Markets Daily
Despite limited news and data, US yields and the USD recovered some of Friday’s steep falls. US equities slipped and the Aussie retreated to 0.6620. Today’s crowded calendar includes the RBA policy decision, Australia Q3 balance of payments and public demand and US November services ISM and October JOLTS jobs survey.
Yesterday
Australia Q3 non-farm business inventories rose 1.2%, representing a significant upside surprise. This will see inventories add 0.9ppts to Q3 activity, which is above Westpac’s forecast of +0.5ppts. A mining inventory rebuild accounted for 97% of the total increase in inventories in the quarter. Company profits were weaker than expected, -1.3%qtr after -12% in Q2. The total value of Australia housing finance approvals surged 5.4% in October, well above Westpac’s top-of-the-range forecast of 3.2%. That said, the complexion was as we expected with a strong rise in construction loans seeing owner occupier loans outperform investors slightly. AUD/USD reached a fresh high since 1 August, at 0.6691, then eased back to 0.6660, down modestly on the day. Regional equities were quite mixed, Japan and China underperforming. The ASX 200 rose 0.7% to a high since September.
Currencies/Macro
Supported by the rise in Treasury yields, the US dollar rose against all G10 currencies on the day. EUR/USD tumbled from 1.0880 to test 1.0805 before edging back to 1.0835 (-0.4%) in relatively light trading. GBP/USD slipped -0.6% to 1.2635. USD/JPY rose 0.3% to 147.25. AUD/USD underperformed, slipping -0.8% to 0.6620 with a low of 0.6605. NZD/USD retracing from recent highs to 0.6165 (-0.7%). AUD/NZD ground down to test 1.0730.
US October factory orders posted a headline fall of -3.6%m/m (est. -3.0%m/m) and -1.2%m/m ex-transport. September rebounds were pared back to +2.3%m/m and +0.4%m/m from +2.8%m/m and +0.8%m/m respectively.
Eurozone Sentix Investor Confidence for December continued a mild rebound to -16.8 from prior -18.6 but had little market impact.
Interest rates
The US 2yr treasury yield rebounded from 4.54% to 4.63% (versus 4.69% pre-ISM on Friday) and 10yr yields lifted +6bps to 4.26% as markets addressed the scale of recent marking down of yields. Fed funds rate, currently 5.375% (mid), continue to suggest unchanged policy at next week’s FOMC meeting, but pared back pricing of a March 2024 cut to 60% (from 65% on Friday) and pared 12bps of the cuts priced into December 2024 (at 4.105%).
Australian 3yr government bond yields (futures) rebounded to 4.05%, while the 10yr yield edged up from 4.39% on Friday to 4.46%. Though there is no pricing of a change at Tuesday’s RBA meeting, markets are pricing 33% chance of hike 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, and a full 25bps cut for August 2024.
Credit reflected the weaker sentiment with both Main CDX a bp wider at 67 and 62 respectively, however cash credit has remained firm as primary supply got away to a solid open for the new month. Europe saw just the 2 issuers, with Rodamco’s EUR750M green deal notable in the REIT space, pricing at 7yr at MS+145 (BBSW+203). The US saw 8 issuers price USD9.4bn with GM’s USD3bn, 2 tranche offering the largest on the day.
Commodities
Crude markets ground out further losses despite the Saudi Energy Minister stating that OPEC+ cuts can “absolutely” be extended past the first quarter if needed. The January WTI contract is down 1.44% at $73.00 while the February Brent contract is down 1.12% at $78.00. In an interview with Bloomberg, Prince Abdulaziz bin Salman said that he “honestly believed that 2.2mb will overcome even the usual inventory build that usually happens in the first quarter”. He also noted that “it’s extremely hard for Russia to cut production in the winter”. US Deputy Energy Secretary David Turk said the country is taking advantage of low prices to refill the Strategic Petroleum Reserve, though those efforts are ‘limited by logistical constraints. NSC spokesman John Kirby said he was “extremely concerned that [Venezuela] didn’t take those two extra steps – release of political prisoners and getting four wrongfully detained Americans home” noting that the Venezuelan president had missed an end of November deadline. US Central Command confirmed four attacks against three commercial vessels operating in the Southern Red Sea. The USS Carney responded to the attacks which were claimed by Houthi rebels and the US military said were “fully enabled by Iran”. Despite ice and snow across much of Europe, gas prices slumped to a two-month low as low demand preserved winter inventories. The January TTF contract fell 7.8% on the day.
Metals gave back much of the previous day’s gains with copper down 2% at $8,443 and aluminium sliding 1.22% to $2,182. Citi warned that the effect of tight credit conditions could impact demand for metals and the postponement of hearings on Evergrande liquidation until January 29, 2024, didn’t help sentiment either. First Quantum confirmed it had signed a revised agreement to develop a copper mine in Zambia with the Fishtie project in the central province aiming to produce 30kt of copper by 2030 and first metal as early as 2026. Bank of Montreal said that “we now assume that Cobre Panama is closed for the first nine months of 2024”. Gold hit a record high, only to finish the day down about 2%.
Iron ore markets softened as inventory rose and demand remained uncertain due to winter weather. The January SGX contract is down $3.30 from the same time yesterday at $128.05 while the 62% Mysteel index is down $2.65 at $130.70. Chiangjiang securities noted that neither infrastructure nor high-end manufacturing ‘can fill the missing demand from a lack of homes’. The top 100 developers’ annual aggregate sales in China are expected to fall 15% from 2022 after falling 29.6% yy in November.
Day ahead
The RBA policy decision is due at 2:30pm Syd. In line with consensus and market pricing, Westpac anticipates that the RBA Board will leave the cash unchanged at 4.35%. In November, the RBA opted to raise the cash rate by 25bps from 4.10% to 4.35%, after having left policy on hold over four consecutive months, in what was considered a response to a “material upward revision to the outlook for inflation”. Move forward to December, and no further upside surprises to the inflation outlook have materialised. Indeed, the somewhat volatile Monthly CPI Indicator printed below expectations in October, down from 5.6%yr to 4.9%yr, and other data was broadly in line with expectations. The RBA Board will instead look toward the Q4 CPI report (due January 31) for a more complete assessment of inflation’s momentum and the risks at hand.
At 11:30am Syd, more Australia Q3 partials are due for release. The current account surplus is anticipated to contract as the fall in the terms of trade weighs on the trade surplus (Westpac f/c: $1.0bn; market f/c: $3.2bn). This supports the expectation that net exports should subtract from GDP as lifts in exports are outstripped by stronger import gains (Westpac f/c: –0.4ppts; market f/c: –0.2ppts). Public demand should see a continuation in subdued growth after the H1 2023 investment burst (Westpac f/c: 0.3%). We will finalise our forecast for tomorrow’s GDP following these releases.
Japan: The Tokyo CPI in November should continue to reflect the impact of strong import prices and a weak yen (market f/c: 3.0%yr).
At 12:45pm Syd, the November Caixin/S&P Global China services PMI is expected to continue conveying subdued demand (market f/c: 50.5).
Eurozone: With energy inflation from last year almost cycled out, deflation in October’s PPI should slow (market f/c: -9.5%yr).
US: November’s non-manufacturing ISM should reflect an emerging slowdown in the services sector (market f/c: 52.3). October’s JOLTS job openings should reflect gradual cooling in the labour market (market f/c: 9300k).
The final estimate of November’s S&P Global services PMI is due for Japan, Eurozone, UK and US.
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