Markets Daily
Bond yields and the US dollar continued to rise, with little fresh news. Asia’s equity selloff did not extend to Europe and the US. AUD returned to near 0.6500. Today’s busy calendar includes Australia Q2 wages, RBA August minutes, China July activity data, UK June unemployment and US July retail sales.
Yesterday
AUD/USD started quietly just under 0.6500 but came under pressure once north Asia came online. Analysts published bearish notes on China property developer Country Garden, warning of contagion across China’s economy. Hong Kong’s Hang Seng (where it is listed) led regional equity declines, down more than 2%. Asian currencies came under pressure, AUD/USD falling in sympathy to a low of 0.6457, one pip below the 31 May low and thus the Aussie’s weakest point since November 2022. It later pared losses to 0.6480. The ASX 200 closed down -0.9%.
Currencies/Macro
The US dollar rose against all G10 currencies on the day. EUR/USD fell 40 pips to 1.0905. GBP/USD was volatile at times but overall only -0.1% at 1.2685. USD/JPY rose 60 pips to 145.55, reaching highs since November 2022. Not coincidentally the 10-year Treasury yield also reached a high since November. AUD/USD dipped as low as 0.6454, just below the local session lows, also the weakest since November, later trimming losses on the day to just 10 pips at 0.6485. NZD/USD fell to 0.5944 (low since November) but finished barely changed. AUD/NZD ranged sideways around 1.0850.
The NY Fed’s monthly Survey of Consumer Expectations showed that inflation expectations declined across all horizons, according to its monthly Survey of Consumer Expectations. The 1-year measure ahead fell to 3.5% from 3.8%, and the 3- and 5-year fell to 2.9% from 3.0%.
Interest rates
US 2yr treasury yields rose from 4.89% to 4.97%, while the 10yr yield rose from 4.16% to 4.19%. 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 3.90% to 3.96%, while the 10yr yield rose from 4.19% to 4.24% (a nine-month high). Markets are pricing the RBA cash rate, currently at 4.10%, to be 2bp higher in September, and to peak at 4.25% in December.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be unchanged at tomorrow’s meeting and to peak at 5.59% in November.
Commodities
Concerns about China again capped crude markets with the September WTI contract down 71c at $82.48 and the October Brent contract down 59c at $86.22. The stronger US$ and higher global bond yields also weighed on sentiment as did signs of further progress on Iran-US relations with the Iranian foreign minister stating that the prisoner deal “can be conducive to easing tensions and opening up other paths”. Crude markets will be closely watching the raft of Chinese data today to gauge refining activity in July given the pivotal role that Chinese demand has played in energy markets so far this year. Last week China reported that imports of crude slipped to a 6-month low. Vortexa noted that Chinese onshore crude stockpiles fell by 13mb over the past two weeks after swelling to a record 1.02bn barrels as of July 27.
Natural gas prices eased for the third consecutive session in Europe after last week’s aggressive jump on strike action in Australia. The September TTF contract is down a cumulative 13.5% from Thursday’s closing level and 21% from last week’s high.
Metals slid again with fresh China concerns very much front of mind. Copper is largely unchanged at $8,292 though aluminium fell another 1.5% to $2,143 and zinc fell 1.9% to $2,351. Tin slumped 4.25% to $25,325 which is a fresh 2 month low. The discount between spot tin and the three-month contract hit a record on the LME as inventories jumped to the highest since 2020, despite a crackdown in tin mining in northern Myanmar in April when production was ordered to a halt though producers with valid permits were allowed to continue to August 1. The discount for aluminium versus the three-month contract also hit the widest since the GFC, pointing to waning physical demand.
Iron ore markets slipped below $100 on China construction woes with the September SGX contract down $2.30 from the same time yesterday to $99.70 while the 62% Mysteel index is down $2.65 to $103.00. The plight of the once largest residential construction firm Country Garden was the main focus of the market after last week’s announcement that it had missed payments on US$ bonds and over the weekend announcing it would suspend trading on nearly a dozen onshore bonds. The Chinese property sector accounts for circa 40% of the country’s steel demand. China will report industrial production including steel output for the month of July later today.
Day ahead
Australia’s wage price index is expected to post a moderate gain in Q2 but ultimately remain consistent with RBA's inflation target (Westpac f/c: 1.0%qtr, 3.8%yr versus Q1’s 0.8%qtr, 3.7%yr). The minimum wage rise will be evident in the Q3 data, not Q2.
Also at 11:30am Syd, the minutes from the August RBA Board meeting will provide more colour around the second consecutive policy pause, though we have already heard plenty from the RBA since the meeting.
Japan: Q2 GDP will be supported by strong external demand though domestic demand remains restrained (market f/c: 0.8%qtr). July’s industrial production is expected to remain muted as demand remains weak.
At 12pm Syd, China releases July key activity data on retail sales, fixed asset investment and industrial production. These are expected to remain muted given hampered confidence of consumers and businesses alike. Consensus on industrial production is 4.3%yr versus June’s 4.4%yr, retail sales 4.0%yr versus June’s 3.1%yr and fixed asset investment is seen up 3.7%ytd.
UK’s unemployment rate for June is expected to remain low given labour force constraints (market f/c: 4.0%). There should be more market focus on the average earnings reading, expected to remain very elevated at 7.4%yr ex-bonuses in the 3 months to June.
Europe’s ZEW August survey of investor/analyst expectations should reflect lingering pessimism in response to tightening policy (market f/c: -14.7pts).
US: July’s retail sales growth is expected to weaken in line with goods disinflation (Westpac f/c: 0.3%mth, market f/c: 0.4%mth). Import prices growth in July is expected to decelerate coming off a high base (market f/c: 0.2%mth). Minneapolis Fed president Kashkari is due to speak.
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