Markets Daily
The Fed hiked by 25bp, as was widely expected, and left the door open to either hiking or holding. Following the press conference, bond yields and the US dollar are slightly lower. AUD underperformed post-CPI, down to 0.6760. Today’s highlights are the ECB policy decision and US Q2 GDP.
Yesterday
Australia overall CPI rose 0.8%qtr/6.0%yr; trimmed mean 0.9%qtr/5.9%yr; weighted median 1.0%qtr/5.5%yr. The more modest than expected rise in the headline and core measures highlight disinflationary forces greater than we had thought. Pricing for another RBA rate rise next week dropped from about 55-60% to 30%. The Aussie tumbled in sympathy, from 0.6775 to a low of 0.6731, but soon stabilised around 0.6765. The ASX 200 turned a 0.1% gain into a +0.9% close, strongest in the region.
Currencies/Macro
The US dollar was mixed overall, though it dipped on Fed headlines. EUR/USD rose from 1.1060 to 1.1090/1.1100 in response to the Fed outcome. GBP/USD rose 40 pips to 1.2945. USD/JPY chopped down 70 pips or -0.5% to 140.20. AUD/USD flickered up 40 pips to 0.6780 on the Fed headlines but was an underperformer on the day in the wake of the CPI data, steadying around 0.6760, net down 30 pips or -0.5%. NZD/USD was also choppy, overall -0.2% at 0.6210, trimming AUD/NZD by 30 pips to 1.0885.
The US Fed’s Federal Open Market Committee hiked by 25bp, to 5.25-5.50% as was widely expected. The rate is now at the highest level since 2001. The policy statement was similar to June’s, repeating: "The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."
Fed Chair Powell’s press conference didn’t offer significant new information regarding the future course of rates, Powell saying they could either raise rates or keep them unchanged in September, data dependent. He added that policy is restrictive, with the real Fed funds rate at a "meaningfully positive" level, but it has not been restrictive enough for long enough.
Interest rates
US 2yr treasury yields fell from 4.90% to 4.82% after the FOMC, steadying at 4.85%, while the 10yr yield fell from 3.89% to 3.84%, steadying at 3.87%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 5bp higher at the next meeting on 20 September.
Australian 3yr government bond yields (futures) rose from 3.94% to 4.02%, the 10yr yield from 4.00% to 4.08%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 7bp higher at the next meeting on 1 August, and another 21bp higher by March.
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 5.65% in November.
Credit spreads were a touch firmer with Main in half a bp to 69.5, while CDX closed a bp better at 63.5 having seen only limited reaction to the Fed, largely mirroring the move in equity. US cash spreads were in positive territory early (1-2bp better) and remained so into the close with no IG supply in play (as expected). The credit focus will now return to corporate reporting and any potential follow on supply.
Commodities
The Fed rate hike plus a mildly negative EIA inventory print capped crude prices though diesel and gasoline prices continued pushing higher. The September WTI contract is down 85c at $78.78 while the September Brent contract is down 64c at $83.00. The EIA reported crude inventory fell 599kb while gasoline inventory fell 786kb and distillate by 245kb. Crude production slipped back to 12.2mb and Gulf Coast inventory hit its highest since April as refinery run rates fell by 108kbpd, presumably due to the Exxon Baton Rouge FCC being taken offline for up to 3-4 weeks. The price of gasoline is starting to surge as a result with the retail price of ‘regular’ gasoline in the US hitting highs back to November last year and the August NY diesel contract at highs back to January this year. A Bloomberg survey of oil analysts saw 15 of 22 analysts forecasting an extension of Saudi cuts through to September though 6 expect the cuts to be tapered back by restoring 250 to 500kb. Natural gas prices in Europe saw a modest retracement despite increased focus on one production train on the Yamal LNG pipeline being shut in August for 3 weeks of maintenance. Norway is also planning maintenance at major facilities through August too.
Metals gave back much of the previous day’s gains with copper down 0.8% to $8,604 and aluminium down 1.4% to $2,208. Nickel fell by a heavier 3.9% to $21,570. Chile’s copper commission, Cochilco, cut its projection for copper prices in 2023 from $3.90/lb to $3.85 with the average price in 2024 expected to be $3.74. The commission raised price forecasts from $3.65 to $3.80 for 2024 in May of this year. Global copper production is forecast to rise 2.8% this year while Chilean output is forecast to increase 1% to 5.4mmt. versus 5.6mmt in May. Norsk Hydro warned that analysts were too optimistic on aluminium demand with the CFO warning they see “quite a sharp fall in demand fall to the second half of the year”. Rio reported a steep drop in profit and dividends though the CEO did note that “the Chinese have quite an impressive ability to manage the economy”.
Iron ore markets softened with the September SGX contract down $1.70 from the same time yesterday to $113.00 while the 62% Mysteel index managed to rise 25c to $117.05. There was little fresh news with analysts still very much focused on what the readout of the Politburo meeting late last week means for the property sector in China. Morgan Stanley still expects prices to drop to $90 in Q4 while Goldman has a 3-month target down at $80 with rising supply a factor. Rio continues guiding full year production in the upper half of the 320 to 335mt range.
Day ahead
Australia: A large decline in export prices is anticipated in Q2 given the moderation in commodity prices (Westpac f/c: –7.2%); import prices should meanwhile post a more tepid fall (Westpac f/c: –0.8%).
China: Outright declines in industrial profits will likely remain for the foreseeable future.
ECB President Christine Lagarde declared a July rate rise “very likely” when discussing the 15 June hike to 3.5%. Market pricing reflects this confidence but there is considerable uncertainty over the September meeting, which Lagarde may choose not to clarify at today’s press conference. Markets price the deposit rate to peak below 4.00% in December.
The pace of US GDP growth is set to ease slightly in Q2, likely centred on waning momentum in consumption (market f/c: 1.8% annualised).
Other US data is low key. Some upside may be found in business investment, as partially evinced by durable goods orders’ robust pace (market f/c: 1.2%); but a weak Kansas City Fed index and stalling wholesales inventory accrual highlights the broader risks to the outlook (market f/c: –10 and –0.1%). Meanwhile, pending home sales should post another decline (market f/c: –0.5%) as weekly initial jobless claims remain broadly unchanged (market f/c: 235k).
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