Markets Daily
The US dollar and bond yields rose after firm second-tier US data, weighing on US equities. AUD trimmed jobs-related gains to 0.6780, still outperforming major FX. Today’s light calendar includes Japan June CPI and UK June retail sales.
Yesterday
Australia’s June labour force survey was stronger than expected. Total employment rose +32.6k from +76.5k in May (revised up from +75.9k), the unemployment rate remained at 3.5% (May revised down from 3.6%) while the participation rate: 66.8% from 66.9%. The employment-to-population ratio remained at a record high 64.5%. Pricing for a hike at the RBA August meeting rose from about 40% to 60% chance. The jobs data appeared to account for about 35 pips of the AUD/USD rally from 0.6775 in early trade to as high as 0.6840. Most of the rest of the rally appeared to correlate with a sharp bounce in the Chinese yuan, following daily guidance from China’s central bank. Asia-Pacific equities were mixed, China and Japan underperforming. The ASX 200 closed flat.
Currencies/Macro
The US dollar was generally stronger against European currencies and JPY but AUD and CAD held their ground on the day. EUR/USD fell from 1.1220 to 1.1130. GBP/USD fell about 70 pips to 1.2870. USD/JPY rose with help from Treasury yields, from 139.60 to 140.50, later trimming gains to 140.10. AUD/USD extended its local session gains to a high of 0.6847 but then slipped back to 0.6780 as the US dollar bounced, net +10 pips on the day. NZD/USD fell -0.4% to 0.6235. AUD/NZD rallied to a high of 1.0901 in the NY morning and starts Friday around 1.0870, net +0.5%.
US jobless claims weekly data indicated continued tightness in the labour market. Initial claims fell to 228k (est. 240k ,prior 237k), while continuing claims were at 1.754m (est. 1.722m, prior.721m). The Philadelphia Fed business survey index remained weak in July at -13.5 (est. -10.0, prior -13.7), but the prices received component rose to 23.0 from 0.1, and the six-month outlook rose to 29.1 from 12.7. Existing home sales in June fell to 4.16m annualised (est. 4.20m, prior 4.30m), but low inventory (lowest on record for the survey) supported prices. The Conference Board leading index for June fell 0.7% (est. -0.6%, prior revised to -0.6% from -0.7%), indicating a further slowing of the economy.
Eurozone consumer confidence was slightly less weak at -15.1 (est. -15.8, prior -16.1). German WPI inflation fell 0.3%m/m and +0.1%y/y (est. -0.4%m/m and flat y/y). Eurostat revised Q1 Eurozone GDP to 0.0%qtr from -0.1%qtr, wiping ‘technical’ recession from the records, after Q4’s -0.1%qtr.
Interest rates
US 2yr treasury yields rose from 4.77% to 4.84% while the 10yr yield rose from 3.75% to 3.88%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 26bp higher at the next meeting on 27 July, and another 9bp higher by November.
Australian 3yr government bond yields (futures) rose from 3.90% to 3.99%, the 10yr yield from 3.95% to 4.03%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 15bp higher at the next meeting on 1 August, and another 26bp higher by February.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be 6bp higher at the next meeting on 16 August and to peak at 5.70% in November.
Credit spreads were fairly contained with Main a bp wider at 70.5, CDX unchanged at 65.5 and cash flat to a bp tighter as summer conditions settle in. Primary was also quiet as bank supply came to a halt leaving DS Smith as the largest deal on the day with its EUR1.5bn dual tranche green offering, pricing the 4yr at MS+108 and the 7yr at MS+145. IG fund flows remain supportive in the US, recording an other inflow of USD1.96bn (Lipper), marking the 7th straight week of inflows and in the short term we will be balancing the mix of slower summer markets with potential post earnings supply as corporate reporting lifts next week.
Commodities
Crude markets saw modest gains, helped by optimism about China stimulus though WTI contract expiry kept liquidity light. The September WTI contract is up 48c at $75.77 while the September Brent contract is up 27c at $79.73. Bloomberg noted that Saudi Arabia and the UAE are expanding production capacity with an increase of a combined 1.8mbpd of sustainable oil production by 2027 and Kuwait will lift output capacity from the current circa 2.8mbpd to 3.5 by 2025 and a further 4mbpd by 2040. Iran’s national oil company is also looking to raise output from 3.8mbpd to 5.7 by the end of the decade. Combined, these 5 countries are targeting a 5.3mbpd of additional capacity by 2040 meaning the Middle Eastern producers will be the “last man standing” as the world moves away from fossil fuel energy.
Gas markets pushed higher with extreme heat across the Mediterranean forecast to build again into the weekend as temperatures are forecast to hit 47C on Saturday in Greece. The August NBP and TTF contracts were up circa 4% albeit from fresh lows back to October 2021 earlier in the week. Escalating tensions between Russia and Ukraine in the Black Sea added a layer of concern to the gas market while wires reported that Argentina’s state run energy company Enarsa rejected a cargo of Russian LNG over ‘payment issues’. Bloomberg reported that China’s imports of thermal and coking coal from Russia hit a record 10.6mt in June.
Metals rose on optimism about China stimulus as analyst focus turned to the Politburo meeting at the end of next week. Copper is up 0.3% to $8,457, zinc is up 0.7% to $2,376 and nickel is up 2% to $21,329. Chile announced plans to increase local copper processing capacity in a bid to reduce its dependence on Asian smelters. More than half of Chile’s copper output is shipped in semi-processed form, with the last smelter built back in 1990. And Freeport-McMoRan said it had met Indonesia’s regulatory requirements and expects approval to resume exports of copper concentrate from its Grasberg mine within days. The IAI reported global aluminium production rose 0.2%mm and 0.85%yy in June.
Iron ore markets gained further modest ground, helped by a joint statement from the Chinese CPC and State Council to “promote the development and growth of the private economy”. The August SGX iron ore contract is up $1.40 from the same time yesterday to $113.90 while the 62% Mysteel index is up $2.15 to $116.70. The 31-point action plan covered a wide range of policy initiatives focusing on shoring up the ‘ailing private sector’. However, economists continued cutting Chinese growth forecasts with BoA slicing its 2023 forecast from 5.7% to 5.1% after JPM cut from 5.7% to 5% and Deutsche from 6% to 5.3% earlier in the week.
Day ahead
Japan: June’s headline CPI inflation is likely to be unchanged at 3.2%yr, with energy subsidies containing prices. CPI ex-fresh food is seen ticking up to 3.3%yr and CPI ex-fresh food and energy down a touch to 4.2%yr. These are obviously a long way above the Bank of Japan’s 2% target, but base effects are likely to help inflation ease from September and October. A steady hand is generally expected at the BoJ meeting a week from today.
UK: Retail sales growth in June was likely muted as discretionary spending eased in response to rate rises (market f/c: volumes +0.2%mth, -1.6%yr). GfK consumer sentiment in July should continue to exhibit its resilience despite rising inflation and interest rates (market f/c: -25 vs the -49 ‘Trussonomics’ low in September 2022).
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