Markets Daily
US 10yr Treasury yields reached highs since 2007 but then fell, weaker US ADP jobs data contributing. Oil prices dropped to 2-month lows. The USD gave up some recent gains, AUD grinding up to 0.6325. Today’s low-key calendar includes Australia August trade balance and US weekly jobless claims.
Yesterday
The RBNZ left the OCR unchanged at 5.5% and communicated a relatively dovish statement on the future OCR in the accompanying statement. The MPC noted that GDP was stronger than they expected in the first half of 2023. However, the RBNZ retains confidence that the required amount of slowdown will ultimately occur in light of recent indicators such as the QSBO and PMI indicators. The MPC seems to also take comfort from the increase in mortgage rates that has occurred since August as global long-term rates have increased, helping add disinflationary pressure. NZD/USD dropped from 0.5920 to 0.5871. AUD/USD dipped to 0.6287 then edged back to 0.6305, net little changed over the session. Regional equities fell sharply, the ASX 200’s -0.8% better than most.
Currencies/Macro
The US dollar was strong in Asian trade but then reversed, closing lower on the day against most major currencies. EUR/USD rose 40 pips to 1.0505. GBP/USD rose 0.5% to 1.2140. USD/JPY ranged between 148.74 and 149.32. AUD/USD rose 25 pips net over the day to 0.6325. NZD/USD rose from 0.5881 to 0.5925. AUD/NZD sits around 1.0700, consolidating the initial reaction to the RBNZ’s dovish hold (1.0665 pre-RBNZ).
US ADP private sector jobs in September rose 89k (est. 150k, prior 180k). The restrained gains in both August and September followed four consecutive outsized increases, leaving a slowdown that signals downside risk for Friday's payrolls report.
The US ISM services index fell to 53.6 in September (est. 53.5, prior 54.5), but remains expansionary. Prices paid was unchanged, while employment and new orders fell.
Interest rates
US 2yr treasury yields fell from 5.15% to 5.05%, while 10yr yields fell from 4.88% (a 16-year high) to 4.73%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be 7bp higher at the next meeting in November, with a 45% chance of a hike by December.
Australian 3yr government bond yields (futures) fell from 4.19% to 4.06%, while the 10yr yield fell from 4.73% to 4.57%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 7bp higher in November, with a 100% chance of a hike by March. New Zealand rates markets price the OCR, currently at 5.50%, to have a 50% chance of a hike in November and a 100% chance by May 2024.
Credit was mixed overall with Main in half a bp to 85.5 as it halted the move wider seen earlier in the week, CDX is now a bp tighter at 77 after joining the equity rally late in US time and US IG cash is close to unchanged (+/- 1bp). Primary activity was light against the backdrop of rates volatility with 2 deals completed in both Europe and the US for a total volume of ~USD2bn across both markets (details below).
Commodities
Crude markets slumped by the largest margin in a year as concerns about gasoline demand and the global growth outlook slammed sentiment. The November WTI contract is down $4.54 at $84.29 while the December Brent contract is down $4.71 at $86.21. EIA inventory data added to the volatility with stockpiles at Cushing finally showing signs of a reversal, rising for the first time in 8 weeks. Total crude inventory did fall by 2.22mb, though gasoline rose by a whopping 6.48mb. Exports rose by 944kbpd to 4.95mb. In a sign that higher prices are hammering consumer demand, the 4-week average of gasoline delivered hit the lowest level for this time of year since 1998, to be nearly 1mb below the 5yr average.
Metals were hit by signs of weakness in US jobs data, the rapid rise in US yields and the ongoing strength in the US$. Copper again led the charge lower, and spent pretty much all the session below $8,000, testing the lows seen in May of this year. Copper is last down 1% at $7,921 while aluminium is down 2% at $2,244. Having noted yesterday that the DRC and Zambia broke ground on an $850m road project connecting copper, cobalt and lithium mines to a port at Dar es-Salaam, Barrick announced it had committed $2bn to turn its Lumwana copper mine in Zambia into a ‘super pit’. The Lumwana Super Pit expansion project aims to double last year’s production to roughly 240kt of copper as Barrick looks to increase copper production to 30% of its profits. And the ICSG forecast that the copper market will see a surplus of 467kt in 2024 after recording a 27kt deficit in 2023.
Iron ore markets marked time with China remaining closed for Golden Week holidays. The November SGX contract is down just 10c from the same time yesterday at $115.30. There was little fresh news though Bloomberg did note that premiums for super high quality Brazilian iron ore have dropped by circa 50% since March as measures of steel mill profitability have slumped to the lowest level in about a year.
Day ahead
Australia: The August trade balance will likely show flat exports and stronger imports due to elevated prices (Westpac f/c: 8.9bn, market f/c: 8.7)
NZ: The ANZ commodity price index for September is expected to bounce given recent gains in dairy prices.
US: The trade deficit in August is expected to have narrowed off weaker imports due to subdued consumer demand (market f/c: -59.8bn). Initial jobless claims are likely to remain near their lows (market f/c: 210k). The FOMC’s Mester and Daly are speaking today.
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