Markets Daily
European bond yields fell steeply but the US was more mixed, fitting the US economic data. Equities remained upbeat. The US dollar was mixed, AUD returning to 0.6810. Today’s data includes the Westpac Australian June leading index, UK June CPI and US June housing construction.
Yesterday
The RBA July minutes revealed the debate between raising the cash rate 25bp and holding steady. The stance of policy was described as “clearly restrictive” and more prominence given to possible downside risks to growth but persistence of high inflation and tight labour market conditions still look to be the main factors shaping policy decisions in coming months. Markets read the minutes as slightly dovish, yields a touch lower on the day. AUD/USD was a touch softer after the minutes, but overall tightly rangebound, trading 0.6807 to 0.6837. The ASX 200 was again little changed, closing -0.2%. North Asian markets were mostly weaker.
Currencies/Macro
The US dollar was mixed against the G10. EUR/USD touched 1.1276 (a seven-month high) then eased back to 1.1225, little changed net. GBP/USD fell a net 35 pips to 1.3040. USD/JPY recovered in line with US Treasury yields to be a fraction higher overall at 138.80. AUD/USD was almost flat on the day at 0.6810. Underperformer NZD fell from 0.6340 to 0.6275, ahead of today’s key CPI data. AUD/NZD rose from 1.0770 to 1.0855. The twice-monthly GDT dairy auction resulted in an overall price fall of -1.0%, with whole milk powder -1.5%.
US retail sales in June rose 0.2%m/m (est. +0.5%m/m), but the ex-auto and gas measure was in line at +0.3%m/m, while the important core ‘control group’ rose 0.6%m/m (est. +0.3%m/m), with May revised up to +0.3% from +0.2%.
Industrial production fell -0.5%m/m in June (est. flat, prior revised down to -0.5%m/m from -0.2%m.m). Capacity utilisation fell to 78.9% (est. 79.5%, prior 79.4%). The NAHB homebuilder confidence survey continued to recovery from late 2022 lows, to 56 in July (est. 56, prior 55).
As the G20 meeting of central bank governors and finance ministers in India concluded, Bank of Japan Governor Ueda said that the BoJ narrative on monetary policy is unchanged, with still some distance to sustainably reach the 2% inflation goal.
Canada’s CPI in June rose 0.1%m/m and 2.8%y/y (est. +0.3%m/m and 3.0%y/y, prior 3.4%y/y). However, the median and trim core measures were firmer at 3.9%y/y (est. 3.7%, prior 3.9%) and 3.7%y/y (est. 3.6%, prior 3.8%).
ECB hawk Knot said inflation has probably peaked, and while he expects a July hike will be necessary, was less confident about additional tightening. ECB dove Visco was open to inflation declining more rapidly than forecast, and warned of potential over tightening.
Interest rates
US 2yr treasury yields fell to 4.66% then recovered to 4.77% while the 10yr yield slipped to 3.73% then rose to 3.79%. 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) bounced off 3.82% to 3.87%, the 10yr yield from 3.91% to 3.95%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 9bp higher at the next meeting on 1 August, and another 23bp 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 indices remain within recent ranges which are at the low end of year-to-date marks. Main was 2bp tighter last night at 69.5 with CDX in a bp to 65.5, while cash spreads little changed (flat to a bp better).
Commodities
Crude markets rose on fresh signs of slowing Russian exports and general risk-on sentiment in markets. The August WTI contract is up $1.60 to $1.30 to $79.80. Bloomberg noted that crude shipments from Russia in the 4 weeks to July 16 dropped to 3.1mb, down 780kbpd from the peak in May. API reported that crude inventory fell 797kb last week while gasoline fell 2.8mb and distillate fell 100k. Germany’s Miro refinery on the Upper Rhine is planning a partial shutdown in the early autumn. In 2020, the plant was supplying circa 25% of Germany’s gasoline.
European natural gas prices finally showed some signs of strength as extreme heat raged across southern Europe. The August TTF contract rose circa 8% after making a fresh low back to September 2021 in the previous session. Strong LNG imports in Asia with Chinese imports up 24.4%yy and signs of a pickup in Japanese imports are helping LNG prices stabilise after recent falls. And in coal markets, the NDRC noted that China now has enough stockpiles to see it through the summer months with power plant inventory reaching a record 199mt at the end of June.
Metals markets fell again following weak June Chinese activity data and waning expectations around Chinese stimulus. Copper is down 0.4% to $8,461 though aluminium fell 2.2% to $2,205. China’s CMOC has reached an agreement with the DRC state-backed mining company Gecamines that will see it pay $800m between 2023 and 2028 and at least $1.2bn in dividends. The dispute over CMOC’s Tenke Fungurume mine royalties began mid last year and has seen a massive estimated 200kt stockpile of copper built since then. The company will ship about 50kt of copper from that stockpile and new production per month, allowing for availability of trucks. Alcoa will report Q2 earnings on Wednesday.
Iron ore markets gained some modest ground despite signs of another wave of distress washing through Chinese property developers. The August SGX contract is up 65c at $113.65 while the 62% Mysteel index is up $1.20. Vale announced that it produced 78.7mt of iron ore in Q2 versus analyst estimates of 75.5mt though annual guidance was held at 310-320mt. Rio will report later today and BHP tomorrow.
Day ahead
Australia: The June Westpac-MI Leading Index will likely reflect weakening conditions ahead (10:30am Syd).
The Eurozone releases the final estimate of June CPI, with the flash estimate 5.5%yr overall, 6.9%yr ex-energy and 5.4%yr core rate.
UK: CPI inflation in June should remain elevated as core spending remains strong supporting the case for strong monetary action ahead. Consensus is 8.2%yr, 7.1%yr core rate, versus May’s 8.7%yr and 7.1%yr respectively.
US: June’s housing starts likely to be weak after a strong May figure (market f/c: -10.2%mth). Permits are also likely to be weak as risks around the pipeline linger (market f/c: -0.9%mth).
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