Markets Daily
Oil prices, US bond yields and the US dollar fell from their mid-week peaks and equities rose in the approach to quarter end. US GDP data disappointed slightly and Fedspeak was mildly dovish.
Yesterday
The negative lead from Wall Street’s earlier decline amid high oil prices and rising bond yields saw Nikkei slip 1.5% yesterday, while Hong Kong fell 1.4%. The ASX fell fractionally (-0.1%). AUD/USD clawed back earlier losses, rising from 0.6345 to around 0.6375 by day’s end.
Australia’s retail sales disappointed in August, posting another feeble gain of just 0.2%, slightly below consensus expectations of +0.3% and Westpac’s bullish forecast for +1%. Annual growth overall slowed to just 1.5%yr, representing a sizeable decline in real terms (retail prices rose 5% over the year to June), and an even bigger contraction in real per capita terms (population growth currently running at 2.3%yr). Our strong expectation for August was based on card data that had shown a material lift, particularly in the hospitality sector where the FIFA Women’s World Cup looked to have delivered a boost. But this failed to show through even in the detail of the August retail report with cafes & restaurants recording a fairly muted 0.7% gain in sales in the month.
Job vacancies fell 8.9% between May and August, from 428.4k to 390.4k, a larger decline that is consistent with a gradual moderation in labour demand from very strong levels.
Currencies/Macro
The US dollar index is down 0.4% on the day as both US yields and oil prices reversed after their recent sharp gains.
EUR rose from 1.0491 to 1.0579, largely unbothered by a lower than expected German CPI and renewed widening in peripheral sovereign bond spreads. The Italian and French governments unveiled uncomfortably large budget deficit projections just as the focus returns back to the EU’s deficit rules. USD/JPY fell from 149.40 to 149.15 as US yields slipped lower.
After a rough couple days that saw AUD slip to 10 month lows at 0.6331 mid-week, AUD stabilised overnight, rising from 0.6380 to 0.6432, mainly driven by a reversal in the USD-leg. NZD rose from 0.5935 to 0.5973. AUD/NZD rose from 1.0720 to 1.0771.
US GDP for Q2, in its third estimate, remained at 2.1% annualised (markets had expected 2.2%). Personal consumption was revised lower to +0.8% annualised from 1.7%. The core PCE deflator was unchanged at 3.7%. Weekly initial jobless claims remained low at 204k (est. 215k, prior 202k), with continuing claims at 1670k (est. 1675k, prior 1658k). Pending home sales surprised with a 7.1%m/m fall (est. -1.1%m/m, prior +0.5%m/m) to a three-year low. NAR commented that buyers are “taking a pause”. The Kansas Fed manufacturing survey fell to-8 (est. -2, prior zero).
FOMC member Goolsbee said policymakers shouldn’t place too much weight on the traditional economic idea that steep job losses are needed to quell inflation, which he said could lead officials to raise interest rates too high. He said the traditional view “misses key features of our recent inflationary experience and that, in today’s environment, believing too strongly in the inevitability of a large trade-off between inflation and unemployment comes with the serious risk of a near-term policy error.”
German CPI in September undershot expectations at +0.3%m/m and 4.5%y/y (est. 4.6%y/y, prior 6.1%y/y), with the EU harmonised version at +4.3%y/y (est. 4/5%y/y, prior 6.4%y/y).
Interest rates
US 2yr treasury yields fell from 5.12 to 5.06% via 5.16%, while 10yr yields roundtripped from 4.59% to 4.68% - a fresh high since 2007 – and back. Markets price the Fed funds rate, currently 5.375% (mid), to be 6bp higher at the next meeting in November, with a 45% chance of a hike in February.
Australian 3yr government bond yields (futures) rose from 4.10% to 4.14% via 4.18%, while the 10yr yield rose from 4.45% to 4.59% - a fresh high since 2011, currently 4.51%. Markets price the RBA cash rate, currently at 4.10%, to be 2bp higher in October, with a 100% chance of a hike by February 2024. New Zealand rates markets price the OCR, currently at 5.50%, to be 3bp higher in October, with a 100% chance of a hike by April 2024.
Credit spreads were mixed with more positive equity sentiment supporting indices which saw Main a couple of bp better at 80 and CDX in a bp to 73, however US cash spreads were 1-4bp weaker despite the slowdown in supply as US IG bond funds recorded a USD1.7bn outflow on the week (Lipper). Primary activity was limited to single EUR (Fresenius, EUR500M 7yr) and GBP (Suez GBP600M 20yr) transactions in the IG space, however in the HY space we also saw MinRes price its USD1.1bn 5nc2yr deal to yield 9.25%. As we head into month end, the US will finish with IG supply of ~USD124bn for September (assuming a typically quiet Friday), broadly in line with original expectations of ~USD120bn.
Commodities
After brief trade above $95, profit taking set in with a sharp reversal on the November WTI contract taking it down $1.97 and almost 4% from the high to $91.71. And the November Brent contract closed down $1.41 at $95.14 after hitting a high of $97.69. Despite the sharp reversal, with demand in the US and China remaining resilient, many are forecasting $100 plus. Bloomberg’s BNEF is forecasting crude deficits of 1.3mbpd in Q3 and 1.1mbpd in Q4. Adding to tightness in fuels, Russia’s energy minister Shulginov was cited in a Tass report as stating that the country had no plans to remove its fuel export ban anytime soon. And Deputy PM Novak said the Russian Government was ready to take serious steps if the situation with fuel prices doesn’t change. And the Chinese government was said to have told the major oil refiners not to expect any more fuel export quotas this year after a release this month took exports above 2022 levels. China has granted about 40mt of fuel export quotas so far this year versus 37.3mt in 2022.
Metals saw a decent bounce Thursday led by a 6% surge in zinc prices to $2,626. Copper jumped 1.2% to $8,215 and aluminium by 1.9% to $2,280. The jump in zinc prices was driven by a sharp rise in warrant cancellations driven by requests for the metal in Singapore resulting in the largest one-day rally since January. And in industry news, the China Nonferrous Metals Industry Association signed a memorandum of understanding with the Russian Aluminium Association in Beijing on Monday, aiming to increase collaboration on alumina, aluminium fabrication and aluminium product trade.. The MoU comes ahead of a visit by President Putin to China next month. Chinese imports of Russian aluminium hit a record circa 131kt in August.
Iron ore markets stabilised with the October SGX contract up $3.95 from the same time yesterday to $119.55 while the 62% Mysteel index is up $1.50 to $120.15. Chinese markets shut down for Golden Week holidays today. China reports the official PMIs Saturday and the Caixin version Sunday.
Finally, its worthy of note that coking coal prices in China have risen after a fatal accident in the Guizhou region saw 93% of coking coal capacity shut down according to Mysteel. No timeline has been given on when the suspension will end. Dalian coke futures were up 7% on the high on Thursday.
Day ahead
Australia: Growth in private sector credit is expected to remain subdued in August, consistent with the slowdown in economic growth amid elevated interest rates (Westpac f/c: 0.3%).
NZ: ANZ consumer confidence will likely remain near weak levels given the ongoing impact of financial headwinds.
Japan: A moderation in the Tokyo CPI is anticipated in September, with easing energy prices expected to be a key driver (market f/c: 2.7%yr). Meanwhile, a modest fall in the jobless rate (market f/c: 2.6%) and another decline in industrial production likely eventuated in August (market f/c: –0.8%).
Eurozone: Elevated services inflation reads from last year will begin to cycle out of the CPI measure in September (market f/c: 4.5%yr).
US: Growth in personal income has maintained a solid pace of late, and this will likely see further gains in personal spending (market f/c: 0.4% and 0.5% respectively). The August PCE deflator is expected to broadly mirror the CPI outcome for the month (market f/c: 0.5%m/m, 3.9%y/y, prior 4.2%y/y). Meanwhile, the Chicago PMI will continue to reflect softness in conditions for now (market f/c: 47.6), as declines in wholesale inventories also persist (market f/c: –0.2%). The FOMC’s Williams is also due to speak.
China: The NBS manufacturing and non-manufacturing PMIs for Sept along with the private sector Caixin PMIs will be released over the weekend. While news out of China’s property sector remains gloomy, consensus expectations are for small rebounds in all the PMIs surveys thanks to recent policy easing steps.
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