Markets Daily
Markets, awaiting Friday's speech from Fed chair Powell, pushed short term bond yields slightly higher and longer-term bond yields slightly lower. AUD was resilient at 0.6425. Today’s data calendar is dominated by flash August PMIs, most notably in the Eurozone and UK.
Yesterday
China remained the focus of market attention, starting with the central bank’s latest attempts to shore up the yuan. The daily midpoint of the band was again fixed a long way from the previous day’s close, capping its potential decline on the day. The one-month interest rate on CNH also squeezed to 4.90%, a high since 2018, reportedly to support the offshore yuan. AUD/USD traded quietly most of the day around 0.6410-25, then flickered up to 0.6440 as Chinese equities rallied sharply in their final hour of trade. The ASX 200 however finished barely higher.
Currencies/Macro
The US dollar was quite mixed against G10 FX on the day. EUR/USD fell half a cent to 1.0845. GBP/USD followed a similar path, rallying in the London morning then rolling over, net -0.2% at 1.2730. USD/JPY chopped down -0.3% to 145.85, broadly following the gyrations of the US 10-year Treasury yield. AUD/USD pushed up to 0.6458 then slipped back to 0.6425, up marginally on the day. NZD outperformed, up 0.3% net at 0.5945. AUD/NZD lost about 20 pips to 1.0805.
US existing home sales for July pulled back to an annualised 4.07mn (-2.2%m/m, est. -0.2%m/m to 4.15mm) from prior 4.16mn. This is a 13-year low, with sales held back by very low inventory levels as homeowners seek to avoid moving onto today’s much higher mortgage rates.
US Richmond Fed August manufacturing Index continues to reflect sluggish activity, with a mild lift to -7 (consensus -10, prior -9) and conditions lifting to +1 from prior -8.
Interest rates
US 2yr treasury yields rose from 5.00% to 5.05%, while the 10yr yield ranged between 4.30% and 4.36% (highest since 2007). Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 5bp higher at the next meeting on 20 September.
Australian 3yr government bond yields (futures) ranged between 3.88% and 3.92% while the 10yr yield fell from 4.29% to 4.26%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 1bp higher in September, and to peak at 4.22% in May.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be 5bp higher at the next meeting on 4 October and to peak at 5.71% in November.
Credit indices were more positive last night with Main 1.5bp tighter at 77bp while CDX held firm to be half a bp better at 69 despite US risk sentiment fading into the close and weakness in bank equity. US IG cash was flat to a bp better and we saw a return of supply in Euro primary markets.
Commodities
Crude markets edged lower as the focus remained on potential return of supplies from Iran and Iraq. The October WTI contract is down 48c at $79.64 while the October Brent contract is down 59c at $83.87. As noted yesterday, Bloomberg reported TankerTrackers.com data that showed Iran’s oil exports were at an estimated 2.2mb for the first 20 days of August. The Iranian oil minister said that the country has boosted crude production by 50% over the last two years and it is set to increase further. Current production is at 3.2mbpd and capacity is 3.8mbpd with production headed for 3.4mbpd by the ‘end of the summer’. Iraqi Foreign Minister Hussein said “we hope to reach a solution to this problem”, referring to the closure of the Ceyhan pipeline since March, while the Iraqi oil minister and the Turkish energy minister said they were looking for “ways to enhance areas of joint cooperation” after a trip to Baghdad. The trip is expected to lead to a visit by Erdogan. However, API reported that US crude inventory dropped by another 2.4mb last week which if replicated by EIA data would be the lowest level of inventory for the year. Vortexa noted that Russian shipments of some fuels including diesel, fuel oil and naphtha have dropped as prices have breached the price thresholds imposed by the G7.
Metals appreciated the action taken by the PBoC to support the Chinese yuan with copper up 1% at $8,361 while aluminium jumped 1.7% to $2,181 and nickel is up 2.4% at $20,600. Chinese imports of Russian primary aluminium hit a fresh record 108kt in July, the highest back to records being available in 2008. Russian aluminium ingots were said to being offered at a discount to buyers such as China and South Korea according to traders. BHP reported a 37% fall in profit as CEO Henry told Bloomberg that “it is fair to characterise [the China outlook] as a bit uncertain”.
Iron ore markets rose again as traders focused on the fact that steel production cuts have yet to materialise in China. The September SGX contract is up another $65c from the same time yesterday to an almost 4-week high of $110.85 while the 62% Mysteel index is up $3.45 to $113.65. Hongye Futures reported that steel production averaged a relatively high 2.5mtpd in the week to August 20, slightly more than the week before, suggesting that steel production is well above average levels for the late summer period. However, BHP predicted that China’s annual steel output will be 1bn to 1.1bnmt amid sustained struggles in the housing sector. Total iron ore production from Vale, Rio, BHP and FMG reached 539mt in the first half of 2023, 4% higher than a year ago.
Day ahead
Today’s calendar is dominated by the advance August PMIs from S&P Global, with various sponsors around the world. Australia’s version (Judo Bank, 9am Syd) receives little attention. The final July reading was 49.6 for manufacturing, 47.9 for services.
Japan’s PMIs (Jibun Bank) are showing some divergence, manufacturing at 49.6 in July but services an elevated 53.8.
The Eurozone PMIs frequently move markets. The Eurozone HCOB manufacturing PMI is expected to remain very weak at 42.7 in August, unchanged from July, while the services index edges down to 50.5 from 50.9.
The UK PMIs (CIPS) are also market-sensitive and show a similar divergence to the Eurozone. The August manufacturing index is expected to slip to 45.0 from 45.3 while the services index eases to 51.0 in August from 51.5 in July.
The marquee US PMIs are from the ISM, due next week, but there is some interest in the S&P Global versions due today. The final July manufacturing PMI was 49.0, the services PMI 52.3. Meanwhile, growth in new home sales will likely remain fragile as rising mortgage rates continues to impact (market f/c: 1.0%).
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