Markets Daily
US long term bond yields rose to their highest levels in 16 years, amid ongoing concerns about government debt levels, the Fed rate remaining high, and sticky inflation. Moody's warned of shutdown implications. The USD followed bond yields, while equities are little changed.
Yesterday
Regional sentiment was hit by renewed concerns over the fate of China’s Evergrande Group, the company saying that it failed to repay an onshore 4 billion yuan ($547 million) bond. The company said key meetings with creditors had been scrapped too, leaving its restructuring plan unclear.
China property stocks saw outsized declines, with Bloomberg’s mainland property developer equity index shedding more than 6%, while Hang Seng slid 1.8%. Iron ore was knocked 4.5% lower to $115.9/t and AUD/USD underperformed, falling from 0.6450 to around 0.6420. Less than reassuring messaging from a PBOC official that there is less scope for further expansionary monetary and fiscal policies did not help. The Nikkei and ASX indices bucked regional sentiment, rising 0.5% and 0.1% respectively.
Currencies/Macro
The US dollar index is up 0.4% on the day to 105.95, and at a 10-month high, boosted by fresh multi year highs in US long term yields. EUR fell from 1.0650 to 1.0576 – a six-month low. USD/JPY rose from 148.40 to 148.96 – an 11-month high.
AUD was not immune to USD gains and a steep 4.5%+ decline in iron ore prices in the prior Asian time zone weighed too, falling from 0.6430 to 0.6404. NZD proved a little more resilient, rising from 0.5943 to 0.5974. AUD/NZD fell from 1.0805 to 1.0765 – a two-month low.
The Chicago Fed national activity index stuttered to a sub-trend -0.16 (est. +0.10, prior revised from +0.12 to +0.07) as it continues to hover either side of trend growth (zero) for over a year. The Dallas Fed manufacturing activity index fell to -18.1 (est. -13.0, prior of -17.2), the report citing improved production and recovering new orders with softness persisting in forward expectations, though orders and production were still expected to be sound.
FOMC member Goolsbee said the US can avoid a recession: “I’ve been calling that the golden path and I think it’s possible, but there are a lot of risks and the path is long and winding”.
Moody’s sounded a warning on a potential US government shutdown: “While government debt service payments would not be impacted and a short-lived shutdown would be unlikely to disrupt the economy, it would underscore the weakness of US institutional and governance strength relative to other Aaa-rated sovereigns that we have highlighted in recent years…a government shutdown would demonstrate the significant constraints that intensifying political polarization continue to put on US fiscal policymaking during a period of declining fiscal strength, driven by persistent fiscal deficits and deteriorating debt affordability”.
Germany’s IFO business survey was largely as expected at 85.7 (est. 85.2, prior 85.8). However, the report underscored the likelihood of a contraction in Q3.
Interest rates
US 2yr treasury yields rose from 5.10% to 5.14%, while 10yr yield rose from 4.46% to 4.54% (highest since 2007), steepening the curve by around 7bp. Markets price the Fed funds rate, currently 5.375% (mid), to be 6bp higher at the next meeting in November, with a 55% chance of a hike in February.
Australian 3yr government bond yields (futures) rose from 4.00% to 4.06%, while the 10yr yield rose from 4.32% to 4.43% - highest since 2011. Markets price the RBA cash rate, currently at 4.10%, to be 2bp higher in October, with a 95% chance of a hike by March 2024. New Zealand rates markets price the OCR, currently at 5.50%, to be 3bp higher in October, with a 95% chance of a hike by April 2024.
Credit spreads were wider last night after holding firm on Friday with Main a bp wider at 78 and CDX out half a bp to 73, while US IG cash was unchanged. Primary was in place in both the US and Europe, although there were reports that 3 US issuers stood down to keep an eye on conditions tomorrow. Europe saw 5 issuers price EUR4.8bn including Carlsberg in the corporate space with its EUR1.3bn 2 part deal (5/10yr) and ING Bank with a EUR1.75bn 3yr fixed/FRN (MS+58, BBSW+109). The US saw just the 2 yankee bank issuers with Credit Agricole pricing a USD1.75bn 6nc5yr SNP at T+170, and on the local front, ANZ completed its USD1.65bn 2yr (fixed/FRN) at T+55, SOFR+64 (BBSW+66).
Commodities
Crude markets were again mixed with physical markets remaining tight, but paper markets focused on the strong US$ and Chinese property developments. The November WTI contract is down 10c at $89.93 while the November Brent contract is up 12c at $93.39. Last week Chevron Corp CEO Mike Wirth told Bloomberg “It sure looks like $100 a barrel is going to happen”. Continental Resources CEO Doug Lawler raised that bar arguing that oil is headed to $150 unless the US government does more to encourage further exploration. However, industry consultant PGE warned that high pump prices are starting to hit gasoline demand with the end of fuel tax subsidies in some countries adding to the pressure. The US October RBOB gasoline contract has fallen almost 6% over the last week. The Russian Government amended its fuel export ban excluding bunker fuel, gasoils and some middle distillates. Finally note that LNG prices hit 1-month highs in Europe despite Chevron agreeing to a union proposal ending industrial action which commenced September 8. Russia’s ban on diesel exports was cited as a driver for higher LNG prices in Europe.
Metals were hit hard by property developments in China and warnings of overcapacity in Chinese copper production. Copper is last down 0.9% at $8,149 while nickel is down 1.4% at $19,150. That’s a closing low back to May of this year for copper and fresh low back to July last year for nickel. The China Nonferrous Metals Industry Association urged copper producers to strengthen control over capacity given a “complex, grim external environment”. Chinese refined copper output hit a record high in August, with output hitting more than 1mt per month in 2023 so far and copper ore and concentrate imports in August hitting a record 2.7mt. The copper cash to 3m spread hit the lowest on Bloomberg data since at least May 1994, indicating limited physical demand.
Finally note that iron ore slumped on Chinese property developer news with Evergrande confirming it could no longer issue new notes due to an investigation of its mainland business Hengda Real Estate by the CSRC. The October SGX contract is down $4.20 from the same time yesterday to $115.30 while the 62% Mysteel index is down $4.95 to $118.05. A survey by Mysteel of 90 downstream construction companies revealed that less than half planned to replenish steel inventories ahead of the Golden week holiday which commences Friday.
Day ahead
Eurozone: The ECB’s Lane, Simkus and Muller speak.
US: Growth in the FHFA and S&P/CS home price indices is starting to peel back under the weight of affordability and lack of on-market supply (market f/c: 0.4% and 0.65% respectively). In light of these supply constraints, new home sales have received some level of support but remain subdued overall (market f/c: –2.2%). The Conference Board’s consumer confidence index should meanwhile soften in September (market f/c: 105.9) while the Richmond Fed index is expected to hold in weak territory (market f/c: –7). The FOMC’s Kashkari and Bowman are also due to speak.
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