Markets Daily
US non-farm payrolls were weaker than expected, weighing on bond yields and the US dollar. AUD rebounded to 0.6690. Today’s calendar includes China June CPI and PPI and plenty more Fed commentary.
Friday
AUD/USD traded a tight range, mostly 0.6620-40, with no local data. Equity sentiment remained poor, most Asian indexes posting sizeable losses. The ASX 200 fell for a third consecutive day, closing -1.7% at a low since March.
Currencies/Macro
The US dollar fell against all major currencies on Friday in response to the payrolls data. EUR/USD rose from 1.0890 to 1.0965. GBP/USD rallied about 1 cent to 1.2835. USD/JPY was already under pressure pre-NFP, extending its decline to 142.15, -1.3% overall. AUD/USD bounced from 0.6625 pre-payrolls to 0.6690. NZD/USD rose 50 pips to 0.6205, leaving AUD/NZD 15 pips higher at 1.0775.
US non-farm payrolls in June fell short of expectations, rising 209k versus 230k consensus and with -110k in downward revisions, May now 306k. However some details were stronger, with the unemployment rate still falling from 3.7% to 3.6% (as expected), and average hourly earnings a little firmer than expectations, up 0.4%m/m and 4.4%y/y.
Interest rates
US 2yr treasury yields fell from 5.01% to 4.86% following the jobs data, later retracing to 4.95%. while the 10yr yield rose from 4.02% to 4.06% via 4.00%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 23bp higher at the next meeting on 27 July, and another 13bp higher by November.
Australian 3yr government bond yields (futures) fell from 4.26% to 4.24% via 4.19%, while the 10yr yield rose from 4.25% to 4.28% (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 51bp higher by February.
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 5.82% in February.
Credit put in a firmer session to close the week with Main 1.5bp tighter at 76.5, though 2.5 wider on the week, CDX was in 1bp to 70, and also ~3bp wider wtd, while cash spreads were little changed on both the day and week having eased off the recent tights seen ahead of the July 4 holiday. As expected, there was no supply into a payrolls Friday and expectations for the week ahead in both Europe and the US reflect summer volumes. Markets will also be looking toward US CPI mid-week and the start of US 2Q reporting (banks start Friday).
Commodities
Crude markets posted their first back-to-back weekly gains since May, helped by the larger than expected Saudi price hike plus the signs that the Russian and Saudi production cuts were having an impact on the physical market. The August WTI contract is up $2.07 to $73.86, a 1-month high while the September Brent contract is up $1.95 to 2-month high. The UAE oil minister told Bloomberg TV that voluntary cuts were enough to balance the market – “what has been done is adequate for the time being”.
In fuel markets, diesel showed unusual signs of summer tightening as low Rhine water levels, a fire at the Bayernoil refinery in southern Germany and falling inventory in the US pushed prices up to 3-month highs. The European August heating oil contract rose 6% last week to hit a high back to the 18 April. The FT reported that surging European demand for LNG to offset the loss of piped Russian gas has diverted additional supplies from the US and Qatar, leaving some southeast Asian economies such as Bangladesh, Vietnam and Thailand short of gas which has “pushed these countries to need more coal” according to TotalEnergies.
Metals markets marked time with the hot but not too hot US jobs report lifting copper 1.27% Friday to $8,366 and aluminium by 0.6% to $2,141. Nickel was the outlier, down 2% to $20,780. Chinese Premier Li on Thursday said that he would “spare no time” in implementing targeted stimulus, though he gave no details other than the fact that measures would be “targeted, comprehensive and well-coordinated” according to Xinhua News. The comments were made at a meeting with economists. The FT reported that European aluminium producers were warning that a loophole in the EU’s carbon border tax will lead to heavy polluting exporters such as China flooding the bloc with low cost, emissions heavy metal. Because offcuts of aluminium which are remelted can be sold as a zero-carbon product, “widespread greenwashing of imported aluminium products [will undermine] the effectiveness of CBAM” according to Norsk Hydro.
Iron ore markets ended the week modestly lower with the lack of fresh detail on any stimulus in China, last weekend’s purge of leadership at the PBoC, idling of steel production in the Tangshan region through July due to deteriorating air quality and forecasts of 40C plus temperatures in some regions in China all weighing on sentiment. The August SGX contract is down 90c from the same time last week at $109.00 while the 62% Mysteel index is down $3 at $109.20. China will release its first batch of June trade data Thursday including iron ore imports and steel exports.
Day ahead
At 11:30am Syd we see China’s June consumer and producer prices data. Weak prices growth in June is expected as managed prices keep CPI growth tempered while base effects around commodity prices should result in a decline in the PPI (market f/c: 0.2%yr, -5.0% respectively).
US: Wholesale inventories for May are expected to slide as firms become more uncertain (market f/c: $20.5bn). May’s consumer credit is expected to come under pressure with higher rates (market f/c: $20.5bn). Fed governor Barr speaks on bank supervision while regional Fed presidents Daly, Mester and Bostic discuss the economic outlook.
Japan: The May current account is likely to show a narrowing of the trade deficit offset somewhat by primary income (market f/c: ¥1865.8bn).
Eurozone: The result of the Sentix investor confidence survey for July will reflect pessimism about the outlook for the economy.
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