Markets Daily
Softer US data weighed on bond yields but the USD was mixed, AUD down to 0.6660 despite upbeat equities. Today’s data includes Australia June private credit, China July PMIs and Eurozone Q2 GDP and July CPI.
Friday
Australia June retail sales dropped -0.8%mth after +0.8%mth in May and consensus 0.0%, to be up just 2.3%yr despite high inflation. Annual growth is basically flat in per capita terms, and down substantially in real per capita terms (likely running at about –3%yr). AUD struggled most of the day, slipping from 0.6710 to 0.6630. The ASX 200 largely matched Wall Street’s decline, closing -0.7%. The Bank of Japan maintained its 0% 10-year JGB target as expected but adopted new flexibility, tolerating higher yields while formally maintaining the +/-0.5% target range. The big surprise is that the flexibility is such that instead of standing by each day to buy the 10-year JGB at 0.50%, the BoJ will stand aside until 1.0%. The BoJ stressed that sustainable inflation backed by wage increases “has not yet come in sight” so the bank needs to “patiently continue with monetary easing.” CPI ex-fresh foods is seen up just 1.9% in FY24 and 1.6% in FY25. Governor Ueda insisted that the 1% yield cap just provides flexibility in case inflation is higher than expected and that he doesn’t expect the 10-year JGB to reach 1% any time soon. The yen was volatile but overall little changed net.
Currencies/Macro
The US dollar was mixed on Friday. EUR/USD bounced off 1.0944 to 1.1025, net +0.4%. GBP/USD rose 0.5% to 1.2855. USD/JPY bounced off 138.07 to 141.00, the yen underperforming despite the BoJ tweaking monetary policy in a less accommodative direction. AUD/USD was weak despite the upbeat equity mood, starting the week down about half a cent or -0.8% at 0.6660. NZD/USD was more resilient, net -0.4% at 0.6160, leaving AUD/NZD 45 pips lower at 1.0810.
US personal income in June rose 0.3%m/m (est. +0.5%m/m), and personal spending rose 0.5%m/m (est. +0.4%m/m). The core PCE deflator rose 0.2%m/m and 4.1%y/y (est. 0.2%m/m and 4.2%y/y, prior 4.6%y/y). The Employment Cost Index in Q2 rose +1.0%q/q (est. +1.1%q/q, prior +1.2%q/q).
Consumer sentiment (University of Michigan) for July was finalised at 71.6 (prelim. 72.6, prior 64.4). Inflation expectations 5-10yr ahead fell to 3.0% (from 3.1%).
German CPI inflation in July was close to expectations. Headline CPI rose +0.3%m/m and 6.2%y/y (as expected, prior 6.8%y/y). The EU harmonised reading was 6.5%y/y (est. 6.6%y/y, prior 6.8%y/y). Eurozone economic confidence undershot estimates at 94.5 (est. 95.0, prior 95.3), with industrial confidence at -9.4 (est. -8.0, prior -7.3), services at 5.7 (est. 5.4, 5.9).
Interest rates
US 2yr treasury yields fell from 4.93% to 4.87%, while the 10yr yield fell from 4.00% to 3.95%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 6bp higher at the next meeting on 21 September.
Australian 3yr government bond yields (futures) fell from 3.90% to 3.79%, the 10yr yield from 4.10% to 3.98%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 6bp higher at tomorrow’s meeting, and another 20bp higher by March.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be 4bp higher at the next meeting on 16 August and to peak at 5.66% in November.
Credit spreads reflected the firming of sentiment post US data with Main closing a bp tighter at 66.5 after early weakness, but now clearly at its tights for the year, while CDX was 2.5bp tighter at 62.5 and US IG cash (bberg) is now within 5bp of the Feb lows. Primary activity was absent again on Friday, with Euro IG seeing just EUR1.6bn priced this week and the US USD14.7bn
Commodities
Tight supply and an improving demand outlook helped crude markets to a fifth weekly gain, as the September WTI contract closed up 49c at $80.58 Friday while the September Brent contract closed up 75c at $84.99. Cushing stockpiles have fallen 7.5mb over the last 4 weeks, taking stocks to the lowest level since May, supporting a widening backwardation in the WTI prompt time spreads to the highest level back to November last year. And in fuel markets, outages at refineries saw the August RBOB gasoline contract up 5.5% last week while the August NY diesel contract was up 7.75% and the August European gasoil contract was up 9.9%. However, gas prices fell into the end of the week as sluggish demand and high inventory took their toll. Forecasts of cooler temperatures across southern Europe and cooler wet weather in northern Europe added to the softer prices. The IEA estimated that China’s coal demand will grow 3.5% this year to 4,679 megatons, about 56% of global coal demand and far ahead of the second largest consumer India at 1,212 megatons.
Metals jumped into the end of the week as global market sentiment improved despite the BoJ YCC shift. Copper closed up 1.2% at $8,675, up 2.6% on the week while nickel closed up 2.8% Friday at $22,300 and up 7.4% on the week. The world’s largest copper miner Codelco cut its annual copper guidance after another disappointing quarter at projects in Chile driven by a decline in ore grade, weather and supply chain disruptions plus rising inflation. Codelco lowered its annual guidance to between 1.31mt to 1.35mt from a previous call of 1.35 to 1.42. Glencore was said to be in advanced talks to buy out its partner in Argentina’s Mara copper project.
Iron ore markets closed down sharply Friday despite pledges from the Politburo to “advance the stable and sound development of the real estate market” and calls from senior housing officials for “further efforts to consolidate the trend of real estate market stabilisation”. The September SGX contract is down a hefty $3.40 from the same time Friday to $106.80 while the 62% Mysteel index is down $3.85 to $109.60. The Yunnan Provincial Development and Reform Commission affirmed its yearly cap of steel production at 2022 levels and asked local mills to submit individual output targets. US Steel confirmed it had idled a blast furnace in Slovakia due to weak demand, with the idling to last about 40 days.
Day ahead
Australia: Growth in private sector credit should continue to hold at a modest pace in June (Westpac f/c: 0.4%). The July Melbourne Institute inflation gauge is due; June was 0.1%mth, 5.7%yr.
NZ: While some nervousness has been dissipating, ANZ business confidence remains in very fragile territory.
Japan: A bounce-back in industrial production is anticipated in June, though the outlook remains clouded by the global growth slowdown (market f/c: 2.4%).
At 11:30am Syd we see China’s official PMIs. Both the manufacturing and non-manufacturing PMIs are expected to remain little changed in July, highlighting a level of underlying resilience (market f/c: 49 and 53 respectively).
Following upsides from France and Ireland, Q2 GDP in the Eurozone should step up from the stalling in Q1 (market f/c: 0.2%qtr, 0.5%yr). Q1 was originally reported at -0.1%, sparking a ‘recession’ narrative after -0.1% in Q4, but it was subsequently revised to 0.0%. Meanwhile, a slight moderation in Eurozone CPI is anticipated in July, though the core reading will likely remain sticky. Consensus is 5.3%yr overall versus 5.5%yr in June, with the core 5.4%yr versus 5.5%yr in June.
US: The Chicago PMI and Dallas Fed index should both continue to highlight an ongoing weakness in business conditions in July (market f/c: 43.4 and –22.5 respectively).
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