
The Bank of England’s latest survey of business leaders saw 1yr-ahead inflation expectations falling to 5.7% from 5.9%, but 3yr-ahead expectations rose to 3.7% from 3.5% and wage growth for the year ahead rose to 5.3% from 5.2%.
Interest rates
US 2yr treasury yields jumped from 4.96% to 5.12% - highest since 2006 – after the ADP jobs data, but later retraced to 4.98%, while the 10yr yield rose from 3.93% to 4.03%. The 2-10yr curve thus steepened slightly, having this week reached a 40-year low. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 23bp higher at the next meeting on 27 July, and another 15bp higher by November.
Australian 3yr government bond yields (futures) rose from 4.12% to 4.24% - highest since 2011, while the 10yr yield rose from 4.14% to 4.25% (highest since 2014). Markets are pricing the RBA cash rate, currently 4.10%, to be 16bp higher at the next meeting on 1 August, and another 43bp higher by February.
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 5.67% in November.
Credit spreads reflected the weaker sentiment with Main out 3bp to 78 and CDX extending yesterday’s move to be another 2bp wider at 70.5 with US cash also 1-3bp wider. Primary activity was mixed with Europe seeing 8 issuers (ex-SSA) price EUR3.25bn, however the largest print on the day was EUR500M (ave. ~EUR400M) and there were 5 HY issuers on the docket. In the US the theme of the shortened week so far has been Yankee banks and this continued last night with DB pricing a shorter SNP deal (USD1.25bn 4nc3yr) while SUMIBK priced a combined senior/Tier 2 transaction including USD3.3bn of Sen from 3yr to 10yr and a USD1bn 20yr Tier 2 bullet at T+195 (BBSW+273). The US also saw Toyota price USD1.5bn across 3-10yr as the only corporate in the market and we are likely to see a quiet primary session tonight on a payrolls Friday.
Commodities
Despite US crude stocks falling to the lowest level since January, gasoline demand hitting the highest since December and Saudi Arabia also unexpectedly lifting its selling price to Asia, crude markets spent much of the day lower with the August WTI contract currently unchanged at $71.80 and the September Brent contract down 14c at $76.51. The sharp rise in global borrowing costs and general risk off mood hit sentiment with rising concerns about the outlook for China adding to the gloom. The EIA reported a smaller than expected 1.5mb decline in crude inventory, though gasoline stocks dropped by a larger than expected 2.5mb and distillate by 1mb. That’s the first distillate draw since May. US crude production rose by 200kbpd to 12.4mb despite the recent slump in rig count to the lowest since April last year. The SPR saw another 1.46mb draw while weekly gasoline implied demand jumped to 9.6mb and the 4-week rolling average hit 9.39mb, the highest since late 2021 on record road travel. Saudi Arabia raise the cost of its Arab Light to Asia to a premium of $3.50 while prices to the Mediterranean were set at a record premium of $3.20. Xinhua reported that energy ministers from Iran, Saudi Arabia and the UAE met on the sidelines of the 8th OPEC International Seminar in Vienna to discuss joint investment in shared oil fields.
In fuel markets, diesel continued tightening in Europe as Rhine water levels fell and refinery disruptions caused the front end of markets to spike. A fire occurred at the Neustadt refinery in southern Germany. Despite higher temperatures expected over the weekend in northern Europe, weak demand and rising inventory saw European gas prices down by 6%. And in climate news, John Kerry is set to travel to China later this month to try to build consensus ahead of the UN climate conference in the UAE in November.
Metals markets were lower with copper down 0.5% at $8,277 and aluminium down another 0.6% to a fresh 9 month low at $2,130. Chinese property jitters plus recent heavy rains in the Yunnan province weighed on sentiment though Goldman warned that copper demand for EVs will rise by 2.8mt by 2030 from 1mt this year and 1.5mt in 2025. EVs will represent 27% of additional copper consumption over the rest of the decade, driving “open ended deficits”.
Despite the property market issues and lack of signs of fresh stimulus in China, iron ore markets marked time with the August SGX contract unchanged at $109.75 and the 62% Mysteel index up 35c at $112.20. CISA reported that steel stockpiles at major steel mills dropped to the lowest since December, helping lift sentiment. China will report June trade data next week and a barrage of activity data the week after including Q2 GDP.
Day ahead
China: June’s foreign reserves will reflect the impact of a weaker dollar (market f/c: US$3180bn).
Japan: May’s household spending likely declined further and is expected to remain subdued for the remainder of the year (market f/c: -2.5%yr).
US non-farm payrolls growth in June is expected to slow from May’s strong 339k gain, though the ADP survey should leave markets braced for another solid report. Westpac f/c: 190k, market f/c: 230k. Growth in average hourly earnings is expected to remain steady (Westpac f/c: 0.3%mth, 4.2%yr, market f/c: 0.3%mth). The unemployment rate will likely reflect marginal slack from the household survey (Westpac f/c: 3.6%, market f/c: 3.6% versus May 3.7%).
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