Markets Daily
The US dollar was mostly softer as US bond yields fell again despite the FOMC’s message. AUD slipped to lows since November but then recovered to flat at 0.6575. US equities rebounded with earnings season in full swing. Today we see Australia December housing finance then little to distract markets before the US January employment report.
Yesterday
The CoreLogic home value index, covering Australia’s eight major capital cities, rose 0.4% in January, broadly in line with the 0.3% gains in December and November. Price growth continues to show a clear step-down, having averaged 0.8%mth through July-October and 1.2%mth through March-June. Prices are up 10% over the year to January but have been rising at a more subdued 4% annual pace over the last three months. Australia December dwelling approvals dropped -9.5%mth thanks to the volatile apartment block sector; private house approvals ticked down only -0.5%. Australia’s terms of trade improved in Q4, export prices +5.6%, import prices +1.1%. Regional equities were mixed despite the very negative lead from Wall Street. The ASX 200 was weakest of all, closing -1.2% after its record high. AUD/USD was quiet for a few hours then slipped about -0.4% to 0.6540.
Currencies/Macro
The US dollar softened against most major currencies on the day, the Aussie underperforming. EUR/USD reached a low of 1.0780 in the London morning but then rose steadily to 1.0870. USD/JPY fell from 147.00 to 145.90 then trimmed losses to -0.3% or 50 pips at 146.40. AUD/USD fell as far as 0.6508 (low since November) then recovered to flat on the day at 0.6575. NZD/USD extended its rebound to 0.6140, net +0.4%, trimming AUD/NZD 30 pips to 1.0705.
US unit labour costs in Q4 were soft at +0.5%q/q (est. +1.2%q/q), seeing productivity remain firm at 3.2%q/q annualised (est. 2.5%). Weekly initial jobless claims came in at 224k (est. 212k), with continuing claims at 1.898m (est. 1.839m), indicated a slightly cooler labour market. The January ISM manufacturing survey was solid, the headline index rising to 49.1 (est. 47.2, prior 47.4). New orders and prices paid were firm, but the employment component was soft.
The Bank of England MPC held their benchmark Bank Rate unchanged at 5.25%, as was universally expected. Two of the three hawkish dissenters at their last policy meeting (Haskell and Mann) again voted to lift rates 25bps while serially dovish Dhingra preferred a rate cut of 25bps (previously voting for no change). The tightening bias was dropped, while highlighting that a restrictive stance would be retained for a prolonged period. The MPC noted sticky services CPI inflation and wage costs were concerns. Later in a Bloomberg TV interview, Governor Bailey said that UK economic activity was picking up and that there were inflation risks at home (wages) and abroad (Red Sea). This helped GBP/USD rally from 1.2680 to 1.2745.
Eurozone CPI in January was slightly above consensus. Headline CPI fell -0.4%m/m (as expected), 2.8%y/y (est. 2.7%y/y, prior 2.9%y/y). Core CPI fell to 3.3%y/y (est. 3.2%y/y, prior 3.4%y/y).
Interest rates
The US 2yr treasury yield was volatile, overall falling from 4.25% to 4.20% via 4.14%, while the 10yr yield fell from 3.95% to 3.87%. 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) fell from 3.55% to 3.50%, while the 10yr yield fell from 4.03% to 3.98%. Markets are pricing the RBA cash rate to be unchanged at the next meeting on 6 February, with a 55% chance of a cut in May. 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.
Credit spreads reflect market sentiment with Main half a bp wider at 61 (now 3bp off its low from Friday), however CDX is a bp tighter at 55.5 as a more upbeat session for equity and perhaps more sanguine view of regional bank risk in the credit space saw a positive open for the new month.
Commodities
Crude markets slumped again as conflicting stories appeared in various press on whether an agreement had been reached to pause the Israeli-Hamas war that is almost into its 5th month. The March WTI contract is down another 2.1% at $74.21 after falling 2.6% the previous session while the April Brent contract is down 1.9% at $79.03 after falling 2.4% the previous day. Al Jazeera initially reported that Israel had agreed to a ceasefire, but then deleted the post, noting that Hamas had welcomed the proposal “in a positive atmosphere”. Bloomberg reported that negotiations were advancing with Egypt, Qatar and the US pushing the two sides towards agreement. Meanwhile Reuters reported that the US has approved plans for multi day strikes against multiple targets in Iraq and Syria “including Iranian personnel and facilities” according to CBS News. In supply news, OPEC+ will meet in March to decide whether to extend supply curbs totalling 900kbpd beyond the end of the quarter. The JMMC met on Thursday and reaffirmed its readiness to take additional measures at any time”. According to a Bloomberg survey, OPEC+ production fell by 490kbpd in January to 26.57mbpd with Iraq and the UAE producing above their quotas.
In gas markets, the US House of Representatives will vote on overturning the Biden administrations freeze on LNG export approvals. The vote will take place the week after next. The “Unlocking Our Domestic LNG Potential Act” includes proposals that would strip the Energy Department from a role in granting export licences, delegating complete authority to FERC. US natural gas prices slumped again with the March Henry Hub contract sliding to $2.05/MMBtu on lower-than-expected storage withdrawals while prices in the March Asian JKM swap paused below $10 as Asian buyers were expected to curb purchases. Shell said it saw “robust demand” for LNG and “not a lot of new supply coming into the market” noting that “just in 2024 and 2025, the volume of natural gas power generation capacity that China is building is equivalent to the entire installed capacity in the UK today”.
Metals gave back some recent gains with copper down 1% at $8,524 while aluminium fell 1.4% at $2,249 and zinc slumped 2.2% to $2,470. Concerns about bank losses on the US commercial property market hit sentiment. Bloomberg however reported that hedge fund managers are betting that copper stocks are significantly undervalued with Terra Capital arguing for “at least 50% upside” in prices by the end of 2024, noting that copper “should have a sustained bull market” with “growing demand and constrained supply”. Human Rights Watch reported that major automakers including Tesla, GM, and Toyota are failing to ensure that they are not using aluminium processed by forced labour including Uyghurs and other ethnic minorities in China.
Iron ore markets were mixed with weak China factory data weighing on sentiment. The March SGX contract is down another $1.10 at $129.25 while the 62% Mysteel index is up $1 at $132.80. Rising steel inventory at major dealers is also weighing on sentiment with measures for mid-January sitting at more than 1 standard deviation above the 5-year seasonal average levels.
Day ahead
At 11:30am Syd, Australia December housing finance is expected to show a solid upturn, led by the established market (Westpac f/c: 2.5%, market f/c: 1.0%). Owner occupier finance in December should indicate both prices and turnover are moving higher (Westpac f/c: 2.0%). Investor finance in December should reflect an uptick in investor activity (Westpac f/c: 3.5%). Q4 PPI is expected to show falling energy prices as the highlight in December.
US non–farm payrolls are likely to see weakness in the coming months. For January, Westpac forecasts 150k, median forecast 185k, versus 216k in December. The unemployment rate for January is expected to show a still-tight labour market (Westpac f/c: 3.8%, market f/c: 3.8%). January average hourly earnings should show wage pressures are slowly abating (Westpac f/c: 0.3%, market f/c: 0.3%).
Also on the US calendar, December factory orders should indicate a soft finish to the year (Westpac f/c: 0.3%, market f/c: 0.2%). The final estimate for January’s University of Michigan consumer sentiment will be released, the preliminary reading having shown a sharp gain.
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