Markets Daily
The US dollar rose amid a more risk averse mood and higher bond yields, with Fedspeak cooling rate cut hopes. AUD slid to 0.6585. Today’s calendar includes China Q4 GDP, UK December CPI, US December retail sales and comments from ECB president Lagarde as the Davos forum continues.
Yesterday
The Australia January Westpac Consumer Sentiment index declined -1.3% to 81. Last year’s extreme pessimism has continued into 2024. This is the weakest January read outside of the early-1990s recession. The continued weakness is despite a notable easing in rate rise fears in the latest survey. The US dollar rose against all major currencies, backed by a sharp rise in Treasury yields on the reopening after the US long weekend. Still, the Aussie underperformed, sliding from 0.6660 to as low as 0.6610, its weakest point since 13 December.
Currencies/Macro
The US dollar rose notably against all G10 currencies. EUR/USD fell from 1.0950 to 1.0863 – a one-month low. GBP/USD fell almost one cent, -0.7%, to 1.2635. USD/JPY rose from 145.75 to 147.31 – a six-week high. AUD/USD extended its local session decline to 0.6576 – a low since 13 December. NZD/USD fell from 0.6200 to 0.6127 – a one-month low. AUD/NZD edged down slightly to 1.0730.
The NY Fed manufacturing survey (Empire State) fell sharply to -43.7 in January (est. -5.0, prior -14.5) – a four-year low. Outsized declines in the previous two January surveys suggests a possible developing seasonal pattern. Weakness was notable in new orders and shipments.
Fed governor Waller offered detailed remarks on the Fed’s intentions to ease policy this year, pushing back on aggressive market pricing: “As long as inflation doesn’t rebound and stay elevated, I believe the FOMC will be able to lower the target range for the federal funds rate this year…When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully…With economic activity and labour markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past.”
Canada’s CPI in December was in line with consensus, at -0.3%m/m and +3.4%y/y (prior 3.1%y/y). However, the key core measures rose, with trimmed mean at 3.7%y/y (est. 3.4%y/y, prior 3.5%y/y) and median at 3.6% (est. 3.3 %y/y, prior revised up to 3.6%y/y from 3.4%y/y).
Germany’s January ZEW investor survey showed expectations rising to +15.2 (est. 11.7, prior 12.8), but current conditions remaining pessimistic at -77.3 (est. -77.0, prior -77.1). The ECB’s consumer expectations survey showed a decline in inflation expectations, the 1yr to 3.2% (prior 4.0%) and the 3yr declined to 2.2% (prior 2.4%).
UK employment data showed unemployment remaining unchanged at 4.2% in November. with a fall in payrolls of -24k (est. -13k) in December. Average weekly earnings growth in November fell to 6.5%y/y (est. 6.8%, prior 7.2%).
Interest rates
The US 2yr treasury yield rose from 4.14% to 4.22% with help from comments from Waller, while the 10yr yield rose from 3.94% to 4.05%. Markets currently price the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 1 February, with a 60% chance of a cut in March.
Australian 3yr government bond yields (futures) rose from 3.70% to 3.76%, while the 10yr yield rose from 4.17% to 4.23%. 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 90% chance of a rate cut in May.
Credit spreads were mixed with Main little changed at 61, CDX moving in line with broader sentiment to be 1.5bp wider at 56, while US cash credit was unchanged as the market reopened and primary supply picked up, led by the banks.
Commodities
Despite the US launching a third round of strikes against Houthi militant sites in Yemen in less than a week, a second commercial ship being hit by Houthi rebels in the Red Sea in the space of 24hrs plus both Shell and Mitsui OSK suspending shipments through the region, crude fell again with the February WTI contract down 0.6% to $72.23 while the March Brent contract is down 0.05% at $78.11. Chevron CEO Mike Wirth told Bloomberg that the company has not made “fundamental” changes to shipping routes though Citi noted that while no output has been lost, the diversions round the Cape of Good Hope are “indirectly tightening the market by forcing [up] oil stocks on water”. However, Bloomberg noted that Russian crude flows in the 4 weeks to Jan 14 were up 94kbpd while fuel exports extended gains to a 9-month high, driven by flows of almost all finished products. Meanwhile, extreme cold weather in the US has curtailed circa 650bpd from North Dakota. Houston-area refiners are paying a wider premium to bring WTI to the Gulf Coast due to the weather impacting the Bakken oilfield. Some refiners may be pulling WTI barrels from Cushing to replace lost light sweet Bakken crude.
Natural gas prices plunged the most in 10 months in the US with forecasts for warmer weather in the eastern half of the US. The February Henry Hub contract fell 14% Tuesday, the most since March with US stockpiles being more than 11% above the 5yr average. Meanwhile the February TTF contract in Europe remained below €30/MWh which is about $25 cheaper than Brent on a barrel of oil equivalent basis.
Metals probed lower still with risk off sentiment from rates markets weighing on prices. Copper is down 0.4% at $8,345 while zinc fell 0.2% to $2,553. However, aluminium managed a modest 0.4% bounce to leave it down 7.1% ytd at $2,214. Indonesia said it would inspect all of the country’s smelters after a deadly blast at a nickel facility owned by the Tsingshan Holding Group. The blast in December killed 21 people. Alcoa will report earnings after the close on Wednesday, a week after announcing it will close one of its three Western Australian aluminium refineries. Bloomberg noted that China’s record copper output is being challenged by the plunge in processing fees which have dived to their lowest level in more than two years as overseas mine disruptions reduce the amount of ore available for processing.
Iron ore showed some signs of stabilising after the 12% high to low correction over the last two weeks with chatter about an additional round of Chinese stimulus helping prices. The February SGX contract is up 45c at $128.70 while the 62% Mysteel index is up 50c at $129.25. Bloomberg reported that China is considering 1tn yuan of new debt issuance under the ‘special sovereign bond plan’ with the proceeds of the sale used to fund food, energy, supply chain and urbanisation projects. Rio reported a 2% drop in iron ore output in Q4 last year though China’s economy started to show signs of stabilising in Q4 with increased spending on infrastructure and manufacturing helping to offset prolonged weakness in the property sector according to the quarterly production report. China will report December Q4 GDP and IP data today including steel and aluminium production today and BHP will report its quarterly production data Thursday.
Day ahead
At 1pm Syd we see China’s Q4 GDP and December activity data. GDP is expected to meet the growth target of ‘around 5%’ set at the start of 2023, with a median forecast of 5.3%yr vs 4.9% in Q3. December retail sales should reflect continued weakness in consumer confidence, forecast up 8.0%yr vs 10.1%yr in November, annual growth still being flattered by the low base of late 2022 Covid partial lockdowns. Industrial production is expected to hold at 6.6%yr. The outlook for fixed asset investment outlook depends on investment, housing, and other factors (market f/c: 2.9%yr ytd).
ECB president Lagarde speaks in Davos at 6:05pm Syd. The final estimate for Europe’s December CPI is due, with the preliminary reading 2.9%yr overall, 3.4%yr core.
UK’s December CPI is likely to show sticky services inflation, with goods driving disinflation. Consensus for overall CPI is 3.8%yr, with the core rate 4.9%yr, services 6.1%yr.
US December retail sales are anticipated to show further gains after solid Black Friday sales (market f/c: 0.4%mth). Industrial production in December is likely to be consistent with a subdued picture for manufacturing (market f/c: 0%mth). Import prices index should show declines (market f/c: -0.5%mth). November business inventories should reflect an uncertain outlook limiting inventory accrual (market f/c: -0.1%mth). The January NAHB housing market index is likely to indicate homebuilder sentiment is near historic lows.
The Federal Reserve's Beige Book provides an update on economic conditions across the country. Fed officials Barr, Bowman, and Williams are listed to speak.
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