Markets Daily
US and European long bond yields closed lower Friday, with limited news and data. AUD/USD traded tight ranges and returned to 0.6400. Today’s light calendar includes a likely cut in China’s key interest rates.
Friday
AUD/USD traded a tight 0.6393 to 0.6429 range, unchanged overall around 0.6400. Japan’s July national CPI was right in line with expectations, 3.3%yr overall, unchanged from June. China’s central bank set the midpoint of the daily +/-2% USD/CNY band at 7.2006, again well below the previous day’s spot rate and according to Bloomberg, the widest gap versus its analyst survey since the survey commenced in 2018. This clear message from the PBoC helped the yuan rise initially but it later returned to about flat. Regional equities extended their selloff for another day, but the ASX 200 stood out by finishing about unchanged.
Currencies/Macro
The US dollar was little changed against most major currencies on Friday. EUR/USD is net unchanged at 1.0870. GBP/USD also recovered from a modest dip to be about flat at 1.2735. The yen outperformed, USD/JPY chopping down 45 pips to 145.40. AUD/USD ranged between 0.6379 and 0.6429, returning to 0.6400/10. NZD/USD ranged between 0.5909 and 0.5947, starting the week around 0.5930, AUD/NZD at 1.0810.
Eurozone CPI for July was finalised at 5.3%y/y, unchanged from the initial estimate and matching market expectations. Core similarly was unchanged at 5.5%, the same pace as in June.
ECB Chief Economist Lane was cautiously optimistic on the growth outlook: "there are a number of reasons to believe that the European economy will grow over the next couple of years…many people are in ok shape. So they will respond to high interest rates by reducing demand".
Interest rates
US 2yr treasury yields edged down to 4.90% then up to 4.94%, +1bp on the day, while the 10yr yield fell 5bp to 4.22% then nudged back 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) ranged between 3.85% and 3.90% while the 10yr yield ranged between 4.20% and 4.24%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 1bp higher in September, and to peak at 4.21% in May.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be 3bp higher at the next meeting on 4 October and to peak at 5.65% in February.
As with other asset classes, credit spreads were mixed on Friday but wider across the week with Main another 1.5bp wider Friday to make it 6.5bp for the week (78) and the widest levels we’ve seen in a month, while CDX was little changed on Friday but 4.5bp wider on the week (70.5). US IG cash bucked the trend to be firmer on Friday, but as with indices, was ~4-5bp wider on the week. There was no primary activity on Friday in a week that saw less than ~EUR5bn of supply in Europe, with GBP a feature across the deals that were completed, while the US saw a solid open to the week with USD13.8bn of supply in the first couple of days but nothing since, and expectations for next week remain light.
Commodities
Crude saw modest gains on Friday but finished the week lower with concern about the Chinese economy and the rising US$ weighing on prices. The Sep WTI contract was last up 86c at $81.25 while the October Brent contract was up 68c at $$84.80. Both contracts finished the week circa 2.3% lower. Last week the EIA reported US crude inventories had fallen to the lowest level since January. However, late last week, Norway’s oil and gas operator DNO ASA was said to have partially resumed operation at the Tawke field it operates in the semi-autonomous Kurdish region in northern Iraq. And traders were closely watching for developments in terms of US Iran relations. Iran’s President Raisi will attend the BRICS summit which commences Tuesday in Johannesburg. Wood Mackenzie warned that stockpiles of diesel fuels will fall, and supplies remain tight due to “lower diesel/ gasoil yields and unplanned refinery outages”, further noting that “demand is expected to increase month-on-month to November”. The September NY Harbour gasoline contract rose 2.1% Friday to be up 1.2% on the week.
Weekend talks between Woodside and Offshore Alliance workers did not appear to make much progress with a social media post Sunday confirming the group had “unanimously endorsed” giving Woodside seven working days’ notice of industrial action if enterprise bargaining claims were not resolved by close of business Wednesday. And workers at Chevron’s LNG plants began voting on industrial action on Friday.
Metals were mixed Friday with copper and zinc up 0.5% to $8,276 and $2,310 while aluminium was down 0.3% to $2,138 and nickel down 0.7% to $20,130. However, metals were down across the board on the week with concerns about China, the stronger US$ and rising inventory the key drivers. Codelco CEO noted that the company will have to replace 50% of its output over the next decade as project delays, rising costs and declining ore quality all reach a ‘point of no return’.
Iron ore markets gave back some of the earlier gains into the end of the week as policy developments disappointed. The September SGX contract is down $$1.15 from the same time Friday to $104.20 though the 62% Mysteel index rose $1.50 to $109.75. The PBoC, CSRC and NFRA met on Friday and a statement from the PBoC on Sunday said that “financial support to the real economy must be strong enough” while major banks should increase lending. The statement also reiterated that the authorities would optimise credit policies for the property sector and coordinate support to resolve local government debt problems. Bloomberg reported August 11 that China will offer local governments a combined CN¥1tn in bond issuance quotas for refinancing with additional funding, debt swaps, payment extensions and possible debt restructuring likely to be seen on a case-by-case basis.
Day ahead
Australia’s calendar is very light this week, with no official data of note and the RBA quiet until Deputy Governor Bullock speaks on 29 August.
Having already lowered its 1-year lending rate by 15bp last week, China is expected to also cut its 1-year loan prime rate by 16bp to 3.40% and its 5-year rate by 15bp to 4.05% at 11:15am Syd.
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