Markets Daily
The US dollar firmed slightly during an otherwise quiet trading session, with the US observing a holiday. AUD slipped to 0.6660. ECB officials continued to push back on rate cut speculation. Today’s calendar includes Australia January Westpac consumer sentiment, UK November average earnings and a speech by Fed governor Waller.
Yesterday
China’s central bank held its benchmark 1-year lending rate steady at 2.50%, despite a majority of forecasters in the Bloomberg survey predicting a 10bp easing. The steady hand was announced despite December CPI printing -0.3%yr, PPI -2.7%yr. China equities slightly underperformed in the region. The ASX 200 closed about flat while Japan outperformed, the Topix +1.2% as Japanese yields softened. There was no official Australian data but the December MI inflation gauge rose to 5.2%yr from 4.4% while ANZ-Indeed Job Ads ticked up 0.1%mth after -5.1% in November. AUD traded tight ranges and was net unchanged around 0.6685/90.
Currencies/Macro
The US dollar rose against most G10 FX on the day. EUR/USD ranged between 1.0934 and 1.0968. GBP/USD slipped -0.2% to 1.2730. USD/JPY rose from under 145.00 to 145.80. AUD/USD fell from 0.6685 in the London morning to 0.6660. NZD/USD fell -0.7% to 0.6200, leaving AUD/NZD up 30 pips on the day at 1.0745.
Eurozone industrial production in November fell -0.3%m/m (as expected) and fell -6.0%y/y (est. -6.8%y/y)
German (preliminary) GDP in 2023 fell -0.3% (also -0.3%q/q for Q4) but narrowly escaped a technical recession due to Q3 being revised to flat q/q (from -0.1%q/q). The 2023 preliminary budget deficit ratio to GDP scraped in at -2.0% (est. -2.3%) from -2.5% in 2022.
ECB officials Nagel (Germany) and Holzmann (Austria) both said that it was too early to consider any discussion of rate cuts. Holzmann pointed to uncomfortable wage inflation and inflationary risks from the shipping disruption through the Suez Canal and doubted there would be any cuts in 2024.
Interest rates
The US treasury market was closed for the holiday. German 2yr government bond yields rose from 2.54% to 2.60%, while the 10yr yield rose from 2.20% to 2.23%. Australian 3yr government bond yields (futures) rose from 3.63% to 3.65%, while the 10yr yield rose from 4.09% to 4.12%. Markets currently price 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 a 100% chance of a rate cut in May.
Credit spreads were a touch weaker on a quiet session for secondary credit with Main a bp wider at 61 and EUR cash credit also marked 1-2bp wider, however primary activity remained robust. Europe saw 11 IG issuers (ex-SSA) price ~EUR8bn and the mandate list suggests supply will continue this week. Last night’s supply was weighted to financials across the capital structure including Credit Ag with a EUR1.5bn 10yr Sen Pref at MS+115 (BBSW+168), SocGen with a GBP650M 8nc7yr SNP at UKT+205 and Santander with a EUR1.25bn 10.25nc5.25yr Tier 2 at MS+250 (BBSW+300). This evening will see the US market reopen and bank reporting continue with GS and MS both up to round out the big 6 banks/brokers.
Commodities
Crude markets dipped again despite continued extreme cold in the US and a further deterioration in the situation in the Red Sea. The February WTI contract is down 0.25% in light holiday trade at $72.50 while the March Brent contract is down 0.1% at $78.20. Yemeni Houthi rebels hit a US-owned commercial ship with an anti-ship ballistic missile on Monday. The world’s largest shipping association BIMCO (Baltic and International Maritime Company) recommended “companies avoid shipping operations in the area”. The US Department of Transportation also issued a warning to ships to avoid the area due to “a high degree of risk to commercial vessels transiting the Southern Red Sea”. And temperatures of -30C in North Dakota have reduced crude production by as much as 425kbpd according to the state’s pipeline authority though a rapid warmup is expected in coming days and most lost production should be restored over the next week. Bloomberg reported that the physical oil market has jumped as European refiners have gone on a “buying spree to hoard supplies in case of further disruptions”, with Guyanese medium oil being sold at almost parity to Brent versus a discount a month earlier of $4 a barrel.
In gas markets, Qatar announced it had paused gas shipments through the Red Sea after US-led airstrikes on Houthi targets in Yemen. Bloomberg noted that at least 5 LNG vessels operated by Qatar had been halted since Friday. Despite ‘yellow’ weather warnings for snow and ice for the UK and France, European natural gas prices plunged through €30 to hit the lowest since August with reserves remaining at super high levels.
Metals were mixed with copper up 0.5% at $8,384 but aluminium down 0.88% at $2,200. Chile’s state copper agency Cochilco said on Monday that it expects copper prices to average $3.85/lb this year up from a previous call of $3.75 while it expects prices to average $3.90 in 2025. Chilean output is forecast to increase 5.7% this year and 6.4% in 2025. Reuters noted the ‘LME’s growing Russian aluminium problem’ with author Andy Home noting that if the LME’s UK members or clients bought Russian aluminium after December 15, “they can only hold or sell that metal, not take physical delivery or re-warrant it in the LME system” which “complicates the stocks financing trade and is likely to reduce risk appetite for Russian metal”. The piece also noted that “the European Union is also slowly closing the door on Russian aluminium” with a new sanctions package adopted by the European Council on December 18 targeting imports of Russian aluminium wire, foil, tube and pipe.
Iron ore markets pushed lower again yesterday with prices falling below $130 on rising inventory and weak steel production into the end of last year. The February SGX contract is down 30c at $128.25 while the 62% Mysteel index fell $2 to $128.75. Rio will report its quarterly production data today and BHP on Thursday. China will report December IP data on Wednesday including steel and aluminium production.
Day ahead
At 10:30am Syd we see Australia January Westpac-Melbourne Institute Consumer Sentiment. The December reading rose 2.7%mth but only to a still weak 82.1. The January reading is seasonally adjusted to discount the positive impact of summer holidays. In the background are concerns around inflation and interest rates.
UK average weekly earnings reached a post-pandemic peak of 8.5%yr in mid-2023 and had eased to 7.2%yr in the October reading, with consensus for November 6.8%yr. We will also see the December jobless claims data.
The January ZEW survey of investor and analyst sentiment for Germany is expected to show expectations still somewhat positive at +12 but the current conditions index still very weak at -77.
The New York Fed’s Empire State manufacturing index for January should depict softer conditions (market f/c: -5pts). Influential Fed governor Waller will speak. He was very hawkish as rates were being raised but by Q4 23 had softened his tone notably.
The first formal votes of the 2024 US presidential primary process are cast today in the Iowa caucus, with results due late today AEDT. Former president Trump seems certain to win easily but the performance of Nikki Haley and Ron DeSantis could impact how long they stay in the race.
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