Markets Daily
US bond yields fell in response to weaker than expected US data on producer inflation on Friday. The USD initially did fall but recovered, AUD returning to 0.6685. Australia has second tier data today: December MI inflation gauge and ANZ job ads. US markets are closed for Martin Luther King Jr. Day.
Friday
The Aussie mostly traded either side of 0.6700, lacking fresh direction. Since our last publication on 15 December, AUD/USD rose as high as 0.6871 (28 December) but is net flat over the month. Regional equities were quite mixed, Japan and India posting decent gains while Hong Kong, China and Korea softened and the ASX 200 was in the middle, -0.1%. The total value of Australia housing finance approvals lifted once again in November, up 1.0%, following an upwardly revised surge of 7.1% in October. November was broadly in line with the consensus forecast, which settled on a median of 1.3% (ranging from –2.0% to +3.5%). As Westpac anticipated, the mix showed November’s gain being led by investor loan approvals, although there were some interesting developments within the owner-occupier detail.
Currencies/Macro
The US dollar was mixed on Friday, though with only small net movements. EUR/USD fell from 1.0980 to 1.0950 after fluctuation in both directions. GBP/USD returned to 1.2750. A major opinion poll over the weekend projected a massive win for the Labour Party in the election expected in H2 2024. USD/JPY fell steeply on the PPI data then trimmed losses to about -0.25% at 144.90. AUD/USD rose as high as 0.6729 post-PPI then returned to 0.6685. NZD/USD printed a high of 0.6278 then steadied up slightly at 0.6240, leaving AUD/NZD -0.1% at 1.0715.
US PPI inflation in December was softer than expected at -0.1%m/m and +1.0%y/y (est. +0.1%m/m md +1.3%y/y), with ex-food and energy flat m/m and +1.8%y/y (est. +0.2%m/m and +2.0%y/y).
UK production data for November was stronger than expected, with GDP +0.3%m/m (est. +0.2%m/m), industrial production +0.3%m/m (est. +0.3%m/m), manufacturing +0.4%m/m, (est. +0.3%m/m), and services +0.4%m/m, (est. +0.2%m/m), although there were downward revisions to prior data.
ECB chief economist Lane said that it was inappropriate to discuss rate cuts in the near term: “A false dawn, too rapid a recalibration, can be self-defeating. The history of high inflation episodes tells us that if central banks try to normalize too quickly, before the problem is really conquered, then we get another inflation wave, and then another wave of interest rate hikes. That would be a far worse scenario.”
Taiwan’s presidential election produced another victory for the independence-leaning Democratic Progressive Party as former VP William Lai Ching-te won comfortably.
Interest rates
The US 2yr treasury yield fell from 4.28% to 4.14%, while the 10yr yield fell from 3.98% to 3.94%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 1 February, with a 75% of a cut in March.
Australian 3yr government bond yields (futures) fell from 3.66% to 3.62%, while the 10yr yield fluctuated between 3.94% and 4.12% but closed little changed at 4.09%. Markets are pricing the RBA cash rate to be unchanged at the next meeting on 6 February, with a 50% chance of a cut in June. New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged on 28 February, with an 80% chance of a rate cut in May.
Credit indices remain around the lows recorded in December with CDX at 55bp having been ~61bp in early January and Main is now 60, a touch above the 58 seen late in 2023. US cash spreads are also now back to the tights seen in December despite the strong primary volumes seen in the opening weeks of 2024. Credit markets saw a quiet close to the week on Friday with no deals of note in either Europe or the US, however Europe has already seen EUR195bn priced ytd (including SSA) to be almost 10% ahead of the 2023 run rate and the US seen USD99.8bn priced to remain on track for forecasts of ~USD160bn (record January was USD176bn in 2017).
Commodities
Despite two rounds of strikes by US and its allies against Houthi rebels in Yemen, crude markets only closed with modest gains Friday and we finished the week lower. The February WTI contract closed up 0.92% Friday at $72.68 but down 1.5% on the week while the March Brent contract closed up 1.14% at $78.29 though down 0.6% on the week. The US together with the UK and support from Australia, Bahrain, Canada and the Netherlands conducted strikes against a number of targets in Yemen used by Houthi rebels with President Biden noting that he “will not hesitate to direct further measures to protect our people and the free flow of international commerce as necessary”. The strikes did see WTI briefly trade above $75 and Brent above $80 given they followed the largest round of strikes to date from Houthi rebels on shipping in the Red Sea and Iran seizing a tanker off the coast of Oman. The EIA monthly released last week forecast a slowdown in the growth in crude plus liquids demand this year to 1.4mbpd from 1.9mbpd in 2023 and to 1.2mbpd in 2025. Meanwhile supply is forecast to rise by just 0.61mbpd in 2024 but 1.6mbpd in 2025. OPEC will release its oil monthly on Wednesday and the IEA will publish its Oil Market Report on Thursday. BoA joined other IBs last week cutting its 2024 price forecast by $10 with head of commodity research Francisco Blanch noting “we have had a lot of supply, and demand is accelerating”. BoA joined Morgan Stanley, UBS and Barclays in cutting price forecasts for 2024.
In gas markets, an arctic blast sweeping across North America sent grids from Texas to Alberta into a frenzy with power demand surging. Bloomberg reported that more than 1m people saw noon temperatures below 20F and grid operators issuing calls to conserve energy. The February Henry Hub contract jumped 7% on Friday at 2-month highs and was up 14.5% on the week. The energy regulator in Texas issued a power demand estimate for Sunday at 78GW with the possibility that we will see fresh records later in the week. Texas has never set an all-time power demand record in winter.
Metals finished the week at 1-month lows with copper down 0.7% to $8,295 and aluminium down 0.9% at $2,215. Nickel fell 1% to $16,250. Weak China CPI data weighed on sentiment into the end of the week. The weakness in copper came despite Codelco reporting copper production was 358kmt in Q4 meaning production for the year is running at its lowest in almost 25 years. Alcoa will report its full year earnings on Wednesday. Indigenous communities agreed to lift roadblocks at Chilean lithium mines following a deal struck between SQM and Codelco that overseas production at the Atacama salt flats.
Iron ore plunged Friday on weak demand with the February SGX contract down $3.80 to $128.55 while the 62% Mysteel index fell $4.15 to $130.75. Iron ore stockpiles rose for a 6th straight week last week according to data from Steelhome and demand was described as “muted ahead of the Lunar New Year holidays”. Rio will report its quarterly production data on Tuesday and BHP on Thursday. China will report December IP data on Wednesday including steel and aluminium production.
Day ahead
Australia: While ANZ job ads have begun to decline notably into year-end, they remain well above the historic average. The December Melbourne Institute inflation gauge is also due; the November reading was 4.4%yr.
Eurozone: Growth in industrial production will likely remain broadly weak as demand conditions soften. The trade surplus should continue to track a widening trend.
US markets will be closed for Martin Luther King Jr Day.
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