Markets Daily
Bond yields jumped after stronger US jobs and consumer confidence data. FX movement was limited, AUD returning to 0.6600. Today’s critical calendar features Australia Q4 CPI, China January PMIs, US Q4 employment costs then the FOMC decision and Chair Powell press conference.
Yesterday
Australia’s December retail sales dropped -2.7%, more than unwinding the downwardly revised 1.6% gain in November. While a pullback was expected, the consensus forecast was for a milder 2% decline. Annual sales growth slowed to just 0.8%yr, an extremely weak pace given price and population growth. The size of the December month pull back means nominal retail sales growth held at 0.5% in Q4, in line with Q3 rather than accelerating. That in turn points to a likely flat or small decline in real, inflation adjusted terms. AUD dipped only 5 pips on the data, overall closing about flat on the day around 0.6610/15. Regional equities were mixed again, the ASX 200 managing a 0.3% rise, its seventh consecutive daily rise, while China lagged again, the Shanghai Composite -0.9%. AUD/NZD slipped from 1.0795 to below 1.0770 as RBNZ chief economist Paul Conway sounded hawkish.
Currencies/Macro
The US dollar was mostly little changed net versus G10 FX. EUR/USD rose 10 pips to 1.0840. GBP/USD dipped as low as 1.2640 then trimmed its loss to 20 pips, at 1.2690. USD/JPY jumped from 147.10 to 147.93 following the US data then steadied with a 15 pip gain at 147.65. AUD/USD fell as low as 0.6575 after the US data, later grinding back up to 0.6600 with help from equities lifting from intraday lows. NZD/USD is net unchanged at 0.6130. AUD/NZD is down -0.15% at 1.0765.
US JOLTS job openings data for December was strong, rising to 9.025m (est. 8.750m, prior revised to 8.925m from 8.790m). January Conference Board consumer confidence was also strong at 115.8 (est. 114.5, prior 108.0), with the present situation component at 161.3 (prior 147.2), and expectations at 83.3 (prior 81.9). S&P CoreLogic house prices in November rose 0.15% (est. +0.5%), the annual pace at 5.4%.
Eurozone GDP in Q4 skirted recession at 0.0%q/q and +0.1%y/y (est.-0.1%q/q and +0.1%y/y). German GDP contracted -0.3%q/q, and French GDP was flat, while other national outcomes beat expectations.
Interest rates
The US 2yr treasury yield jumped from 4.29% to 4.39% following the US data, steadying around 4.36% while the 10yr yield rose 6bp to 4.10% but then eased to 4.06%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be unchanged at today’s meeting, with a 35% chance of a cut in March. Australian 3yr government bond yields (futures) rose from 3.68% to 3.74%, while the 10yr yield rose from 4.14% to 4.21%. 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 40% chance of a rate cut in May.
A quiet session for credit has mirrored the broader market with spreads little changed across indices leaving Main at 58.5 and CDX 54, while US IG cash was flat to a bp wider as month end approaches and supply has slowed in primary markets.
Commodities
Crude markets saw modest gains as US President Biden told reporters that he had made up his mind how the US would respond to a drone attack that killed US servicemen in Jordan though he did not elaborate on his decision. The March WTI contract is up 1.3% at $77.79 while the March Brent contract is up 0.44% at $82.76. Saudi Aramco abandoned plans to boost oil capacity to 13mbpd by 2027. Aramco will update spending plans when it announces annual results in March, though Saudi Arabia currently is producing just over 9mbpd and has capacity for 12mbpd. Brazilian state-owned oil company Petrobras argued that oil prices could top $90 if attacks on ships in the Red Sea escalate given “we have a very fragile neck there for the oil and gas business”. And with Venezuelan production at a four high, and the Biden administration saying that sanctions relief will expire on April 18 unless the government holds free and fair elections, Rapidan Energy Advisors noted “if I were a buyer of Venezuelan crude, I’d stock up before April 18”. Analysts noted that Russia’s oil-processing rates remained relatively resilient despite the latest drone attacks at Novatek’s condensate processing plant on the Baltic coast and Rosneft’s refinery near the Black Sea. Combined, those plants account for about 5% of the nation’s daily processing average while “more than half of Russian refining capacity is within the attack range of Ukrainian drones” according to Sergey Vakulenko, a 25yr veteran at Russian oil firms including Rosneft.
Metals had a stronger bias helped by the recent gains in equity markets, the IMF’s upward revision to global growth and stimulus in China. Copper is up 1% to $8,642 while both nickel and zinc are up 0.6% at $16,545 and $2,568. Bloomberg reported that McEwen Copper Inc was looking to raise $100m for a copper mine in Argentina.
Iron ore markets slipped with the Evergrande liquidation order weighing on sentiment. The March SGX contract is down $2.95 from the same time yesterday to $132.05 while the 62% Mysteel index fell $2.70 to $135.15. Bloomberg Intelligence noted that the Evergrande liquidation “is another blow to the confidence of investors and potential home buyers in the domestic market that leads to further deterioration in the housing sector”.
Day ahead
At 11:30am Syd, Australia CPI in Q4 is estimated to have risen 0.8%q/q and 4.3%y/y (prior 1.2% and 5.4%). Housing, via robust gains in rents, dwelling prices and electricity, is contributing a touch more than half of the increase, while alcohol & tobacco is contributing about a quarter. Offsetting these increases are falling prices for health (due to rising access to the PBS), recreation (seasonal fall in airfares) and household contents (falling durable goods prices). We look for the core ‘trimmed mean’ measure to have risen 0.9%qtr, 4.4%yr (previous 5.2%yr). Released at the same time is the December monthly indicator, which we see slowing from 4.3%yr to 3.0%yr (median 3.7%) which might draw some attention.
NZ: ANZ business confidence has taken a sizeable step higher since October’s election. However, while business sentiment has been on the rise, trading activity and hiring have remained subdued. We’ll be watching the January survey to see if that divergence has continued into the new year.
At 12:30pm Syd, China January manufacturing and non-manufacturing PMIs are expected to be little changed from the previous readings which were around neutral (between the 50.0 contractionary and expansionary line).
Germany: CPI in January is estimated to have risen 0.1%m/m and 3.0%y/y.
US ADP private sector employment in January is estimated to have risen 150k after 164k in December, which was (unusually) right in line with the official private payrolls estimate (December report due Friday).
At 6am Thu Syd, the Federal Reserve is expected to keep the Fed funds rate on hold at 5.375% mid. With the real stance of policy highly restrictive, the January meeting communications will be closely scrutinised for signals of the timing and scale of rate cuts to come as well as any guidance on what will lead to a re–assessment by the FOMC. The December meeting statement’s line about “determining the extent of any additional policy firming that may be appropriate” seems too hawkish, so it may be tweaked to be more neutral. Powell will no doubt be asked whether a rate cut was discussed at the meeting. Westpac continues to expect the case for a cut to be made by March, but also believe policy easing should continue at a modest pace thereafter.
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