Markets Daily
Despite multi-month lows on US Treasury yields, the US dollar recovered some lost ground, AUD slipping to 0.6615. Today’s busy data calendar includes Australia capex and building approvals, China manufacturing and services PMIs, Eurozone CPI and US personal income and spending.
Yesterday
Australia’s monthly CPI Indicator rose 4.9%yr in October, down from 5.6%yr in September and the recent peak of 8.4%yr in December 2022. This was meaningfully less than Westpac’s forecast of 5.3%yr, and the market median forecast of 5.2%yr. The main surprise was the fall in rents (–0.4% vs +0.8% forecast), softer dwelling purchase prices (+0.2% vs +0.5% forecast) and a larger than expected fall in gas prices (–2.5% vs –0.5% forecast). Government support for renters looked to be key in the soft rent number. Australia construction work expanded by a further 1.3% in Q3. That met our expectation (a forecast 1.3%) but was well above the market median of 0.3%. Activity has risen a hefty 12.4% since mid-2022. AUD/USD dipped 10-15 pips on the CPI data, to 0.6637, but within an hour reached its session high of 0.6676 as Asian currencies rallied again. The Aussie was eventually 10 pips lower at 0.6640, while AUD/NZD slumped from 1.0825 to 1.0735 as the RBNZ held steady but delivered an unexpectedly hawkish message. Regional equity sentiment soured over the day, especially Hong Kong and China. The ASX 200 managed a 0.3% gain, including a bounce on the CPI data.
Currencies/Macro
The US dollar recovered in NY trade, finishing a little higher on the day, its first gain in a week. EUR/USD slipped 20 pips to 1.0970. GBP/USD was choppy at times but ultimately unchanged at 1.2690. USD/JPY was a touch lower at 147.30. AUD, after making a four-month high of 0.6676 in local trade, fell to 0.6615. Similarly, NZD retraced yesterday’s peak of 0.6208 (which followed the RBNZ’s hawkish surprise), down to 0.6150. AUD/NZD extended its Aust CPI/RBNZ slide to 1.0723, then trimmed losses to 1.0755, net -0.8%.
US GDP for Q3 in its second estimate was revised higher to 5.2%q/q annualised from the initial reading of 4.9% (markets expected 5.0%). Noteworthy components were personal consumption falling from 4.0% to 3.6%, government consumption rising from 4.6% to 5.5%, and investment rising from 8.4% to 10.5%. The core PCE deflator fell from 2.4% to 2.3%.
German CPI in November fell -0.4%m/m (est. -0.1%), taking the annual pace to 3.2%y/y (est. 3.5%, prior 3.8%).
Interest rates
The US 2yr treasury yield fell from 4.73% to 4.61% (lowest since July) before bouncing to 4.65%, while the 10yr yield ranged between 4.25% (lowest since mid-September) and 4.32%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 14 December, with a 40% chance of a rate cut in March 2024.
Australian 3yr government bond yields (futures) extended yesterday’s decline from 4.04% to 3.97%, while the 10yr yield fell from 4.40% to 4.34%. Markets are pricing no hike at Tuesday’s meeting, but a 40% chance of one in February 2024. New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged on 28 February, with no further rate hikes in this cycle (despite the RBNZ’s November MPS indication), and a 50% chance of a rate cut by July 2024.
European primary markets saw five deals price on the day. In the US, Macquarie placed USD2.25bn across three tranches, USD1.25bn at the Bank & USD1.0bn at the Group. Itraxx Europe tightened 2.0bps to 66.2bps with Unibail-Rodamco-Westfield and ArcelorMittal the best performing contracts and Phillips and GSK weighing on the index. CDX IG tightened 0.8bps to 62.3bps. Cash bonds tightened 1.8bps to 143.0, the best performing sectors were energy and subordinated financials, while utilities and materials were again the worst performing.
Commodities
Crude markets hit 3-week highs on Fed pivot hopes and WSJ headlines suggesting OPEC+ was mulling new oil production cuts amid the middle east conflict, the piece again highlighting that the conflict was ‘galvanising’ producers. The January WTI contract is up $1.54 to $77.95, and the January Brent contract is up $1.54 to $83.22. The move came despite the EIA reporting that crude stocks rose for the sixth consecutive week to the highest since July even as US exports remained close to record levels. Crude inventory rose by 1.6mb, gasoline by 1.7mb and distillate by a hefty 5.2mn as distillate demand dropped by the largest weekly amount back to 2016. On a positive note, the SPR rose by 300kb, the first increase since the end of September. As a measure of how much liquids demand is crunching in Europe, Germany’s oil products sales fell 6.4%yy in September. Bloomberg noted that diesel shipping rates from the US Gulf Coast to Europe have more than doubled in the last 3 weeks as refiners return from fall maintenance.
In LNG markets, European prices slumped for a fourth session in a row to be down close to 10% though the plunge in temperatures in the UK have started to accelerate withdrawals which may slow price declines.
Metals gave back some of the previous day’s gains with copper down 0.3% to $8,445 despite First Quantum confirming it was shutting down the massive Cobre Panama mine which accounts for about 1.5% of global copper production. The mine is a key supplier in the concentrate market and production amounts are enough to effectively upend the forecast market surplus for next year. Bloomberg also noted that MMG workers started a strike this week though they are due to return to work after authorities declared the action illegal. The LME won the nickel case brought by Elliot and Jane Street though Elliot said it planned to appeal. Norsk Hydro said it was looking to step up aluminium recycling, ramping up its post-consumer scrap capacity to 540ktpa having already hit its 2025 target of 520-760 outlined at last year’s Capital Markets Day.
Iron ore prices stabilised after aggressive interventions by China’s NDRC over the last week or so capped prices. The January SGX contract is up $1.30 from the same time yesterday to $127.55 while the 62% Mysteel index is up $1.25 to $130.95. There was little fresh news in the market though China will report PMIs today and tomorrow.
Day ahead
At 11:30am Syd we see an update on Australia business investment. Westpac expects a decline in private business capex in Q3, driven by a fall in plant and equipment investment, though risks are to the upside (Westpac f/c: –0.6%qtr; market f/c: 1.0%qtr). On the outlook, estimate 4 for 2023/24 capex plans should continue to reflect a growing divergence between buildings and structures and equipment investment.
Australia October dwelling approvals are expected to continue oscillating around weak levels (Westpac f/c: 1.0%mth) as private sector credit growth remains subdued (Westpac f/c: 0.4%mth).
NZ: November’s ANZ business confidence is expected to show a sustained lift in sentiment post-election.
Japan: Slowing foreign demand will remain a key driver in the trend deceleration in industrial production (market f/c: 0.8%mth).
At 12:30pm Syd we see China’s official November PMIs. These should highlight a slight improvement in conditions across both manufacturing and services, although the full impact from stimulus will take time (market f/c: 49.8 and 50.9 respectively).
Eurozone: The November CPI is expected to experience further deceleration as energy prices cycle out. The overall CPI is seen easing to 2.7%yr from 2.9%yr, core CPI softening to 3.9%yr from 4.2%yr. Additionally, the Eurozone unemployment rate should hold steady in October despite a cooling economy (market f/c: 6.5%).
US: In step with a gradually easing labour market, personal income growth is cooling, and personal spending will likely soon follow suit (market f/c: 0.2%mth for both releases). The PCE deflator should take its cue from the CPI’s unexpectedly soft print in October (market f/c: 0.1%mth). Furthermore, the November Chicago PMI should continue to highlight a downbeat business mood amid tight financial conditions (market f/c: 46.0pts). Initial jobless claims are expected to tick-up but remain in low territory for now (market f/c: 218k).
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