Markets Daily
US bond yields and the US dollar fell amid encouraging inflation signals, though Fedspeak remained hawkish. Equities are little changed.
Yesterday
A soft update on China’s June CPI and further falls in China’s factory-gate prices set the tone for regional markets (Shanghai +0.2%, HK +0.6%. ASX -0.5%). Singapore iron ore slipped over 4% to just below $104/t. AUD/USD slipped from just beneath 0.67 to 0.6650 in local dealings.
Currencies/Macro
The US dollar index is down 0.3% on the day, along with US yields. Manheim’s used car priced index tumbled 4.2% in June, the largest price drop since April 2020, boosting hopes for a softer CPI report this week. EUR rose from 1.0944 to 1.1000. USD/JPY fell from 143.01 to 141.28. AUD round-tripped in the last 24 hours, slipping from just beneath 0.67 to 0.6624 in NY AM trade before rebounding to 0.6675 at the local open. NZD rose from 0.6180 to 0.6218 via 0.6167. AUD/NZD fell from 1.0780 to 1.0733.
The NY Fed’s inflation expectations survey showed 1yr-ahead expectations easing to 3.8% from 4.1%, while 3yr expectations were unchanged at 3.0%. US wholesale inventories in May were finalised at 0.0% (est. and prior -0.1%), while sales fell 0.2%m/m (est. +0.3%).
FOMC member Barr repeated the mantra that there is more work to do, even if policy is close to restrictive, since inflation remains too high. Daly said that they likely need “a couple more rate hikes”, while Mester spoke of the “need to tighten somewhat further”. Bostic, though, said: ““I have the view that we can be patient — our policy right now is clearly in the restrictive territory…We continue to see signs that the economy is slowing down, which tells me the restrictiveness is working.”
Eurozone Sentix investor sentiment fell to -22.5 (est. -17.9, prior -17.0).
Norway’s CPI in June fell from 6.7%y/y to 6.4%y/y (as expected), but the underlying rate rose to a new cycle high of 7.0%y/y (est. 6.6%y/y, prior 6.7%y/y). Sweden’s central bank, Riksbank, published the minutes from the 29 June meeting (where they hiked by 25bp to 3.75%), noting that inflation is seen as too high and that they intend to hike at least one more time this year. They also noted concern about the weakening currency.
Interest rates
The selloff in global bonds ran into some resistance overnight, with a modest rally, driven in the most part by the UST market. European bonds closed on the lows in yields, but still higher on the day, while Gilts performed. BoE Governor Bailey spoke for many global policymakers in a sense, noting the impact of hikes so far are yet to impact the economy, but more importantly, he expected a marked drop in inflation over the rest of this year. Price action for the markets to watch was the sharp richening of the belly - where UST 5s performed very strongly as well as the modest steepening in the UST ultras (10s/30s). US 2yr treasury yields fell from 4.95% to 4.85%. while the 10yr yield fell from 4.08% to 3.98%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 24bp higher at the next meeting on 27 July, and another 11bp higher by November.
Australian 3yr government bond yields (futures) fell from 4.21% to 4.15%, while the 10yr yield fell from 4.29% to 4.21%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 15bp higher at the next meeting on 1 August, and another 42bp 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 5.81% in February.
Credit indices outperformed with Main a bp tighter to 75 and CDX in 2bp to 68, however cash spreads were more subdued to be flat to a bp wider as primary volumes remain sluggish. Euro primary markets recorded a second zero day in a row while the US saw just the 2 issuers come to market. TD completed its first senior USD benchmark deal since January, pricing USD3.5bn across 3yr (USD2.25bn at T+98/SOFR+108, BBSW+112) and 5yr (USD1.25bn 5yr at T+128, BBSW+153) and Metlife priced a USD1bn 10yr at T+145.
Commodities
Traders took profits on WTI after it briefly traded above its 100-day moving average Friday with concerns about Chinese data adding to a modestly bearish tone. The August WTI contract is down 87c at $72.99 while the September Brent contract is down 61c at $77.86. Bloomberg reported that Russian refineries raised their crude processing rate in the first week of July to the highest in 12 weeks with primary processing rates averaging 5.65mbpd, the highest since April. And industry guru Javier Blas noted that Chinese crude production has increased circa 600kbpd from the low point in 2018 to reach around 4.3mbpd, making it the world’s 5th largest oil producer. China has focused on prolonging the life of its large and aging oil fields, tapping its shale deposits and turning coal into liquids as the country focusses on decreasing its energy dependency on foreign countries.
In LNG news, Berkshire Hathaway agreed to buy Dominion Energy’s stake in Cove Point LNG’s export project for US$3.3bn. And European gas prices fell as rising stockpile rates pressured prices. European storage is 79% full compared with a five-year average of 64% for this time of year and may hit capacity by September. That could result in a supply glut which “would crash prices” according to Energy Aspects. The August TTF contract was down 5% at one point during the overnight session and is down 11% over the last week.
Metals were modestly higher with copper up 0.15% to $8,383 while aluminium rose 0.4% to $2,154. Nickel was up 1.04% to $21,020. Peru reported that copper production rose 35% from a year ago, with 234,781t produced in May. Much of the surge came from the Las Bambas mine which was offline last year due to extended strike action. The LME reported that Russian aluminium stockpiles rose again last month, hitting 80% of total inventory.
Finally note that iron ore markets slid further towards $90 as Rio warned that the Chinese economy faced a “big real estate issue”. Morgan Stanley forecast that iron ore would drop to $90 on an “oversupplied” market”, noting that the current strength is unsustainable. The August SGX contract is down $4.15 to $105.05 while the 62% Mysteel index is down $3.40 to $105.80. After yesterday’s weaker than expected CPI and PPI update, China will report the first batch of June trade data Thursday including iron ore imports and steel exports.
Day ahead
Australia: Westpac-MI Consumer Sentiment will likely receive some relief from the RBA’s pause in July. The NAB business survey will also provide a timely update on the moderation in business conditions.
Eurozone/UK: The UK’s ILO unemployment rate is expected to hold steady in May, with slack still yet to clearly emerge (market f/c: 3.8%). The European ZEW survey of expectations should meanwhile continue to reflect a downbeat outlook in July.
US: Tightening conditions and growing uncertainty will likely continue to weigh on NFIB small business optimism in June (market f/c: 89.9).
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