Markets Daily
Bond yields bounced in response to stronger US services activity data. The US dollar rose only modestly, AUD back to 0.6380. Today’s calendar includes Australia July trade balance, a speech by RBA Governor Lowe, China August trade balance and plenty from the Fed.
Yesterday
The Australian economy expanded by a subdued 0.4% in Q2, in line with expectations. Annual growth slowed to 2.1%. The level of activity is 8.0% above that prior to the pandemic, at the end of 2019. Q1 growth was upgraded from 0.2% to 0.4%. GDP per capita contracted for a second consecutive quarter, down by -0.3% in both Q1 and Q2, with annual growth turning negative, to the tune of -0.3%. Consumer spending was broadly flat, up by only 0.1%, meeting our expectations. Domestic demand was a little stronger than anticipated, up by 0.7% vs an expected 0.5%. Business investment provided the upside, increasing by 2.1%, rather than 1.4%. AUD/USD traded a 0.6357 (a fresh low since November) to 0.6405 range, its gyrations broadly tracking the Chinese yuan. Regional equities were mixed, the ASX 200 one of the weakest performers, -0.8%.
Currencies/Macro
The US dollar rose 0.5% against sterling but was otherwise little changed against G10 FX on the day. EUR/USD fell from 1.0740 to 1.0703 – a three-month low – after the US ISM data before rebounding to 1.0725, net unchanged. GBP/USD dropped to 1.2482, a low since 12 June, and then steadied around 1.2500. USD/JPY fell as far as 147.02 in Sydney trade but then returned to 147.65 as US yields rose. AUD/USD ranged between 0.6357 in Sydney to 0.6405 in the NY morning, then returned to 0.6380. NZD/USD dipped 10 pips to 0.5875. AUD/NZD rose 30 pips to 1.0870.
The US ISM services index rose to 54.5 in August (est. 52.5, prior 52.7), with prices paid rising to 58.9 (prior 56.8), new orders to 57.5 (prior 55.0) and employment to 54.7 (prior 50.7).
The Fed’s Beige Book of regional economic conditions reported economic growth was "modest" during July and August. Most districts indicated price growth "slowed overall" and decelerated faster in manufacturing and consumer-goods sectors, and jobs growth was "subdued." Spending on tourism was stronger than expected but was attributed to the "last stage of pent-up demand." There were some suggestions that consumers may have "exhausted" savings.
Boston Fed president Collins said that it was “too early” to say inflation is on a sustained path towards their target, but also saw the need to be patient and careful as they assess policy action, with data dependency repeated once again.
The Bank of Canada left policy unchanged at 5.00% and maintained quantitative tightening, as was widely expected. However, it added that policymakers remain "concerned over the persistence of underlying inflation" and are "prepared to increase the policy rate further if needed."
BoE’s Governor Bailey appeared to be comforted by declines in inflation measures and noted that further effects would be seen from prior tightening.
Interest rates
US 2yr treasury yields rose from 4.95% to 5.02% on the ISM data, while the 10yr yield rose from 4.24% to 4.28%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 3bp higher at the next meeting on 20 September, with a 55% chance of a hike in November.
Australian 3yr government bond yields (futures) roundtripped from 3.82% to 3.77% and back, while the 10yr yield roundtripped from 4.15% to 4.10% and back. Markets are pricing the RBA cash rate, currently at 4.10%, to be 2bp higher in October, with a 45% chance of a hike in December.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be only 1bp higher at the next meeting on 4 October, with a 30% chance of a hike in February.
Credit spreads were mixed with Main now off its recent tights, out another 2bp to 72, while CDX was just half a bp wider at 64.5 and US cash was little changed despite the deluge in primary. Europe saw another 10 issuers price EUR7bn (ex-SSA) taking the week to EUR19.5bn. The US continued the momentum from yesterday with another 11 issuers pricing USD16.2bn to make it USD52.4bn in 2 days.
Commodities
Crude oil prices extended the rally sparked by Russian and Saudi output plans. Brent crude rose a further 0.6% to $90.60/bbl, a high since November and its seventh consecutive daily gain. West Texas Intermediate closed up 1.0% at $87.54/bbl, extending a 9-day rally that commenced at $78.89. The Biden administration announced the cancellation of oil drilling leases in Alaska’s Arctic National Wildlife Refuge that had been auctioned in the final few weeks of the Trump administration in January 2021.
Contract talks between Chevron and trade unions for workers on Western Australian LNG operations were extended for another day, with a new deadline 6am Friday WA time, avoiding planned partial stoppages due to commence today. European gas futures remained sensitive to the news, the benchmark Dutch contract closing -9.8%.
Base metals were mostly weaker on LME as equity sentiment soured on higher yields. COMEX copper closed -1.6%. Gold dropped -0.4% to $1918/oz, struggling with higher US yields.
Iron ore continues to diverge from the broad China growth mood. Spot iron ore rose 0.7% to $119.15/tonne, a high since April. Singapore futures however slipped -1.3% to $114.80.
Day ahead
At 11:30am Syd, Australia’s trade surplus is expected to moderate further in July as the pullback in commodity prices and declines in goods exports continue to weigh on earnings. Westpac forecasts a $9.1bn surplus versus $11.3bn in June.
RBA Governor Lowe will deliver his final speech, titled ‘Some closing remarks’ at the annual Anika Foundation lunch in Sydney at 1:05pm Syd.
China: Growth in export demand from Asia has been offsetting softness elsewhere, allowing the trade surplus to remain at an elevated level (market f/c: US$73.9bn).
Eurozone: The final estimate to Q2 GDP is due; no change is anticipated (market f/c: 0.3%).
US: Initial jobless claims are yet to signal a material lift in job shedding and will likely remain near its low for now (market f/c: 230k). The final estimate to Q2 non-farm productivity is due (market f/c: 3.4%) and the Fed’s Harker, Goolsbee, Williams, Bostic and Bowman are all due to speak.
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