Markets Daily
FX and equity markets were mixed during a session with little major news flow. AUD returned to 0.6575. USD/JPY rebounded from a BoJ-driven dip as the 10yr Treasury yield rose. Today’s calendar features flash January PMIs, notably in Europe, plus the Bank of Canada policy decision.
Yesterday
In the December NAB survey, Australia’s business mood remains pessimistic, notwithstanding the index rebounding from a deeply negative -8 in November (post the RBA rate hike) to -1. That is a well below average reading, by some 6pts. The business conditions index fell 2pts to +7. This included a further and material weakening of trading conditions, down 3pts to +9. That has trading conditions at a below average level (+12 on the monthly series). It is not since September 2020 that trading conditions have been weaker (outside a one-off in January 2022). AUD/USD paid little heed, soon switching focus to a bounce in the Chinese yuan and HK/China equities on a Bloomberg sources story claiming China’s government would take steps to support the stock market. The Aussie rallied from around 0.6570 early to 0.6605, its 0.5% gain firmest in the G10. The Bank of Japan held steady: -0.1% policy rate, 0% target on the 10-year JGB yield but with a 1% ‘reference’ cap. The quarterly forecasts were close to expectations, core inflation in fiscal 2025 only nudged up to 1.8%. Some analysts highlighted more positive language on the economy. The yen weakened initially then recovered.
Currencies/Macro
The US dollar saw modest change against G10 FX, within -0.3% to +0.1%. Underperformer EUR fell 35 pips or -0.3% to 1.0845. GBP/USD trimmed its losses to -0.2% at 1.2680. USD/JPY dipped as low as 146.99 during BoJ Governor Ueda’s press conference but later rallied to 148.40, up 30 pips on the day. AUD/USD traded a range of 0.6552-0.6612 over the day, net flat at 0.6575. NZD/USD fell from a high of 0.6117 to 0.6062 – a two-month low – but steadied flat at 0.6085. AUD/NZD was little changed at 1.0800.
In the US, the January Richmond Fed manufacturing survey index fell to -15 (est. -8, prior -11), with business conditions falling to -3 (prior 0), and the remaining components mixed. The Philadelphia Fed manufacturing survey fell to -3.7 (est. 6.3, prior +2.1).
Eurozone consumer confidence fell to -16.1 in January (prior -15.1, est. -14.3). The European Commission said that the index is below its long-term average.
Interest rates
The US 2yr treasury yield rose from 4.37% to 4.41% then returned to 4.37%. The 10yr yield rose from 4.09% to 4.13%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 1 February, with a 40% chance of a cut in March. Australian 3yr government bond yields (futures) rose from 3.76% to 3.81%, while the 10yr yield rose from 4.20% to 4.29%. Markets are pricing the RBA cash rate to be unchanged at the next meeting on 6 February, with a 70% chance of a cut in August. New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged on 28 February, with a 70% chance of a rate cut in May.
Credit spreads drifted in line with softer bond/equity markets which saw Main a bp wider at 60.5 and CDX out half a bp to 55.5 with US IG cash also flat to a bp wider as primary volumes slowed from the rapid pace seen in January thus far.
Commodities
Crude markets remain torn between rising Middle East tension and record supply/ waning demand. While the 8th round of US pre-emptive strikes on Houthi targets across Yemen did see another test of $75 and $80 for WTI and Brent, we are closing out the NY session down 0.3% for the March WTI contract at $74.53 and the March Brent contract is down 0.33% at $79.73. The North Dakota pipeline authority estimated that the impact from the recent extreme cold had been cut back to between 250k and 300kbpd as of Monday, down from 350k to 400kbpd as of Friday suggesting that production is set to come back fairly quickly though this week’s EIA inventory data will likely capture the peak impact. And Libya’s NOC lifted force majeure at the Sharara field on Sunday with production and exports ramping back up after the three-week closure due to protests. Bloomberg reported that Russia became China’s top crude oil supplier in 2023, selling a record 107mt of crude versus just under 86mt from Saudi Arabia.
Metals saw a solid jump with aluminium leading the charge higher on a Politico report that the EU is “considering” sanctions on Russian aluminium ahead of the second anniversary of the invasion of Ukraine. Aluminium is up 3.38% at $2,232 and zinc up 2.8% at $2,526. Nickel also rose 1.6% to $16,260 and copper is up 0.9% at $8,420. Any sanctions would require unanimous support from all 27 members. The LME recently reported that Russian origin aluminium accounted for 90.41% of LME warranted metal as of December, emphasising how important any decision will be for the market. The LME did note recently it was “actively monitoring for market orderliness” after a flood of Russian aluminium into the exchange in the wake of UK sanctions in December.
Iron ore markets pushed higher above $130 on hopes that demand will return post the LNY holiday after Premier Li Qiang called for more effective measures to stabilise the stock market and improve the economic recovery. The February SGX contract is up 95c from the same time yesterday at $131.95 though the 62% index quoted by Asian Metal is last at $129.50. A tropical low off the Queensland coast is set to hit landfall late Thursday with Hay Point and Abbot Point both being closed as a result.
Day ahead
Australia: The Westpac-MI Leading Index has begun to exhibit signs of an underlying stabilisation into year-end.
We will see flash January Markit/S&P Global PMIs in a number of jurisdictions today including Australia and Japan but by far the most market-sensitive surveys are in Europe. These should continue to highlight a fragile manufacturing sector across both the Eurozone and UK (market f/c: 44.7 & 46.7 respectively). However, prospects for services are expected to continue diverging between these regions (market f/c: 49.0 & 53.2 respectively).
Underlying softness in demand conditions should remain a recurring theme in the US January S&P Global PMIs, across both manufacturing and services (market f/c: 47.6 & 51.4 respectively). The ISMs remain the more market-sensitive PMIs in the US.
The New Hampshire presidential primary takes place, with results due during the Sydney trading session. Former president Trump is expected to defeat former South Carolina governor Haley by a wide margin, though it could be closer than last week’s Iowa caucus given that registered independents can vote in either Republican or Democratic primaries.
Following an upside surprise on underlying inflation, the Bank of Canada is still widely expected to leave policy unchanged, providing room to strike a more dovish tone in its statement (market f/c: 5.00%).
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