Markets Daily
A downside surprise on US inflation data drove a steep fall in US yields and the US dollar, AUD bouncing to 0.6790. Equities rallied strongly. Today’s data includes China June trade balance, UK May GDP and US June producer prices.
Yesterday
RBA Governor Lowe spoke in Brisbane on the RBA review and monetary policy. He announced that from 2024, the RBA would switch to 8 meetings per year from 11, that there would be a media conference after every meeting and that quarterly forecasts would be released the day of the meeting, among other changes. On rates, he said that “It remains to be determined whether monetary policy has more work to do. It is possible that some further tightening will be required.” This sounded a little more dovish; while August RBA OIS pricing remained at 14bp, Feb 2024 slipped about -9bp. AUD/USD showed little response to Lowe’s speech but was lively in line with skittish US$ sentiment, rallying from 0.6685 to a high of 0.6742 then pulling back to 0.6715. The RBNZ held steady at 5.5% as fully expected. The tone of the accompanying statement and MPC minutes displayed confidence and comfort with the level of the OCR. There were no indications of a change in view from that presented in the May Monetary Policy Statement where the RBNZ indicated that the OCR would remain on hold until the second half of 2024. The kiwi slipped only briefly.
Currencies/Macro
The US dollar underperformed all the majors. EUR/USD rose from 1.1025 pre-CPI to 1.1140 – highest since March 2022. GBP/USD rose from 1.2910 to 1.2990, briefly touching 1.3000 for the first time since April 2022. USD/JPY continued its multi-day slide, from 139.50 pre-data to 138.45, including two-month lows. AUD/USD bounced from 0.6690 pre-CPI to 0.6790/95. NZD/USD steadied up 1.5% on the day at 0.6295, unruffled by the RBNZ decision yesterday, and making a two-month high. AUD/NZD remained near 1.0790.
US CPI inflation in June was softer than expected, with headline up 0.2%m/m and 3.0%y/y (est. 0.3%m/m and 3.1%y/y, prior 4.0%y/y). Ex-food and energy rose 0.2%m/m and 4.8y/y (est. 0.3%m/m and 5.0%y/y, prior 5.3%y/y). Shelter remained strong, and excluding this, inflation was flat for the month and 4.0%y/y (vs. 4.6% y/y in May).
The Fed’s Beige Book of regional economic conditions showed an overall increase in activity since late May, although most regions expected that expansion to slow. Prices rose slightly overall, but slowed in some regions. Labour remained difficult to find.
Bank of Canada delivered its expected 25bp hike to 5.0%, referencing persistent excess demand and inflationary pressures. They did, though, say that they had discussed remaining on hold. Governor Macklem also referred to being close to the end of the tightening cycle and that decisions would be made on a meeting-by-meeting basis. USD/CAD dipped slightly on the decision, down a modest -0.3% on the day at 1.3185.
Interest rates
US 2yr treasury yields fell from 4.87% to 4.74%, mostly following the CPI data. while the 10yr yield fell from 3.96% to 3.86%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 24bp higher at the next meeting on 27 July, and another 8bp higher by November.
Australian 3yr government bond yields (futures) fell from 4.07% to 3.92%, while the 10yr yield fell from 4.14% to 4.02%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 13bp higher at the next meeting on 1 August, and another 31bp higher by February.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be only 5bp higher at the next meeting on 16 August and to peak at 5.64% in February.
Credit indices rallied on the CPI release with Main in another 2.5bp to be below 70bp for the first time this year (69.5) and CDX was also 2.5bp tighter at 63.5 to also now be ytd tights. Cash spreads in the US were more subdued (flat to a bp tighter) and are now ~10bp off 2023 tights according to Bberg’s all IG measure. Primary activity was restricted to Europe as the US paused ahead of CPI, with Europe seeing 4 issuers price EUR3bn. HY issuer Telecom Italia was the only corporate on the docket with its EUR750M 5yr, and TD the largest bank issuer with another short dated EUR1bn 2yr deal at E+45 (BBSW+86). Looking forward, the EU regulator’s approval of Broadcom’s acquisition of VMWare has raised expectations that Broadcom could be in the market soon with a jumbo deal to help refinance its USD32bn of acquisition funding… watch this space.
Commodities
Crude markets surged as US CPI hit the lowest rate since March 2021. The August WTI contract is up 92c at $75.75 while the September Brent contract is last up 82c to $80.22, the first close above $80 since April. Production cuts from Russia and Saudi are helping the physical market. Argus reported that Russian Urals blend surpassed the G7 price cap for the first time since the agreement was put in place in December last year. However, the hefty 5.95mb rise in US crude inventory reported by the EIA is arguably capping lighter/ sweeter markets though this was more than fully explained by the 1.75mbpd/ 45% fall in US crude exports last week. Distillate inventory also rose by 4.8mb though this did not stop diesel prices hitting fresh 3m highs.
In energy markets, BNEF is forecasting that June saw a record amount of gas burned in the US as it captured a larger amount of the ‘thermal gap’ and hot weather drove up power demand. Gas prices dipped in the US though with cooler late July temperatures being forecast in central and eastern parts of the country. And European gas prices dropped another 8% to a 1 month low, bringing losses over the last week to 23% as Shell prepares for the Nyhamna to start up on July 15.
Metals surged on the US CPI outcome with copper up 2.3% to $8,513 while aluminium jumped 3.2% to $2,238. Tin is up 4% to $29,069 and nickel up 4.2% to $21,575. That left the LMEX index up 2.75% on the day. There was little fresh industry news though Mysteel reported that some copper rod producers in China have been forced to reduce activity due to electricity rationing in eastern China. Press reports that China will accelerate policy roll out including “quasi-fiscal” policy plus the stronger than expected credit data earlier in the week added to the price gains with copper above $8,500 for the first time in 3 weeks. The FT reported that accused businessman Prateek Gupta stated it was actually Trafigura that had “devised and proposed” the fake nickel scheme.
Iron ore markets jumped on China stimulus optimism. The August SGX contract is up $4.25 from the same time yesterday to $110.25 while the 62% Mysteel index is up $3.10 to $111.40. China will report June trade data today including iron ore imports and steel exports which will be closely watched by the market.
Day ahead
Australia: With upside inflation risks lingering, Melbourne Institute inflation expectations have been holding up at an elevated level; June was 5.2%yr. We will also see Australia’s weekly payrolls and wages series for the reference week 10 June. Official June employment data is due a week from today.
China releases June trade data, with another very large surplus expected, market f/c: US$74.9bn versus $66bn in May.
Eurozone/UK: Growth in European industrial production is expected to remain subdued in May (market f/c: 0.3%). In the UK, May’s GDP is likely set to contract as the outlook continues to weaken (market f/c: –0.3%).
US: The PPI should continue to moderate at a strong pace in June, with producer prices almost flat compared to a year ago (market f/c: 0.2%mth; 0.4%yr). Meanwhile, initial jobless claims are yet to signal any significant degree of emerging slack (market f/c: 250k).
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