Markets Daily
Markets were largely contained, though AUD and NZD underperformed in the wake of the soft China GDP data, the A$ down to 0.6815. Today’s calendar highlights are the RBA July minutes and US June retail sales.
Yesterday
China’s headline Q2 GDP growth rate of 6.3%yr was up from 4.5%yr in Q1 but largely thanks to the low base of a lockdown-depressed Q2 2022. Consensus was 7.1%yr and the q/q expansion only 0.8%. June month data showed a pickup in industrial production growth to 4.4%yr from 3.5%yr but a sluggish 3.1%yr on retail sales. AUD dipped to 0.6812 on the data but overall trade was fairly muted. Japanese markets were closed for a holiday, mainland China equities underperformed the region and the ASX 200 closed almost unchanged.
Currencies/Macro
The US dollar firmed against Aussie and Kiwi but was little changed against other G10 currencies on the day. EUR/USD rose 0.1% to 1.1240 including seven-month highs. GBP/USD was a touch lower at 1.3075. USD/JPY was more lively than most, trading a range of 138.00 to 139.41, steadying about unchanged at 138.65. AUD/USD extended its China data disappointment to a low of 0.6788 then trimmed losses to net -0.3% at 0.6815. NZD/USD slid 45 pips or -0.7% to 0.6325. AUD/NZD rose from 1.0730 to 1.0780.
The July NY Fed’s Empire State manufacturing survey, which has been volatile, fell to +1.1 (est. -3.5, prior +6.6). There were falls in prices paid to 16.7 (prior 22.0) and prices received to 3.9 (prior 9.0). Employee numbers rose to +4.9 (from -3.6), as did hours worked to +0.3 (from -5.8).
ECB member Nagel repeated the view of inflation persistence and the need to hike in July, but appeared more data dependent than he has been recently with respect to the September decision. Central Bank of Slovenia Governor Vasle also spoke of inflation being too high and persistent.
Interest rates
US 2yr treasury yields ranged between 4.71% and 4.77%. while the 10yr yield ranged between 3.77% and 3.83%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 25bp higher at the next meeting on 27 July, and another 9bp higher by November.
Australian 3yr government bond yields (futures) ranged between 3.87% and 3.93%, while the 10yr yield ranged between 3.94% and 4.01%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 10bp higher at the next meeting on 1 August, and another 25bp higher by February.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be only 4bp higher at the next meeting on 16 August and to peak at 5.64% in November.
Credit spreads were mixed with Main a bp wider to 71.5 while CDX closed in a bp at 66 with the moves reflecting sentiment in each market. Cash spreads were marginally weaker, however we did see primary market reopen with US banks commencing their post earnings supply. Europe saw 3 issuers price EUR4.0bn led by SocGen’s EUR2.5bn covered deal (3/7yr), while the US saw 4 issuers price USD7.125bn. The large cap banks commenced their post earnings supply with JPM pricing USD4.5bn across a USD2.5bn 6nc5yr at T+128 (BBSW+153, IPT +150-155) and a USD2bn tap of its 6/34 at T+150 (IPT +175) with very little in the way of NIC for either deal. WFC priced a USD1.725bn PerpNC5yr preferred to yield 7.625% that was labelled GCP but WFC may have an eye on preferred calls in Sept and March (refi).
Commodities
The return of production at the Libya’s Sharara oil field after protestors shut the field late last week plus weaker than expected China GDP weighed on crude markets, sending WTI below $75 and Brent below $80. The August WTI contract is down $1.27 to $74.15 while the September Brent contract is down $1.36 to $78.51. Ed Morse from Citi warned that the “bulls got it all wrong” given that “the world is still waiting for a real China recovery, Europe is in recession, and we still don’t know if the US will have a hard landing”. However, Rapidan Energy warned that the oil market “will dig deeply into inventories this quarter” with Russia seen complying with its pledge to reduce seaborne exports by 500kbd and Saudi by 1mbpd.
In thermal energy markets, LNG plunged again despite ongoing heatwaves gripping southern Europe and large parts of the US. The return of Norwegian gas flows post maintenance at the massive Nyhamna field has seen the August TTF contract decline by 33%, hitting fresh lows back to September 2021. Japan proposed a global stockpile of natural gas similar to the emergency reserves in the oil sector with the IEA creating a framework for member nations. And Whitehaven Coal warned that thermal coal prices are expected to “remain subdued during the Northern Hemisphere summer period” as it confirmed the price it received fell 34% in the 3 months to June 30. The September Newcastle coal contract is down 14% month to date at $135 while the November ARA European thermal coal contract is down 10% and back below $100.
Metals gave back much of the last 3 days of gains as China data disappointed. Copper is down 2% at $8,495 while nickel fell 3.5% to $20,880. Metals for prompt delivery are trading at increasing discounts to 3-month contracts across the board with the discount for zinc hitting some of the lowest levels seen in the last 3 or so years, pointing to a lack of physical demand.
Iron ore markets softened on softer steel production and disappointing GDP in China. The August SGX contract is down $1 from the same time yesterday to $113 while the 62% Mysteel index is down $1.95 to $114.75. China produced 91.1mt of crude steel in June up 0.44%yy but down 2.25% in Q2yy. Vale will release its quarterly production report later today and we have Rio’s on Wednesday and BHP’s full year report on Thursday.
Day ahead
At 11:30am Syd, the minutes from the RBA Board’s July meeting should reveal the degree of debate over holding steady versus another 25bp rate rise.
US: June retail sales will reflect strong car sales, but weak core spending will restrain the headline (market f/c: 0.5%mth). Industrial production is likely to remain soft, with PMIs indicating weakness in manufacturing (market f/c: 0.0%mth). A lack of supply in the housing market is likely to boost confidence in the NAHB housing market index (market f/c: 56 pts). The pace at which business inventories are being accrued will likely stall in May as the economy slows (market f/c: 0.2%mth).
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