Markets Daily
Bond yields were volatile for little net change, unwinding a bounce on strong US retail sales data. Concern over China appeared to weigh on AUD, down to 0.6455. Today’s calendar features the RBNZ policy decision, UK July CPI and FOMC July meeting minutes.
Yesterday
The Aussie was resilient given generally soft data, dovish RBA minutes and renewed pressure on the Chinese yuan. AUD dipped from 0.6490 to 0.6463 amid the data and CNH turbulence but later steadied around 0.6500, up 0.25% on the day. Australia Q2 wages rose 0.8%qtr, 3.6%yr, softer than expected. The RBA August minutes said that “there was a credible path back to the inflation target with the cash rate staying at its present level.” Japan Q2 GDP was much stronger than expected, up 1.5%qtr, though exports drove the surge and consumption actually fell. China surprised forecasters by cutting a key 1-year lending rate by 15bp to 2.50%. China’s July activity data all printed on the weak side of consensus. Industrial production grew 3.7%yr versus 4.4%yr in June, retail sales growth slowed to just 2.5%yr (slowest since lockdown-affected December 2022) and property activity was also soft. Regional equities were mixed, China and HK underperforming again.
Currencies/Macro
The US dollar was mixed against G10 currencies on the day, commodity currencies and Scandis underperforming. EUR/USD roundtripped from 1.0900 to 1.0953 and back. Sterling was strongest in the G10 after the booming UK wages data, retreating from a high of 1.2753 but still up 20 pips on the day at 1.2700. USD/JPY gyrated with Treasury yields, between 145.11 and 145.87 (a nine-month high), ultimately unchanged at 145.55. AUD/USD resumed its recent down trend in London trade, falling to another low since November 2022, at 0.6452. NZD/USD fell 25 pips to 0.5950. AUD/NZD is fractionally lower on the day at 1.0845.
US retail sales in July were notably stronger than expected. Overall sales rose 0.7% (est. 0.4%, prior 0.3%), sales ex-autos and gasoline up 1.0% and the core control group also rising 1.0% (est. 0.5%, prior 0.5%).
The NY Fed’s Empire State manufacturing survey is often volatile, this year ranging from -33 to +11, with an average of -12. In August it slumped to -19.0 from +1.1 in July and versus a median forecast of -1.
The NAHB homebuilder confidence index fell to 50 in August (est. 56, prior 56).
The Atlanta Fed's GDPNow forecast for Q3 was increased to 5.03% from 4.12%. Upward revisions to personal consumption growth and gross private domestic investment were slightly offset by government spending growth.
Minneapolis Fed president Kashkari said “right now inflation is coming down — we’ve made some good progress” but “it’s still too high…I want to see convincing evidence that inflation is well on its way back down to 2%, and then we can allow it some time to run…We don’t need to get there tomorrow, we can allow it to gradually get there over time.” He added he’s “been surprised that the economy has been very resilient” and that the labour market “has remained very strong…It’s a little bit of a double-edged sword, because the question in my mind is, ‘have we done enough to actually get inflation all the way back down to our 2% mark, or do we have to do more”.
Interest rates
US 2yr treasury yields were volatile, spiking briefly from 4.97% to 5.02% following the retail sales data, then falling to 4.90%, and back to 4.94%. The 10yr yield similarly traced a range of 4.16% to 4.27%, steadying up 2bp on the day at 4.21%. 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%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 1bp higher in September, and to peak at 4.22% in December.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be held steady at today’s meeting and to peak at 5.58% in November.
Credit spreads were not immune to the moves with Main out 1.5bp to 73 and CDX 2bp wider at 67.5, US cash also 2-3bp wider and primary activity slowed. We saw another zero session in Europe, while 3 issuers came to market in the US pricing USD1.85bn (to be USD13.4bn for the week). No deals were above USD1bn with PNC Financial’s USD750M 11nc10yr the largest deal to date and longer than we have seen from banks recently.
Commodities
Crude markets slipped to a 2-week low as China worries and higher global yields weighed on prices. The September WTI contract is down $1.52 to $80.99 while the October Brent contract is down $1.18 to $85.03. Chinese SOE refineries pushed operating rates to a record in early August according to OilChem while apparent oil demand rose 21% in July as refineries returned from maintenance. Kpler reported that Chinese imports of sanctioned Iranian oil are running at the highest level in at least a decade as rising global prices make discounted Iranian crude even more attractive. The API reported that US crude stocks fell 6.2mb.
Global LNG markets remained focused on pay negotiations in Australia with the AFR reporting that Chevron is considering bypassing unions and putting a pay offer to a direct vote of its Gorgon and Wheatstone workforce. Talks between the Offshore Alliance (Australian Workers Union and the Maritime Union of Australia) and Woodside were said to be making progress.
Metals continued their plunge to multi-month lows with copper down another 1.4% to $8,178 at a fresh 2 month low, nickel fell 1.6% to $19,770, a 1yr low and zinc fell 1.8% to $2,308 to a 9-week low. Tin is down almost 8% in the last week while zinc is down 6% with concerns about the Chinese economy the key driver. Rising copper and zinc inventory at warehouses around the world were also said to be weighing on prices with inflows from Asia driving zinc stockpiles to the highest since April last year. China reported primary aluminium production at close to a record 3.48mt, up almost 11% versus the 5yr average for July, as rising hydropower allowed idled plant to return to production.
Iron ore markets managed to close above $100 despite Chinese steel stockpiles jumping the most since March in early August and Chinese July steel production rising 11.5%yy. The September SGX contract is down $2.3 to $100.80 while the 62% Mysteel index actually rose 80c to $103. The malaise at Chinese property developers saw the Hang Seng Mainland Property Index hit fresh lows back to November 2022 despite a 15bp cut in the 1yr medium term lending facility.
Day ahead
Australia: The Westpac-MI Leading Index will likely point to below-trend growth carrying into early-2024.
At 12pm Syd, the RBNZ Monetary Policy Statement is expected to keep the OCR steady at 5.50% following previous signals and economic developments which are seen as net neutral for policy (Westpac f/c: 5.50%, market f/c: 5.50%). Governor Orr’s news conference is an hour later.
The second estimate of Europe’s Q2 GDP is expected to be unchanged from the first. Europe’s industrial production for June should reflect emerging risks to the manufacturing sector (market f/c: -0.6%mth).
The UK’s July CPI print is anticipated to show robust growth in services inflation but goods inflation should ease off slightly. Consensus is 6.7%yr versus June’s 7.9%yr, with core CPI little changed at 6.8%yr versus 6.9%yr in June.
Minutes for the July FOMC meeting will shed light on the consensus view around the policy pause. July’s housing starts will likely reflect a struggle to gain momentum (market f/c: 0.4%mth). Building permits should reflect emerging risks to the pipeline (market f/c: 1.6%mth). Industrial production is anticipated to be weak as regional surveys and PMIs disappoint (market f/c: 0.4%mth).
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