Markets Daily
Bond yields and the US dollar fell further, and equities rose further (S&P500 up 0.9%, highest since March 2022). US PPI inflation was softer than expected, endorsing the disinflationary theme evident in the previous day's CPI update.
Yesterday
Regional equities outperformed even Wall Street’s positive reaction to US CPI, many indexes up 1-2%, including +1.6% for the ASX 200. AUD/USD traded quietly for some time around 0.6790 but then picked up to 0.6815/20, aided by sharp gains for the likes of the Kiwi, Korean won, Malaysian ringgit and Thai baht though curiously not the Chinese yuan. ABS data showed Australian payroll jobs rose 0.3% in the month to 10 June 2023, following a 1.1% rise in the previous month. China recorded a hefty $70.6bn trade surplus in June. Export values (in US$) fell -12.4%yr and imports -6.8%yr but the volume of commodity imports including coal, LNG, crude oil and iron ore was very strong.
Currencies/Macro
The US dollar index is down 0.8% on the day and at the lowest level since April 2022, shedding ground against all G30 currencies. EUR rose from 1.1129 to 1.1227 – highest since February 2022. USD/JPY fell from 138.95 to 137.92 – a three-month low.
AUD rose from 0.6800 to 0.6895 – a two-month high. Local media are reporting this morning that Lowe won't be reappointed as RBA Governor. ABC news states that a Cabinet meeting will be held this morning to make a decision on his replacement. After this Treasury Chalmers is expected to make an announcement.
NZD rose from 0.6330 to 0.6395 overnight – highest since February. AUD/NZD ranged between 1.0754 and 1.0800.
US PPI inflation in June undershot expectations at +0.1%m/m and +0.1%y/y (est. +0.2%m/m and +0.4%y/y), with ex-food and energy at +0.1%m/m and 2.4%y/y (est. +0.4%m/m and 2.6%y/y). Weekly initial jobless claims continued to indicate a robust labour market. Initial claims fell to 237k (est. 250k, prior 248k), while continued claims rose to 1.729m (est. 1.729m, prior 1.718m).
FOMC member Daly said: “It’s really too early to say that we’ve declared victory on inflation”. While the CPI update reported on Wednesday “is very positive” she’s in a “wait-and-see mode on that, because I remain resolute to bring inflation down to 2%.”
FOMC member Bullard resigned after 15 years in the position to become dean of a university business school. He has been an influential member of the committee, in this cycle arguing for aggressive interest-rate hikes to fight inflation.
Eurozone industrial production in May rose +0.2%m/m (est. +0.3%m/m), and -2.2%y/y (est. -1.2%y/y).
UK GDP in May fell 0.1%m/m (est. -0.3%m/m). Industrial production fell 0.6%m/m (est. -0.4%m/m) on lower utility/energy activity, services were flat (est. -0.2%m/m), and manufacturing fell 0.2%m/m (est. -0.5%m/m).
Interest rates
Treasury yields dropped sharply again overnight as the bull steepening trade continued to play out. The pricing for FOMC rate cuts in 2024 lifted, while the 2 year note saw the largest drop in yield since March. Fed pricing pivots around the end of 2023, but show a solid set of cuts being built in over the course of 2024.
Australian 3 year government bond yields have dropped to 3.965% from 4.22% a little over a week ago, while 10 year yields are at 4.05% from 4.26%. AUD markets are pricing in an RBA cash rate of 4.375% for the December meeting, and this rate holds steady into mid-2024.
In New Zealand, cash rate expectations are steady post the RBNZ meeting around 5.5%-5.6%. The first cut from the RBNZ is not priced in until August 2024.
Credit spreads underperformed after a strong run this week with Main half a bp wider to 70 while CDX was out 1.5bp to 65, however both remain close to the year to date lows recorded yesterday. Cash spreads lagged the move in outrights to be 1-2bp wider as primary activity remains fairly muted. Both Europe and the US saw 2 issuers come to market with RBC’s USD2.35bn deal comfortably the largest. RBC priced USD1.35bn of 3yr at T+98/SOFR+108 (BBSW+109) and USD1bn of 5yr at T+128 (BBSW+152).
Commodities
Crude markets hit 11-week highs as Libya’s second largest oil field was halted due to protests while the Forcados terminal in Nigeria was also halted due to a potential leak. The August WTI contract is up $1.14 to $76.89 while the September Brent contract is up $1.46 to $81.57. Both contracts have traded through the 100dma, which is seen as a positive sign for trend followers even though the IEA cut its global oil demand forecasts for 2023 by 220kbpd from last month’s forecast. However, OPEC forecast that global demand will increase in 2024 by 2.2mbpd to reach 104.3mb, double the rate forecast by the IEA. Bloomberg reported that Russia is finally cutting crude exports noting that the 4-week average of exports to July 9 dropped below the average for February for the first time while Rystad is forecasting a drop to 3.1/3.2 in August versus about 3.7mb in April and May. Note that Russia classified its crude export data in April meaning there is no official measure of Russian export volumes. China’s imports of crude hit a 3yr high in June.
In gas markets, prices continued falling with the August Henry Hub contract down 3.3% to $2.55/MMBtu while the August TTF contract is approaching the lows back to September 2021. Morgan Stanley warned that a mild European winter could see gas prices in Europe halved to around €15/mwh if renewables perform strongly. Europe’s inventories could become 100% full by early September, resulting in a supply glut. The forming El Nino weather pattern points to mild weather across southern Europe later this year.
Metals surged again with copper up 2.4% to $8,707 while aluminium jumped 2.1% to $2,283 and zinc rose by 2% to $2,475. Falling US bond yields and the drop in the US$ plus optimism about China stimulus all helped lift copper to a 3-month closing high. News that China’s MMG is bracing for further delays at its troubled Las Bambas mine in Peru added to the bid tone. A long-delayed project to build a second pit which would mitigate depletion has faced protests from indigenous communities despite military deployment since March. China also reported copper ore imports in June at 2.125mt, 24% above the 5yr seasonal average and the strongest June imports on record.
Finally note that iron ore markets continued the recent bound from the recent 6-week low with the August SGX contract up another $1.70 from the same time yesterday to $111.95 while the 62% Mysteel index rose 45c to $111.85. That leaves the SGX contract up 4% so far this week though the Dalian contract is up just 1.5% and the SHFE rebar contract is up just 0.2% so far this week. China imported 95.52mt of iron ore in June, up 8.9% versus the 5yr seasonal average and up 7.4%yy.
Day ahead
NZ: Markets will be closed for Matariki Day.
Australia: ABC news reports that a Cabinet meeting will be held this morning to make a decision on RBA Governor Lowe’s replacement. After this Treasury Chalmers is expected to make an announcement.
Japan: The final estimate to May’s industrial production is due.
Eurozone: The trade deficit remains at risk of widening as export demand continues to soften.
US: Longer-run inflation expectations, according to the University of Michigan’s sentiment survey, will likely remain elevated in July (market f/c: 3.0%). Import prices should meanwhile continue the rapid descent from historic highs (market f/c: –0.1%). The FOMC’s Waller, Daly and Goolsbee are also due to speak.
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