Markets Daily
Bond yields fell steeply on soft US labour data and concern over US regional bank earnings, before the FOMC statement which was less dovish than markets had expected. This upset US equities and weighed on AUD to 0.6565. Today’s calendar features Australia December dwelling approvals, Eurozone January CPI, the Bank of England decision and US January manufacturing ISM.
Yesterday
Australia’s Q4 CPI rose 0.6%qtr, significantly softer than the markets and Westpac’s expectation of 0.8%qtr. This saw a further moderation in the annual pace of inflation, to 4.1%yr from 5.4%yr in Q3 and 6.0%yr in Q4 and well down from the recent peak of 7.8%yr in Q4 2022. The six-month annualised pace (seasonally adjusted) is now just 3.5%yr, the slowest pace since Q3 2021. The December monthly CPI ‘indicator’ eased to 3.4%yr from 4.3%yr in November. Interest rate markets responded sharply, pricing for the December 2024 RBA meeting sliding -17bp over the day to 3.72%, a hefty -60bp from the traded cash rate. The Aussie was around 0.6595 pre-data, falling as far as 0.6559 before trying to stabilise. The AUD’s -0.6% fall was not particularly large in the context of a robust US dollar e.g. NZD -0.4%, EUR -0.3%. The ASX 200 was only slightly positive pre-CPI but closed up 1.1% to a record high.
Currencies/Macro
The US dollar rose against most G10 currencies as risk appetite soured on US regional bank worries and Fed Chair Powell’s comments. EUR/USD traded a wide 1.0795 to 1.0887 range, ultimately -0.3% at 1.0810. GBP/USD was also whippy, eventually steadying near session lows at 1.2680, net -0.1%. USD/JPY followed US Treasury yields lower, the yen strongest on the day (+0.5%) at 146.85. AUD/USD rose to 0.6622 in the NY morning but then slipped as low as 0.6551 as US equities tumbled on the Fed comments. NZD/USD followed the volatile USD trend, steadying -0.3% at 0.6115. AUD/NZD fell 25 pips to 1.0735.
The FOMC left the Fed funds rate unchanged at 5.375% (mid) as was widely expected. The statement indicated it may be preparing to lower rates, but not as soon as markets have priced: “The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance…In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks…it does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.” There was a sharp reaction in Fed Chair Powell’s press conference to his statement that he doesn’t think it is likely that the FOMC will be ready to cut rates at the March meeting.
US labour data was softer than expected. ADP (private sector) payrolls in January rose 107k (est. 150k, prior revised to 159k from 164k). The Employment Cost Index in Q4 rose 0.9%q/q (est. 1.0%q/q, prior 1.1%q/q) and 4.2%y/y (prior 4.3%y/y). The January MNI Chicago PMI fell to 46.0 (est. 48.0, prior revised to 47.2 from 46.9).
Canada’s GDP in November rose +0.2%m/m (est. +0.1%m/m), with an early projection for December of +0.3%m/m.
German CPI in January rose +0.2%m/m (est. +0.1%m/m) and 2.9%y/y (est. 3.0%y/y, prior 3.7%y/y). Unemployment fell -2k for an unchanged rate of 5.8% (est. +11k and 5.9%, prior revised from 5.9% to 5.8%).
In January, the Australia CoreLogic home value index showed a moderate monthly gain of 0.4%, continuing the trend of moderation since mid-2023, though still up 10%yr.
Interest rates
The US 2yr treasury yield fell from 4.32% to 4.18% following the US data and concern over US regional banks, later retracing to 4.24% pre-FOMC and closing around 4.20%. The 10yr yield fell from 4.03% to 3.92%. Markets price the Fed funds rate, currently 5.375% (mid), to have a 35% chance of a cut in March.
Australian 3yr government bond yields (futures), which earlier fell about 10bp following softer AU CPI data, extended from 3.59% to 3.48%, while the 10yr yield fell from 4.07% to 3.98%. 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 May, up from 45% the previous day. New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged on 28 February, with a 30% chance of a rate cut in May.
Credit spreads are weaker with Main and CDX both 2bp wider to 60.5 and 56 respectively and US IG cash credit 2-3bp wider in one of the first signs of weakness this year. All of the moves were seen prior to the Fed and while we are at month end, regional back headlines would not have helped. Primary activity ground to a halt in the US as expected, leaving January IG supply at USD189bn.
Commodities
Crude finished January on a soft note though registering strong gains on the month driven by developments in the Red Sea. The March WTI contract is down 2.57% on the day at $75.82 but up 5.8% on the month while the April Brent contract is down 2.4% on the day at $80.52 but up 6% on the month. EIA inventory data showed a 1.23mb rise in crude inventory, the first in 3 weeks and a 1.1mb rise in gasoline inventory though distillate dropped by 2.5mb. The rise in crude inventory was driven by the return of most of the US production hit by recent extreme cold weather, rising 700kbpd to 13mb while exports fell by 540kbpd. Refinery utilisation fell another 2.8%, down for the 4th straight week suggesting that companies are bringing forward maintenance due to weaker demand and weather disruption. Traders are clearly waiting for the US response to the fatal weekend attack on Tower 22 outpost near the Syrian border allegedly by Kataib Hezbollah. However, Reuters reported that the group had been “pushed to announce a suspension of attacks through pressure from Tehran and ruling parties who felt the action had crossed a red line”. Further the report noted that “Tehran and Iraqi groups want to avoid regional conflict tied to the Gaza war”. In 2020, the US killed Quds Force commander Soleimani and Kataib Hezbollah leader Abu Mahdi al-Muhandis in a drone strike at Baghdad international airport days after the killing of a US contractor. The IEA Executive Director Birol said that global oil demand will increase by about 2mbpd in 2024 with the supply increase from the Americas more than enough to meet it. Brazil’s share of global oil supply will jump from the current 3% to 4% (about 4.5mbpd) by 2030 and maintain this level into the 2040s.
Metals were mixed with copper largely unchanged at $8,615 while aluminium rose 0.5% to $2,285 and nickel fell 1.7% to $16,225. Bloomberg reported that “metals sanctions are dividing the biggest traders and banks” with JP Morgan reported as having “stepped in to buy Russian aluminium eve as Citigroup is abandoning the trade”. As of December 15, “UK persons” can’t request delivery of Russian metal from the LME though Russian metal can be traded. Bloomberg also noted that orders for LME aluminium jumped on requests for metal in Taiwan according to data from the bourse.
Iron ore markets slumped further as weak China factory data hit sentiment. The March SGX contract is down another 70c from the same time yesterday to $130.35 while the 62% Mysteel index is down $3.35 to $131.80. Goldman noted that “most investors and Chinese commodity consumers are bearish on China in aggregate and commodity demand, as they don’t see solutions to excess capacity in the property and manufacturing sectors, and to dismal consumer confidence”. Both Angang Steel and Maanshan Iron and Steel reported preliminary losses this week while Posco Holding said it was going through its “most challenging period” as steel prices continued sliding.
Day ahead
At 11:30am Syd, Australia December dwelling approvals are anticipated to increase but remain at the bottom of the cycle (Westpac f/c: 2.2%, market f/c: 0.5%). The Q4 import price index is expected to show little change, with the AUD TWI remaining flat and gasoline prices modestly lower (Westpac f/c: 0.6%, market f/c: 0.6%). The Q4 export price index is forecasted to decrease reflecting an increase in the quarter but a decrease over the year, mirroring commodity prices (Westpac f/c: 2.2%, market f/c: 3.5%).
At 12:45pm Syd, the January Caixin China manufacturing PMI is expected to be more volatile than NBS but broadly signalling flat conditions (f/c unchanged at 50.8).
In January, the Euro Area CPI is anticipated to cool and food is expected to be a prominent driver comprising one-third of overall inflation (market f/c: 2.7%yr, core rate 3.2%yr). The December unemployment rate in Europe should reflect a historically tight labour market despite a broader slowdown (market f/c: 6.4%).
The Bank of England is very much expected to keep its benchmark bank rate at 5.25%. But the MPC vote will be keenly watched, with 3 of the 9 members in December voting for another +25bp hike. The meeting will also produce updated forecasts which could produce a change in policy guidance given the downside surprise on December CPI (4%).
US: In January, the ISM manufacturing index should indicate soft manufacturing conditions across the regions (market f/c: 47.2). Initial jobless claims are expected to remain at a low level, for now (market f/c: 212k).
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