Markets Daily
The US dollar rose, led by USD/JPY, as reports dampened speculation the Bank of Japan could tighten this week. AUD slipped back to 0.6730. Today’s data calendar is dominated by flash July PMIs in Europe and the US.
Friday
Australia’s data calendar was empty. Japan’s June CPI was a touch above consensus at 3.3%yr but only 0.1%mth. Currencies were very quiet, including the previously lively Chinese yuan. AUD/USD traded a very tight 0.6759-0.6788 range. Regional equities were mixed, tech earnings disappointment weighing on Taiwan but China and Australia (-0.2%) little changed.
Currencies/Macro
EUR/USD was net unchanged at 1.1130, GBP/USD a touch lower at 1.2855. AUD/USD was hit by the wave of USD buying against the Japanese yen in the London morning, slipping from 0.6785 to 0.6735. NZD/USD fell about 65 pips or -1.0% to 0.6170. AUD/NZD rose 0.3% to 1.0910.
UK retail sales volumes in June were firm, rising 0.7%m/m, taking the annual pace to -1.0%y/y (est. +0.2%m/m and -1.6%y/y), with ex-food and energy up 0.8%m/m (est. +0.2%m/m).
Canadian retail sales in May rose 0.2%m/m (est. +0.5%mm), with ex-auto flat m/m (est. +0.2%m/m).
According to a Reuters report on Friday, citing “sources familiar with its thinking”, the Bank of Japan is leaning towards keeping its yield control policy unchanged at this week's meeting. Bloomberg had a similar story. USD/JPY jumped from 140.25 to 141.75.
Interest rates
US 2yr treasury yields ranged sideways between 4.82% and 4.87%. while the 10yr yield fluctuated between 3.81% and 3.86%. 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) fluctuated between 3.90% and 3.96%, the 10yr yield between 3.97% and 4.03%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 16bp 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 5bp higher at the next meeting on 16 August and to peak at 5.69% in November.
It was a slow Friday session for credit markets as indices closed firmer with Main 1.5bp tighter at 69 to be on its ytd lows, and CDX was in half a bp to 65. US cash was 1-2 better on Friday and remains ~10bp off its lows from early February, but 35bp inside the wides of March.
Commodities
Crude markets saw a strong close to the week helped by signs of tightening supply though demand concerns lingered. The September WTI contract closed up $1.42 at $77.07, up 2.2% on the week while the September Brent contract closed up $1.43 at $81.07, up 1.5% on the week. That was the fourth consecutive week of gains in crude markets. The UAE energy minister Suhail Al Mazrouei told reporters at the G20 Energy Ministers meeting in Goa that “we are doing [cuts] on behalf or for the benefit of all producers around the world and are balancing the supply and demand for oil consumers as well,” suggesting he sees little reason for additional supply cuts. Over the weekend US Secretary of Defence Lloyd Austin ordered deployment of an Amphibious Readiness Group to the Gulf after numerous incidents with Iranian Revolutionary Guards. The move comes on top of the announcement that an additional destroyer plus F-35s would be sent to the region. The WSJ reported that as of April, half of Russian crude shipments and a third of refined product shipments were on tankers not insured by members of the International Group of Protection and Indemnity Clubs. And the FT reported that “oilfield services groups are feeling the squeeze from a slowdown in activity in the US shale patch” with equipment being “offloaded at fire-sale prices”.
Metals closed lower Friday with losses for the week across the board despite China stimulus announcements. Copper closed down 0.56% Friday at $8,438 while nickel fell 2.2% to $20,800. Goldman warned that the “increase in primary aluminium exports from China … risks being shipped to warehouses in Asia”. Norsk Hydro again called on the LME to reopen the debate over Russian aluminium, saying that it “may put the global aluminium index set by the LME at risk”. Macquarie warned that the nickel market is at a “turning point” due to new plants in China and Indonesia which will convert intermediate forms of nickel into deliverable grades. Last week the LME approved nickel cathodes being produced at Zhejiang Huayou Cobalt’s 36,600 ton per year plant in Zhejiang against the contract. Due to a mining boom in Indonesia, nickel pig iron and ferronickel prices have been trading at about half the level of LME price for a ton of nickel, “something that is unprecedented in the history of the nickel market”.
Iron ore markets finished the week off highs with the August SGX contract down 85c at $113.05 though the 62% Mysteel index closed down 95c at $115.75. Steel prices were generally higher though with the October Shanghai rebar contract up 1.6% on the week at a fresh 3 month high while the October HRC contract rose 2.2% on the week also to a fresh 3 month high. A joint pledge on Wednesday from the Chinese CPC and State Council that it was focusing on shoring up the ‘ailing private sector’ plus a MITI announcement that it was drafting plans to boost developments in 10 key industries including steel and autos helped sentiment on the week.
Day ahead
The data calendar is dominated by flash July surveys by S&P Global/Markit, with the most market-sensitive surveys in Europe and the US.
Japan: The July Nikkei manufacturing PMI is expected to teeter between optimism and pessimism as increased demand for EVs offsets broad-based weakness in demand, while higher wages support consumer demand and thus the services PMI.
In the Eurozone, July’s HCOB manufacturing PMI is set to weaken as Germany drags sentiment lower, while services are slowly edging towards pessimism (market f/c: 43.6pts and 51.6pts, respectively).
UK: Manufacturing pessimism will continue to permeate the July S&P manufacturing PMI while services show resilience as consumers spend their large reserves.
US: The July services PMI reading will reflect emerging risks, while the manufacturing PMI continues down its pessimistic path (market f/c: 54.1pts and 46.1 pts, respectively).
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