Markets Daily
The US dollar and bond yields rose further, helped by US economic data. FOMC minutes contained little new. Equities remained soft. AUD slipped to 0.6425. Today’s calendar features Australia July employment then second-tier US data including jobless claims.
Yesterday
The six-month annualised growth rate in the Westpac-Melbourne Institute Leading Index, which indicates the likely pace of Australian economic activity relative to trend three to nine months into the future, lifted to -0.60% in July from –0.67% in June. Despite a slight improvement in the July month, the Leading Index growth rate remains firmly in negative territory, the reading of –0.6% broadly in line with the –0.73% average seen since August last year. China’s financial and property sector caused fresh concern as Bloomberg reported a large investment firm had missed ‘dozens’ of payments on products recently. AUD/USD dipped as low as 0.6428, a fresh low since November 2022 but later recovered to 0.6475 with help from a firmer Chinese yuan. AUD/NZD fell from 1.0845 to 1.0810 as the RBNZ held steady as expected at 5.50% but projected upside risk to rates. The ASX 200’s -1.5% close was typical of the region.
Currencies/Macro
The US dollar rose against all G10 currencies except sterling, cable managing a 0.2% net gain to 1.2730 after the UK inflation data. EUR/USD fell 25 pips to 1.0880. USD/JPY rose from 145.60 to 146.40 (a nine-month high). AUD/USD followed the broad trend, down 30 pips on the day at 0.6425, with 0.6417 another marginal low since November. NZD/USD made a low since the same month, at 0.5927. AUD/NZD steadied around 1.0820, net -0.25% on the day after the somewhat hawkish RBNZ.
The FOMC’s July minutes showed that "most participants" continued to see "significant upside risks to inflation, which could require further tightening." Offsetting that, "some" saw continued downside risks to the economy and upside risks to the unemployment rate, and "a number of participants" believed policy is now in "restrictive territory". The risks to achieving the 2% inflation goal had become more "two-sided", and it was "important" to balance the risk of overtightening against the cost of insufficient tightening." Regarding the outlook, they reiterated that "policy decisions at future meetings should depend on the totality of the incoming information."
US industrial production in July beat expectations with a 1.0% gain (est. 0.3%, prior -0.5%). Housing starts also beat expectations in July, rising 3.9% (est. 1.1%, prior -8.0%), although permits only grew 0.1% (est. +1.5%, prior -3.7%).
Following the industrial production and housing start data, the Atlanta Fed's model estimate for Q3 GDP was increased to 5.76% rate (from yesterday’s 5.03%, and compared to Friday’s 4.12%).
US 30yr mortgage rates have risen to a 22-year high of 7.16%, according to the MBA, from last week’s 7.09%.
UK CPI in July rose 6.8%y/y (est. 6.7%, prior 7.9%), with core at 6.9% (est. 6.8%, prior 6.9%). Energy prices were the contributor to the headline decline.
Interest rates
US 2yr treasury yields rose from 4.90% to 4.97%, the 10yr yield from 4.18% to 4.25%. 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 3.89% to 3.93%, 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 4.26% in February.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be 2bp higher at the next meeting on 4 October and to peak at 5.61% in February.
Credit spreads matched the broader market with CDX out 1.5bp as the bulk of the move came post the Fed minutes, while cash credit was flat to a bp wider and US IG primary activity absent. Primary activity was limited to the GBP market with Danske (GBP350m 5NC4yr Sr Pref) and Virgin Money (GBP300m WNG 6NC5yr) in the bank space.
Commodities
Crude markets hit a three-week low despite a sharp decline in inventory and further signs of tightening in supplies in the physical market. The September WTI contract is down $1.61 to $79.37 while the October Brent contract is down $1.57 to $83.32. The EIA reported that crude inventories fell by a hefty 5.96mb to hit the lowest since January despite US crude production rising to a post pandemic record of 12.7mb. Exports rose by 2.2mbpd. However, measures of implied fuel demand were weak while oil processing by refineries hit pre-pandemic highs. BoA said that crude won’t see further gains into 2024 because “demand conditions need to improve materially for a sustained move above $100 in Brent, noting that “cyclical energy demand trends remain very soft”. Vortexa also noted that Europe has enough crude despite Saudi and Russian cuts.
Gas markets weakened as strike discussions continued in Australia. Woodside and union officials are expected to sit down for talks on August 23 while Bloomberg reported that a ballot of workers at Chevron’s Gorgon and Wheatstone facilities must be completed by August 24.
Metals continued pushing lower with copper testing 7-week lows, zinc at 10-week lows, aluminium close to 11-month lows and nickel at 1-year lows. Concerns about the renewed downturn in Chinese residential property weighed on copper, down 0.3% on the day to $8,173 and zinc down 0.5% to $2,314. Zinc is down 7% in the last week while tin is down 8% with global zinc inventory hitting a 1yr high and global copper inventory at a 2-month high.
Iron ore markets again managed to hold above $100 despite the bad news coming out of the Chinese property market. The September SGX contract is up 30c at $101.10 while the 62% Mysteel index is down 10c at $103.70. Zhongrong International Trust was reported as missing payments on dozens of products and has no plans to cover payments. The onshore unit of China Evergrande said the country’s securities regulator has built a case against it relating to suspected information disclosure violations while the Hengda Real Estate Group said it had received a notification from the CSRC. China home prices fell for a second month in July.
Day ahead
At 11:30am Syd we see Australia’s July labour force survey. Given the strength of labour market conditions, Westpac expects another robust print in employment with some upside risk associated with the reinstatement of international student work-hour restrictions (Westpac f/c: +25k; market f/c: +15k). Based on participation holding steady, Westpac anticipates the unemployment rate will hold at 3.5% (market f/c: 3.6%).
Australia July overseas arrivals data should continue to mirror the strength in net migration’s recovery.
Japan: June’s machinery orders is anticipated to come in soft following weak external demand (market f/c: 3.5%mth).
Eurozone: June’s trade balance is expected to reverse from a deficit to a surplus following weaker imports demand (market f/c: €4.0bn).
US: Initial jobless claims are likely to remain near lows (market f/c: 240k). The August Philadelphia Fed Index should reflect subdued conditions for manufacturing (market f/c: -10pts).
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