Markets Daily
US inflation data was a fraction above expectations but bond yields steadied lower, while the broad US dollar finished little changed, AUD back to 0.6420. Today’s important calendar includes Australia August employment, the ECB policy decision and US August retail sales.
Yesterday
Australia’s data calendar was empty. Lacking inspiration, AUD/USD appeared to be keeping half an eye on cooling Chinese equities, slipping from 0.6430 to 0.6400 before trimming losses to 0.6410. Asian equities mostly opened heavily but steadied in afternoon trade for only moderate losses. The ASX 200’s -0.7% close was on the weaker side of the region.
Currencies/Macro
The US dollar was mixed against major currencies on the day, though ex-Scandis, G10 currency changes were only +/-0.2%. EUR/USD gyrated around the US CPI data but eventually steadied -0.2% at 1.0730. GBP/USD is net flat at 1.2490, with a low of 1.2436. USD/JPY rose 0.2% to 147.35. AUD/USD dipped to a session low of 0.6381 on US CPI but later returned to 0.6420, little changed net. NZD/USD rose from 0.5890 to 0.5927. AUD/NZD fell from 1.0870 to 1.0845.
US CPI in August rose 0.6%m/m and 3.7%y/y (est. +0.6%m/m and 3.6%y/y, prior 3.2%y/y), with ex-food & energy +0.3%m/m and 4.3%y/y (est. +0.2%m/m and 4.3%y/y, prior 4.7%y/y). The headline rate was boosted by higher fuel costs, while core components were mixed.
Eurozone industrial production in July disappointed, falling -1.1%m/m (est. -0.9%m/m).
UK production data for July was soft. GDP fell -0.5%m/m (est. -0.2%m/m), manufacturing fell 0.8%m/m (est. -1.0%m/m), and services fell 0.5%m/m (est. -0.1%m/m).
Interest rates
US 2yr treasury yields fell from 5.04% (pre-CPI data) to 4.97%, while the 10yr yield fell from 4.31% pre-data to 4.25%. Markets currently price the Fed funds rate, currently 5.375% (mid), to be 2bp higher at the next meeting on 20 September, with a 55% chance of a hike in December.
Australian 3yr government bond yields (futures) roundtripped from 3.83% to 3.89% and back, while the 10yr yield fell from 4.14% to 4.11% via 4.17%. Markets currently price the RBA cash rate, currently at 4.10%, to be 1bp higher in October, with a 45% chance of a hike in February.
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 40% chance of a hike in February.
Credit indices were in positive territory with both Main (70.5) and CDX (63.5) a bp tighter post CPI, while US IG cash remained unchanged as supply slowed. Despite the CPI headline risk we did see some activity remain in place in primary markets. Europe saw 3 issuers price EUR1.25bn iwith the US also seeing 3 issuers in play for USD2.05bn.
Commodities
Commodity markets mostly saw little net change. Oil prices consolidated recent gains. Brent crude oil closed +0.1% at $92.19/bbl, West Texas Intermediate -0.4% at $88.52/bbl. Base metals closed mostly higher on LME though net changes were modest. Comex copper finished +0.1%.
Natural gas was more lively, Dutch futures up 6.1% with an eye on the looming strike at Chevron’s LNG plants in Western Australia. There is also an outage at the Freeport LNG plant in Texas, with supply concerns also in Norway. US natural gas futures slipped -2.3% as markets eyed forecasts for cooler and rainy weather.
Spot iron ore was virtually flat at $121.95/tonne while Singapore iron ore futures (October contract) rose 0.3% to $118.95. Newswires reported that US steel mills were focused on news on a potential strike by United Autoworkers. UAW president Shawn Fain said that while car companies had raised their wage offers, it was likely that workers would proceed with a strike.
Day ahead
At 11:30am Syd we see Australia’s August labour force survey. Following a downside surprise in July associated with school holidays softness, employment growth is set to bounce back strongly in August (Westpac f/c: +40k; market f/c: +25k); with participation holding steady, Westpac expects the unemployment rate to pull-back slightly in the month (Westpac f/c: 3.6%; market f/c: 3.7%).
The Melbourne Institute Inflation Expectations for September will be released. August’s reading was 4.9%.
Japan: Core machinery orders in July likely weakened over the year, prompted by falling demand from overseas as well as domestically (market f/c: -0.8%mth). The final estimate for July’s industrial production is anticipated to be little changed.
The European Central Bank is expected to keep rates steady, although it will be a close decision. While headline inflation is sitting just below the ECB’s projection of 5.4%yr for 2023, core inflation remains more stubborn. Inflation persistence is likely to feature in the ECB’s upgraded projections, with newswires this week citing sources saying inflation would be projected above 3% in 2024. Economists are almost evenly divided on the decision, Bloomberg reporting 34 for an unchanged 3.75% deposit rate, 32 for +25bp. Market pricing is +16bp.
US: Retail sales for August are expected to stall after a strong three months to July (market f/c: 0.1%mth). Producer prices are expected to rise as upstream prices, particularly oil prices, feed through (market f/c: 1.3%yr). Business inventories in July was likely little changed, demand volatility posing a challenge for businesses (market f/c: 0.1%mth). Initial jobless claims should remain low as businesses remain keen on retaining staff despite uncertainty over the demand outlook (market f/c: +225k).
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