Markets Daily
Asia’s equity rally extended to Europe and the US. News and data had limited impact aside from GBP strength on steep wage gains. AUD ticked up to 0.6685. Today’s busy calendar features a speech by RBA Governor Lowe, monetary policy decisions in New Zealand and Canada and US June CPI.
Yesterday
The Westpac-Melbourne Institute of Consumer Sentiment index rose by 2.7%, from 79.2 in June to 81.3 in July. Responses over the course of survey week suggest the RBA Board’s decision to pause in July did nothing to boost confidence. Sentiment was considerably more buoyant ahead of the RBA decision, with an index read of 88, up 11.2% on June. Presumably this captured the full effect of the better news on inflation which had printed in the previous week. The NAB business conditions index held unchanged at +9 in June, locking in the sizeable 6pts decline reported in May. The business confidence index remains at below average levels, notwithstanding a 3pts bounce in June, to be at 0, largely reversing a 4pts drop in May. AUD/USD was little changed at 0.6680, trading a tight 0.6672-0.6695 range. Equity sentiment was notably upbeat, almost all major Asia-Pacific indexes posting sizeable gains. The ASX 200 closed up 1.5%, snapping a 4-day losing streak.
Currencies/Macro
The US dollar was softer against most G10 FX on the day. EUR/USD gyrated but eventually was a touch higher at 1.1010. GBP/USD found support from the strong UK wages data, rallying 0.6% over the day to 1.2930. The yen performed well amid speculation BoJ monetary policy change is looming, USD/JPY down from 141.40 to 140.30. AUD/USD slipped to 0.6651 then recovered to 0.6685. NZD/USD slipped a net -0.2% to 0.6195 and 0.6225, underperforming on the day ahead of the RBNZ decision. AUD/NZD rose 45 pips to 1.0795.
US NFIB small business sentiment rose to 91.0 in June (est. 89.9, prior 89.4). Pricing retreated to levels last seen in March 2021.
In the July German ZEW investor/analyst survey, current conditions fell to -59.5 (est. -62.0, prior -56.5), with expectations at -14.7 (est. -10.6, prior -8.5). Eurozone expectations fell to -12.2 from -10.0. Germany June CPI was finalised unchanged at 6.4%y/y, EU harmonised 6.9%y/y.
UK unemployment rose to 4.0% in the three months to May (est. unchanged at 3.8%), although the underlying details indicated a still strong labour market. Average weekly earnings rose to 6.9%y/y, and ex-bonus earnings rose to a new cycle high of 7.3%y/y.
Interest rates
US 2yr treasury yields rose from 4.86% to 4.88%. while the 10yr yield ranged between 3.95% and 4.00%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 25bp higher at the next meeting on 27 July, and another 13bp higher by November.
Australian 3yr government bond yields (futures) ranged between 4.07% and 4.12%, while the 10yr yield ranged between 4.14% and 4.20%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 14bp higher at the next meeting on 1 August, and another 36bp higher by February.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be only 2bp higher after today’s meeting and to peak at 5.72% in February.
Credit indices extended their solid start to the week with Main in 3bp to 72 and CDX another 2bp tighter to 66 and back to its lows. Cash was also 1-2bp better ahead of earnings later in the week as primary activity remains light. Euro issuance was limited to 3 banks with Caixa the largest on the day after adding a longer dated EUR500M 11nc10yr tranche (MS+195, NIC ~30bp) to its initial 6nc5yr SNP offering (EUR1bn, MS+165, NIC ~12bp). The US saw 3 issuers including Deere with its USD1.5bn 5yr deal at T+75 (BBSW+100) while Rabo became the next Yankee bank issuer with a short dated deal, pricing USD1.5bn of 2yr at T+65/SOFR+70 (BBSW+70).
Commodities
Crude markets rose helped by renewed optimism about China stimulus and signs that Russian production cuts are coming into effect. The August WTI contract is up $1.82 to $74.81 while the September Brent contract is up $1.69 to $79.38. The gains were despite API reporting a 3mb rise in crude stockpiles late in the day plus a 1mb rise in gasoline and 2.9mb rise in distillate. The EIA raised its US crude oil production forecast in 2024 to 12.85mb/d from 12.77 though it cut the 2023 forecast from 12.61 to 12.56mb. It also cut its 2024 world liquids production forecast from 102.69 to 102.57 and increased its world liquids consumption in 2024 to 102.8mb versus 102.71, pointing to supply deficits through 2023 and 2024. Bloomberg shipping data shows crude shipments from Russian ports in the 4 weeks to July 9 “dropped substantially” with no obvious signs of maintenance. And signs of tightness in heavier crude markets increased due to the ongoing fires in Canada, the long-lasting halt of Iraqi oil exports via the Ceyhan terminal and the startup of new refineries in the Middle East and Asia. The premium of Norway’s Johan Sverdrup (JS) blend which has replaced the Russian Urals blend for many refiners in Europe surged to a fresh record.
Despite heatwaves across large swathes of Germany and Italy this week, gas prices fell another 4%, bringing losses over the last 5 sessions to 18% and the August TTF contract to a 4-week low. Storage is close to 80% full and as we move through July, maintenance on Norwegian fields is due to be completed, increasing supply in the region.
Metals were mixed in well-rehearsed ranges with copper down 0.4% to $8,337 but aluminium up 1% to $2,168. Nickel fell 1.6% to $20,675 while zinc rose 0.8% to $2,371. There was little fresh news though extreme heat in the Sichuan province is seeing moves to reduce power consumption which may see about 50,000mt of aluminium production being idled according to SMM. However, the Sichuan region only accounts for about 1mt of more than 40mt of national capacity and given recent heavy rains in the Yunnan province, as much as 1mt of capacity there is expected to be brought back through July.
Iron ore markets stabilised after the weekend slide, helped by indications of further incremental policy support from Beijing. The August SGX contract is up 95c from the same time yesterday to $106.00 while the 62% Mysteel index is up $2.50 to $108.30. Financial regulators were said to be stepping up pressure on banks to ease terms for property companies and extend loan terms, allowing for delivery of homes that are under construction. Financial papers also ran reports on Tuesday flagging the adoption of more property-supportive polices. China will report the first batch of June trade data Thursday including iron ore imports and steel exports which will be closely watched.
Day ahead
RBA Governor Lowe will speak about “The Reserve Bank Review and Monetary Policy” at the ESA National Conference in Brisbane, 1:10pm Syd.
On the migration outlook, China’s reopening should provide support to Australia’s overseas arrivals in time.
At 12pm Syd we expect the RBNZ to leave the Official Cash Rate unchanged at 5.50%. Forecasters are unanimous in forecasting no change, while market pricing shows only a very small risk of a hike. In its May Monetary Policy Statement the RBNZ gave markets a strong steer that it expected that no further increases in the OCR would be required, and that now is the time to “watch, worry and wait”. The data flow since May will likely have given comfort to the RBNZ that its on–hold stance is appropriate for now. The key piece of information was March quarter GDP, which showed that the economy started the year in a slightly less overheated position than believed. The main message we might expect to see is that the future direction of interest rates is data–dependent, so as to leave room for the RBNZ to shift tack should upside (or downside) risks to the inflation profile accumulate. We think that this ‘data–dependent’ message may have gotten a bit lost in the on–hold messaging in May.
Japan: Another lift in core machinery orders is anticipated in May (market f/c: 1.0%).
The global market focus is US June CPI data. Further unwinding of the H1 2022 gasoline price surge should help lower headline inflation to 3.1%yr from 4.0%yr, with CPI ex-food and energy easing to 5.0% from 5.3%.
Regional Fed presidents Barkin, Kashkari, Bostic and Mester are all due to speak. The Federal Reserve’s Beige Book will also provide an update on conditions across the regions.
The Bank of Canada paused its tightening cycle at 4.5% at the March and April meetings but then resumed hiking in June, +25bp to 4.75%. Economists are divided on today’s decision, about two-thirds expecting a 25bp hike to 5.0%, with market pricing similar, at 68%.
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