Markets Daily
Fedspeak was somewhat hawkish, helping US yields recover some of Friday’s payrolls-driven slide. AUD was steady around 0.6575. US stocks snapped a 4-day losing streak. Today’s data includes Australia Aug Westpac consumer sentiment and July NAB business confidence.
Yesterday
The NSW bank holiday drained local markets of liquidity, the ASX 200 closing -0.2% on the lightest volume since 3 January. AUD/USD drifted around mostly 0.6570-90. Regional equities were mixed, Japan rallying but China and Korea closing lower.
Currencies/Macro
The US dollar was little changed against most G10 currencies. EUR/USD roundtripped from 1.1000 to 1.0965 and back. Sterling outperformed, GBP/USD bouncing off 1.2720 to 1.2780. USD/JPY rose 65 pips or 0.5% to 142.40 as US 10-year Treasury yields pushed higher. AUD/USD ranged between 0.6555 and 0.6593, net unchanged since the weekend close at 0.6575. NZD/USD ticked up 10 pips to 0.6105, leaving AUD/NZD around 1.0770.
Fed governor Michelle Bowman delivered some hawkish comments, saying that "additional rate increases will likely be needed to get inflation on a path down to the 2% target…The recent lower inflation reading was positive, but I will be looking for consistent evidence that inflation is on a meaningful path down toward our 2% goal as I consider further rate increases and how long the federal funds rate will need to remain at a restrictive level.”
New York Fed president Williams said that rates will have to be kept at a "restrictive stance for some time", in an interview conducted last week but published overnight. He added that whether the FOMC will have to tighten policy further is an "open question". "Monetary policy is in a good place -- we've got the policy where we need to be." He also said that the Fed might have to lower rates in 2024 or 2025 to make sure the real rate does not rise further.
German industrial production fell 1.5% in June - more than expected, after two strong months of order inflows for the manufacturing sector. Construction was particularly weak.
Interest rates
US 2yr treasury yields rose from 4.76% to 4.85% but then slid back to 4.76%. The 10yr yield rose from 4.04% to 4.09%. 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) ranged between 3.74% and 3.82%, while the 10yr yield ranged between 4.05% and 4.14%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 3bp higher in September.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be 1bp higher at the next meeting on 16 August and to peak at 5.63% in November.
Credit spreads reflected the variable sentiment with Main a bp wider at 71 but CDX 1.5bp tighter to 66.5, and while US cash spreads were little changed, US primary markets were open for business as 9 issuers priced USD14.5bn.
Commodities
Crude markets declined despite increased military actions in the Black Sea over the weekend and news of a leak in the Druzhba pipeline shipping oil from Russia as concerns over higher yields and rates weighed on sentiment. The September WTI contract is down 37c at $82.45 while the October Brent contract is down 42c at $85.82. Saudi Aramco raised its Arab Light blend for sale to Asia by 30c to $3.50 versus an expected 50c rise while Medium and Arab Heavy blends for September sales were raised by 60 to 70c, reflecting lower supplies following the cuts from Saudi Arabia and Russia and increased refining margins. Prices for Arab Light into the Mediterranean were raised by $1 to $4.50 over Brent while prices into Europe were raised by $2 to a premium of $5.80. Saudi Aramco raised its dividend to investors and the Saudi government to $29.4bn from $18.8bn a year ago.
Metals declined as concerns over higher rates in the US hit sentiment. Copper is down 0.9% to $8,496, back below $8,500 for the first time since mid-July while nickel is down 0.87% at $21,124. Aluminium is down 0.25% at $2,227. Goldman warned that Chinese copper inventory is approaching “extreme” levels, with the “risks skewed toward more restrained refined supply ahead.”
Iron ore and steel markets were mixed on warnings from Goldmans of a “potential bearish demand shock” in China. The September SGX contract is up $1.30 from the same time yesterday at $102.60 though the 62% Mysteel index is down 70c at $104.00. Spot rebar prices have dropped circa 2% so far this month as traders have reacted to limited signs of actual policy being rolled out in China. Last week Rio CEO told a Melbourne conference that Chinese steel production had reached a “saturation point.”
Day ahead
At 10:30am Syd, the response to the RBA’s second consecutive policy pause will be the key focus of the August Westpac-MI Consumer Sentiment survey. The July survey showed a 2.7% rise in confidence to a still very gloomy 81.3.
At 11:30am Syd we see the July NAB business confidence survey. The business conditions index correlates best with economic activity and at +9 in June was still above long-term averages. The confidence index was a somewhat downbeat -0.4 though that was an improvement from -3 in May.
The RBA’s Schwartz (Acting Head of Domestic Markets) will speak on “Australian Financial Markets and Climate Change” at 9:05am Syd.
Japan: Weakness in household spending will likely persist in June as real incomes remain under pressure (market f/c: –3.8%yr). Meanwhile, the current account surplus is expected to narrow slightly (market f/c: ¥1500bn).
China: The trade surplus should remain broadly unchanged in July given the lasting supporting from Asian export demand (market f/c: US$70bn).
US: The trade deficit is set to narrow further in June as consumer demand continues to cool (market f/c: –$65bn). NFIB small business optimism will likely be little-changed at a weak level (market f/c: 91.1). The final estimate to June’s wholesale inventories is due (market f/c: –0.3%) and regional Fed presidents Harker and Barkin are also due to speak.
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