Markets Daily
The US dollar and bond yields rose following stronger US economic data, though the pound outperformed on an upside surprise on UK CPI. AUD trimmed its decline to 0.6550. Today’s calendar focus is Australia December labour force survey, with US data second-tier.
Yesterday
China’s headline GDP growth of 5.2%yr was very close to expectations, with official commentary helping guidance. December industrial production growth of 6.8%yr is the strongest since mid-2021, up from 6.6%yr in November. But December retail sales fell short of expectations at 7.4%yr, down from 10.1%yr in November. AUD showed little response to the data but overall remained under pressure, rolling over from a high of 0.6595 to 0.6560. Ongoing equity weakness also seemed to hurt the Aussie, many regional bourses down 1% or more.
Currencies/Macro
The US dollar rebound continued against most major currencies except sterling and the euro. EUR/USD fell from 1.0875 to 1.0845 – a one-month low – but then returned to 1.0875/80. GBP/USD slipped to 1.2610 ahead of UK CPI, which then sparked a rally to 1.2685. USD/JPY followed US yields higher, from 147.20 to 148.52 – a six-week high. AUD/USD extended its local session decline to 0.6525, a one pip under December’s low, but then trimmed losses to 0.6550 as US equities bounced off their intraday lows. NZD/USD fell a net -0.5% to 0.6110. AUD/NZD is net little changed at 1.0725.
US retail sales in December rose 0.6%m/m (est. +0.4%m/m, prior +0.3%m/m), with ex-auto and gas +0.6%m/m (est. +0.3%m/m. prior +0.6%m/m)) and the control group measure +0.8%m/m (est. +0.2%m/m, prior revised to +0.5%m/m from +0.4%m/m). Industrial production rose 0.1%m/m (est. -0.1%m/m, prior revised to flat from +0.2%m/m). Manufacturing rose 0.1%m/m (est. flat, prior revised down to +0.2%m/m from +0.3%m/m). NAHB homebuilder confidence rose to 44 in January (est. 39, prior 37).
The Fed’s Beige Book of regional economic conditions said: “Economic activity was about flat or up slightly since the previous report, down from the modest average pace of growth…Interest rates and inflation continued to weigh on activity, and many contacts expressed greater uncertainty or increased pessimism concerning the outlook.”
UK inflation data for December was stronger than expected. CPI rose 0.4%m/m and 4.0%y/y (est. +0.2% and 3.8%y/y, prior 3.9%y/y), with core at 5.1%y/y (est. 4.9%y/y, prior 5.1%y/y).
Eurozone CPI for December was finalised unchanged at 2.9%y/y, with core at 3.4%y/y.
ECB officials continued to push back on market pricing of rate cuts. In Davos, President Lagarde said that any easing was unlikely before mid-year and that policy needs to remain restrictive near term to ensure that inflation is contained and follows their desired path. Knot said that easier monetary conditions via lower market pricing was counterproductive and self-defeating.
Interest rates
The US 2yr treasury yield rose from 4.22% to 4.36%, while the 10yr yield rose from 4.06% to 4.11%. Markets currently price the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 1 February, with a 50% chance of a cut in March. Australian 3yr government bond yields (futures) rose from 3.75% to 3.87%, while the 10yr yield rose from 4.20% to 4.31%. Markets currently price the RBA cash rate to be unchanged at the next meeting on 6 February, with a 30% chance of a cut by 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 reflected the risk off move with Main 1.5bp wider to 62.5 and CDX out a bp to 57, however US cash spreads have remained resilient. Primary activity continued with Europe seeing 7 issuers (ex-SSA) price EUR7bn with Telefonica’s EUR1.75bn dual tranche offering (8/12yr) the largest on the day, while the US saw 10 issuers price USD11.4bn (following Tuesday’s USD31bn) led by PNC Financial which added to yesterday’s bank supply with its post earnings USD1.75bn dual tranche offering (4nc3, 11nc10yr).
Commodities
Crude markets finally started to show some signs of stabilising helped by the Middle East situation, the hit to production from extreme cold in the US and an upbeat forecast for 2025 demand from OPEC. The Feb WTI contract is up 0.44% at $72.72 though the March Brent contract is down 0.28% at $78.07. Iranian media reported it had destroyed two bases belonging to a Pakistan based Sunni militant group in the remote western province of Balochistan. This followed similar operations in Iraq and Syria. OPEC forecast that global demand for crude will rise by a “robust” 1.8mbpd driven by China and a recovering global economy. Non-OPEC supply is set to rise by 1.3mbpd in 2024, a slight downward revision from the previous month’s assessment, and the same in 2025, meaning markets are set to remain in a deficit through to the end of 2025. OPEC has total world oil demand at a record 104.38mbpd in 2024, up 2.25mbpd from 2023, rising to a fresh record of 106.21mbpd in 2025. OPEC Secretary General Haitham Al Gais pushed back on peak oil forecasts noting that “peak oil demand is not showing up in any reliable and robust short- and medium-term forecasts”. The IEA will publish its Oil Market Report later today. Meanwhile freezing temperatures are estimated to have taken as much as 700kbpd offline in the US with production in the Bakken field in North Dakota and refineries in Texas impacted. There was no letup in the weakness in natural gas markets with February TTF contract down another 6.6% last night to be down more than 14% so far this year.
Metals fell on the back of weaker than expected Chinese data and higher for longer rate expectations in the US. The drop in China home prices which fell the most in almost 9 years in December added to the sense of gloom. Copper is down 1% at $8,283 while aluminium fell 1.7% to $2,176. Aluminium is now down 9.2% from the highs seen 3 weeks ago with the focus very much on rising Russian LME inventory. Aluminium production in China rose to a record 4.16mt last year with China accounting for more than 50% of global production. Output in December was 3.59mt, up 4.9%yy. That’s despite smelters cutting production in the Yunnan province due to winter hydropower shortfalls.
Iron ore markets fell sharply on weaker than expected Chinese data with the weakest steel production in almost 6 years in December weighing on sentiment. The February SGX contract fell $3.30 from the same time yesterday to $125.40 while the 62% Mysteel fell another $2.55 to $126.70. Chinese steel production came in at 67.4mt in December, -13.5%yy to be down 4.1% in Q4 versus the same period in 2022. Increasing pessimism towards the property sector, with the Hang Seng Mainland Property Index down 18.8% so far this year and almost 10% so far this week, added to the iron ore negativity. BHP will report its quarterly production data ahead of the Sydney open today.
Day ahead
At 11:30am Syd we see Australia’s December labour force survey. We expect jobs growth to be consistent with resilient labour demand (Westpac f/c: +35k, market f/c: +15k). Given our more upbeat call on employment growth, we see the unemployment rate rounding down to 3.8% versus a median forecast for it to remain at 3.9%.
Japan November core machinery orders are likely to continue bouncing around at a weak level (market f/c: -0.8%mth).
US December housing starts and permits should suggest additional capacity is needed (market f/c: +1425k annualised and +1477k respectively). The January Philly Fed index should confirm reveal that conditions remain soft across the regions (market f/c: -6.5). Initial jobless claims are expected to remain at a low level (market f/c: +205k). Atlanta Fed president Bostic is due to speak.
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