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The US dollar snapped its 3-day winning streak as US equities rallied and the Japanese yen surged on expectations of policy change. AUD rose back above 0.6600. Today’s calendar is dominated by the US November employment report, with US December consumer sentiment also due.

Yesterday

October Australia’s international trade in goods recorded a surplus of $7.1bn, a $0.9bn improvement on September, with export values ticking up 0.4%mth after -1.8% in September, imports retracing -1.9%mth after the 8.0% surge in September. China reported a November trade surplus of $68bn versus $57bn in October, with exports +0.5%yr, imports -0.6%yr, the latter well below expectations. AUD/USD gyrated within a 0.6526 to 0.6559 range, little changed net. Regional equity sentiment was mostly poor, especially Japan where a bounce in JGB yields (10yr +11bp to 0.74%) upset the Topix, -1.1%. The ASX 200 managed to limit its decline to -0.1%. 

 

Currencies/Macro

The US dollar’s 3-day winning streak ended as yields stepped lower, US equities rallied for the first time this week and the yen surged as markets anticipated BoJ policy tweaks. EUR/USD gained +0.3% to 1.0800, GBP ticked up +0.2% to 1.2590 but CAD struggled at an unchanged 1.3600. AUD/USD reached a high of 0.6620 around the time of the USD/JPY low, later steadying around 0.6600, net +0.8%. NZD/USD tested 0.6193 then consolidated up 0.5%, leaving AUD/NZD up 30 pips at 1.0700.

 

US weekly initial jobless claims were notably benign, spot on consensus at 220k while the surprise lift in continuing claims last week was largely unwound with a read of 1.851mn (consensus 1.91mn).

 

US final October wholesale Inventories were marked down another notch to -0.4%m/m (prelim -0.2%m/m) but a fall in wholesale sales of -1.3%m/m (est. +1.0%) put a soft tone to the data.

 

Eurozone final 3Q GDP was unchanged at -0.1%q/q (maintaining the potential for a technical recession in H2 23) with a slide in fixed capex (-0.3%q/q from flat) offset by a lift in household consumption (+0.3%q/q from flat).

 

German October industrial production missed with a fall of -0.4%m/m against consensus of +0.2%m/m and highlighted the risk of regional recession after yesterday’s sharp fall in German factory orders.

 

Interest rates

 

The US 2yr treasury yield slipped on the day to 4.59% (-0.1bp), and 10yr yields pared back from 4.18% in Asia to around 4.14% (+3bp). Markets continue to see no change in Fed funds rate (5.375%, mid) at next week’s FOMC announcement. March 2024 pricing remains around 75% for a cut, Dec 2024 Fed pricing ticked to -127bps or 4.06%.

 

Australian 3yr government bond yields (futures) rebounded 6bps to imply 3.86%, while the 10yr yield pulled back to 4.28%. Market pricing in February 2024 and March 2024 is effectively for zero change.

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 around 28bps cut for August 2024.

 

Credit spreads held firm with Main marginally tighter at 67, CDX in half a bp to 62.5 and US IG cash flat to a bp better as primary activity slows and all eyes shift to US payrolls this evening. Primary activity was limited to a couple of USD deals (Athene Holding USD600M 10yr, Republic Services USD1bn in 2 parts) and while this has seen supply on the week lift above USD20bn to be in line with expectations, it is expected to slow from here.

 

Commodities

Crude markets marked time in a choppy session despite the US$ slide. The January WTI contract is up 24c at $69.62 while the February Brent contract is up 9c at $74.39. A flurry of OPEC ministers added their support to the cuts announced including the Kuwaiti oil minister who said they are fully committed to the additional voluntary cuts. However, prompt time spreads remained in bearish contango with the Jan/Feb WTI spread at -24c and the Brent Feb/Mar at -15c. Chevron announced it would increase CAPEX to between $18.5bn and $19.5bn in 2024 from $17bn this year. This follows the Chevron purchase of Hess Corp. Russian President Putin met with Saudi Crown Prince MBS for more than three hours and talks were said to have covered OPEC+ and the Israeli-Hamas war. MBS had earlier told Bloomberg that he had ‘faith that Moscow will implement its share of output cuts’. Russian crude output stayed above target in November at 9.63mbpd according to Bloomberg calculations. China’s crude imports slumped to a seven-month low in November due to fuel export curbs and tight margins. And in the LNG industry, Woodside and Santos were reported as holding merger talks that could result in a new global giant worth around $52bn. Talks were described as ‘early stage’ with ‘no agreement in place’. Woodside acquired the BHP petroleum business in 2022. 

 

Metals were again mixed with copper benefiting from the weaker US$ but aluminium down 0.8% on weak demand. Chinese copper imports rose 5.77%mm to be up 18.7% versus the 5yr average for November. Rusal said it had cut aluminium exports by almost 6% so far this year while shipments to the domestic economy jumped 23% between January and November. 

 

Iron ore prices surged on Chinese import data. The January SGX contract is up $1.35 from the same time yesterday at $134.75 while the 62% Mysteel index is up $2.55 at $135.95. Chinese imports of iron ore jumped 3.9%yy to 102.74mt which is up 7.3% versus the 5yr average for November. Expectations that fiscal stimulus will support demand next year, driving restocking activity post the LNY holiday appears to be driving stronger than usual imports into the end of the year.

 

Day ahead

The RBA Head of Financial Stability, Andrea Brischetto, is speaking at the Banking and Financial Stability Conference.

 

Japan: The final estimate for Q3 GDP will be released (market f/c: -0.5%qtr). October’s household spending is expected to reflect broad-based weakness as real cash earnings remain negative (market f/c: -2.9%yr). Moreover, the current account surplus in October is anticipated to widen as a weak yen supports receipts (market f/c: ¥1689.3bn).

 

US November non-farm payrolls are expected to show faster growth than October’s unexpectedly soft 150k, but mostly due to the return of auto workers, which Bloomberg Economics estimates will add 41k alone. Westpac forecasts 180k, median is 183k, with a +/-1SD range of 145k to 216k. The unemployment rate should remain at 3.9%, reflecting weaker household employment and surveys (Westpac f/c: 3.9%). Average hourly earnings should soften as labour weakens (Westpac f/c: 0.2%mth; market f/c: 0.3%mth, 4.0%yr).

 

December University of Michigan US consumer sentiment should remain little changed in historically gloomy territory that doesn’t align well with the past year’s trends in consumer spending (market f/c: 62.0).

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