Markets Daily
Bond yields and the US dollar rose on Friday after firm US producer price inflation data. AUD was also hurt by weak China lending data, slipping under 0.6500. Today’s calendar is largely empty.
Friday
RBA Governor Lowe appeared before the House economics committee for the final time. He described the current period of monetary policy as the “calibration phase.” Asked about the recent rise in housing prices, Lowe said it was “understandable” that the public might perceive rates as having peaked or nearly so and thus look to buy now. Yields flickered a little higher on the day but AUD/USD traded a tight range, only up 0.2% overall at 0.6525. Japanese markets were closed for a holiday. The regional markets that were open were generally weaker, especially China, the Shanghai Composite -2% despite a meeting between regulators and property developers and financial institutions. The ASX 200 limited its decline to -0.2%.
Currencies/Macro
The US dollar rose against most G10 currencies and was about flat versus the other majors on Friday. EUR/USD fell from 1.1005 pre-CPI to 1.0945. Sterling outperformed, GBP/USD up a net 20 pips at 1.2700. USD/JPY rebounded from a low of 144.42 to around 145.00 with support from higher US Treasury yields. AUD/USD fell from 0.6530 pre-China loans data to 0.6486, a two-month low. NZD/USD fell 30 pips to 0.5990, with 0.5975 a low since November 2022. AUD/NZD rose 25 pips to 1.0845.
China released July credit data in Friday London trade, printing much softer than expected. New loans were just CNY346bn, the weakest month since 2009, while aggregate financing was just CNY528bn versus a forecast CNY1100bn.
The US producer price index in July rose 0.3%m/m and 0.8%y/y (est. 0.2% and 0.7%y/y, prior 0.2%y/y). Ex-food and energy rose 0.3%m/m and 2.4%y/y (est. 0.2% and 2.3%, prior 2.4%y/y). Preliminary August consumer sentiment (University of Michigan) fell to 71.2 (est. 71.2, prior 71.6), with 5-10yr inflation expectations slipping to 2.9% (est. 3.0%, prior 3.0%).
Interest rates
US 2yr treasury yields rose after the PPI data, from 4.80% to 4.90%, while the 10yr yield rose from 4.08% to 4.15%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 4bp higher at the next meeting on 20 September.
Australian 3yr government bond yields (futures) rose from 3.81% to 3.88%, while the 10yr yield rose from 4.09% to 4.17%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 2bp higher in September, and to peak at 4.23% in December.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be unchanged at the next meeting on 16 August and to peak at 5.60% in November.
Credit spreads were also mixed with Main a bp wider at 71.5 while CDX was half a bp tighter at 66. CDX remains only a few bp off its lows for the year, however US IG cash (unchanged on Friday) is now 7-8bp wider in August. Primary markets saw no action on Friday however supply early in the week saw USD35.1bn priced in total marking a solid outcome by August standards.
Commodities
Crude markets finished the week with modest gains helped by IEA forecasts of fresh records for world oil demand in August driven by robust Chinese consumption. The September WTI contract rose 37c to $83.19 while the October Brent contract rose 41c to $86.81. The IEA estimated that world fuel use averaged a fresh record of 103mbpd in June, with 70% of this year’s demand growth coming from China. The report came on top of the OPEC monthly earlier in the week that forecast a 2mbpd deficit this quarter. The IEA forecast that global stockpiles are set to deplete by 1.7mbpd in the second half of the year “with a risk of driving prices still higher”. However last week also saw signs of an emerging deal between the US and Iran with 4 US citizens being moved from prison to house arrest in return for the freeing up of $6bn in Iranian oil revenue frozen in South Korea. NSA spokesperson John Kirby said he could not confirm a WSJ report suggesting Iran had “significantly slowed the pace at which it is accumulating near weapons grade enriched uranium”. The IEA reported that Russian crude breached the $60 price cap, with a weighted average price of $64.41. The FT reported that “inflated shipping costs are allowing Russian companies to earn far more from crude sales to India than previously recognised”.
European LNG prices closed lower on Friday but were still up circa 22% on the week as the market remained focused on the potential for strikes in Australia. The Fair Work Commission issued an order late Thursday allowing the Offshore Alliance union to hold a ballot on industrial action. Both Chevron and Woodside remain in talks with workers.
Metals dropped to a 1 month low with copper down 1% to $8,295, aluminium down 1.2% to $2,178 and zinc down 2.4% to $2,398. The plunge in China new loans to a 14yr low added to negative sentiment with copper down 3.2% on the week while nickel fell 5%. The FT reported that Zambia plans to “dig its way out of debt with a copper revival”. The spot to 3m LME aluminium spread hit a 15yr low with the market expecting a rebound in supply from China and high interest rates making it more expensive to hold inventory. However, Citi expects Chinese aluminium consumption to outpace supply this year with the power sector leading demand growth.
Iron ore markets closed the week on a slightly firmer footing with news that steel plants in the Sichuan region were resuming operations, driving daily output up 31% in early August according to Mysteel while blast furnaces in the Tangshan region have also raised operating rates. The September SGX contract is up 60c from the same time Friday to $102.00 while the 62% Mysteel index is up $2.35 to $105.65. Huatai Futures noted that “coupled with insufficient scrap steel supply, short term iron ore consumption is still resilient”. That’s despite Country Garden last week announcing it had missed payments on US$ bonds and over the weekend announcing it would suspend trading on nearly a dozen onshore bonds starting today. Rio said on Friday that it had reached agreement with the Simfer joint venture and reached an important milestone by concluding agreements with the Republic of Guinea and the Winning Consortium on the trans-Guinean infrastructure which includes 600km of multi-use rail plus port facilities.
Day ahead
The global calendar is very quiet. This week’s Australian highlights are RBA minutes and the Q2 wage price index on Tuesday and July labour force survey on Thursday.
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