Markets Daily
US and European bond yields fell amid dovish ECB comments and lower US borrowing projections. US stocks closed at another record high and AUD/USD pushed up to 0.6610. Today’s calendar features Australia December retail sales, Eurozone Q4 GDP and US January consumer confidence.
Yesterday
The data calendar was largely empty, leaving markets to focus on the weekend drone attack on a US base in Jordan which the US blamed on Iran-backed groups. Crude oil prices reopened only modestly higher and regional equities were mostly upbeat, including Japan’s Topix +1%, the ASX 200 +0.3% and India opening sharply higher. Chinese property developer Evergrande was ordered into liquidation after restructuring talks failed. China stocks underperformed but Hong Kong managed to rally.
Currencies/Macro
The US dollar was mixed against major currencies on the day. EUR/USD fell from 1.0845 to 1.0796 amid dovish ECB commentary. GBP/USD was choppy at times but ultimately little changed at 1.2710. USD/JPY followed the fall in US yields from 148.20 to 147.50. AUD/USD rose 0.5% to 0.6610 as US stocks closed at a record high and the US dollar softened.
RBNZ chief economist Conway’s speech this morning was taken as hawkish. While conceding that GDP was softer than expected, Conway noted technical reasons for the surprise (eg. how government services and school attendance are tracked). He then noted that private spending had been stronger than expected. He also discussed the strength in migration. While acknowledging that this added to the economy’s supply capacity, he went on to note that the demand side impacts of strong population growth were apparent (eg. in local authority rates and rent). On inflation, while he noted the recent easing, he pointed out that non-tradables remain strong and there is still a way to go before inflation is back at the target midpoint (the reference to the 2% target midpoint, rather than inflation being lower than the 3% upper bound is notable). NZD/USD bounced from 0.6115 to 0.6140 and AUD/NZD fell from 1.0795 to 1.0770.
In the US, the January Dallas Fed manufacturing survey fell to -27.4 (est. -11.0, prior -9.3), driven by a fall in the production component to a low since mid-2020.
ECB officials hinted at rate cuts. Villeroy (France) said: “We will cut our rates this year. Regarding the exact date, not one is excluded, and everything will be open at our next meetings.” Vice-president Guindos (Spain) said: “There has been good news regarding the evolution of inflation, and that — sooner or later — will end up being reflected in the monetary policy. We are going to be dependent on the data, we don’t have any kind of calendar, it will depend on the evolution of inflation and I am optimistic regarding the evolution of inflation.” Centeno (Portugal) said: “We don’t need to wait for May wage data to get an idea about the inflation trajectory”.
Interest rates
The US 2yr treasury yield fell from 4.35% to 4.31%, while the 10yr yield fell from 4.14% to 4.08%, yields slipping in late NY trade after the Treasury reduced its estimate for Q1 borrowing from $816bn to $760bn. 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) fell from 3.74% to 3.71%, while the 10yr yield fell from 4.24% to 4.18%. Markets currently price the RBA cash rate to be unchanged at the next meeting on 6 February, with a 75% 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 50% chance of a rate cut in May.
Credit was mixed with a marginally softer session for most of the day which saw Main a bp wider at 58.5 and US IG cash also giving up 1-2bp, however the late move in rates markets has seen CDX move from being a touch wider mid-session to now be half a bp better at 54. Primary expectations were uncertain this week into a heavy data and reporting week, however EUR volumes were solid last night and the US has got away to a flier.
Commodities
Crude markets showed signs of profit taking as traders focused on supply and overbought conditions. The March WTI contract is down 1.4% at $76.91 while the March Brent contract is down 1.3% at $82.46. Kpler noted that “all in all, the new OPEC+ production quotas are having a minimal impact on actual crude that’s in the market”. The focus on supply was despite senator Graham writing on X “Hit Iran. Hit them hard” and Senator John Cornyn writing “Target Tehran”. However, USNC John Kirby told NBCs Today Show “we are not looking for war with Iran” but “well keep looking at options … we want these attacks to stop”. Bloomberg noted that hedge funds slashed short positions on US WTI by 33,649 contracts last week, taking net longs to the highest in 11 weeks. Bloomberg noted that the cost of shipping 35,000 tons of fuel from South Korea to Singapore has jumped 50% over the last week to more than $49,000 a day, the highest since 2022 while the cost of larger tankers connecting the middle east to Japan has hit the highest since 2020. Clarksons warned that “theoretically, LR2 spot rates might soar above $220,000/day” which would raise shipping costs from $9bbl to $19/bbl.
In gas markets, an outage at Freeport Energy in the US will see one of three production units out of action for about a month after extreme cold damaged equipment.
Metals were mixed with copper up a modest 0.4% at $8,578 though aluminium gave back the previous day’s gains, down 1% at $2,251 and nickel fell 1.9% to $16,470. Bloomberg reported that top copper smelters in China were calling for sector-wide production curbs, with major smelters including Jiangxi Copper and Tongling Nonferrous Metals meeting on Friday to discuss measures including moving maintenance forward and reducing production runs in response to tighter mine supply following the halt in operations at First Quantum’s Cobre Panama copper mine. Copper treatment charges have plunged to near record lows at around $22.50/t. Bloomberg noted at current treatment charge levels, virtually all smelters are losing money. The Chinese owned metals trading house IXM was reported as stepping back from aluminium to focus on its core business.
Iron ore markets were mixed as the focus remains on recent attempts by the authorities in China to stabilise sentiment and support the economy. The March SGX contract is down $1.75 from the same time yesterday at $135.00 though the 62% Mysteel index is up $1.80 at $137.85. Vale posted a bigger than expected increase in iron ore production for Q4 last year, with 89.4mt of iron ore produced versus Bloomberg consensus of 83mt.
Day ahead
At 11:30am Syd, Australia December retail sales are expected to reflect a post-Black Friday letdown, with seasonal patterns changing. November posted a 2.0%mth gain. Westpac forecasts a -0.5%mth correction in December, with the median forecast -1.7%.
Japan’s December jobless rate is anticipated to show a tight labor market as demand remains strong.
Eurozone Q4 GDP is expected to remain soft, -0.1%qtr, +0.1%yr after Q3’s -0.1%qtr, 0.0%yr. This is likely to prompt headlines about “technical recession” but stagnation seems more accurate.
US: The November S&P/CS home price index is due, with price gains suggesting limited supply is buoying price momentum (f/c 5.8%yr). The Conference Board’s January consumer confidence index is expected to show a shift in policy expectations leading to a confidence upswing into the new year (forecast 114.5 vs 110.7 in December). We have already seen the University of Michigan consumer sentiment survey, which was notably more upbeat.
US December JOLTS job openings, when taken together with other key series, should point to a balanced labour market.
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