Markets Daily
Bond yields and the US dollar rose sharply after much stronger than expected US payrolls data Friday. AUD tumbled to 0.6515. The S&P500 rose 1.1% to another record high as key tech earnings reports were well received. Today we see Australia December trade balance, the China January Caixin services PMI and US January services ISM.
Currencies/Macro
The US dollar posted sizeable gains against all G10 currencies Friday. EUR/USD fell from 1.0885 pre-US payrolls to 1.0785. GBP/USD dropped from 1.2755 to 1.2625. USD/JPY rose from 146.65 to 148.35. AUD/USD dropped from 0.6605 to a low of 0.6502 and starts the week around 0.6515. NZD/USD fell from 0.6155 to 0.6070. AUD/NZD rose 35 pips to 1.0735.
US non-farm payrolls in January were much stronger than expected at 353k (est. 185k, prior revised to 333k from 216k). Unemployment held steady at 3.7% (est. 3.8%, prior 3.7%) as did the participation rate at 62.5%. Average hourly earnings rose 0.6%m/m and 4.5%y/y (est. +0.3%m/m and 4.1%y/y), while average weekly hours worked fell to 34.1 (est. 34.3, prior 34.3).
January consumer sentiment from the University of Michigan) was finalised at 79.0 (est 78.9, flash 78.8). Inflation expectations 1-year ahead remained at 2.9%, but the 5-10yr ahead measure rose to 2.9% (est. and flash reading 2.8%, Dec. 2.9%). Factory orders in December rose 0.2%m/m (as expected), with ex-transport rising 0.4%m/m (est. +0.2%m/m).
Fed governor Bowman (usually hawkish) said it’s too soon to consider cutting rates: “In my view, we are not yet at that point…I will remain cautious in my approach to considering future changes in the stance of policy. Reducing our policy rate too soon could result in requiring further future policy rate increases to return inflation to 2% in the longer run.”
Chicago Fed president Goolsbee said regarding a March rate cut: “I don’t like tying our hands ahead of time when we’ve got weeks and months of data to come in. We ought to base those decisions on how the actual data come through. More and more progress like what we have seen on inflation and on jobs is what we need to see to feel comfort that we’re on target.”
Interest rates
The US 2yr treasury yield rose from 4.20% to 4.36% over the day via 4.40%, while the 10yr yield rose from 3.88% to 4.02%. Markets price the Fed funds rate, currently 5.375% (mid), to have a 20% chance of a cut in March and a 90% chance of a cut by May. Australian 3yr government bond yields (futures) rose from 3.52% to 3.63%, while the 10yr yield rose from 4.00% to 4.10%. Markets price the RBA cash rate to be unchanged at tomorrow’s meeting, with a 50% chance of a cut by 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 were mixed with Main recovering some of the weakness of the previous couple of days to close 2bp tighter at 58.5, CDX was half a bp better at 54.5 (just off its yd lows) and US IG cash was also 2-3bp better but ultimately wider on the week for the first time in 2024. Primary activity halted as was expected on a NFP Friday.
Commodities
Crude markets slumped again on Friday as traders focused on the developing Israeli-Hamas peace talks, ignoring rising tensions between the US and Iran and its various proxies in the Gulf. The March WTI contract closed at $72.78, down a hefty 2.09% on Friday and 7.35% on the week while the April Brent contract closed down 1.74% Friday and 7.44% on the week at $77.33. On Friday evening, the US retaliated for the drone attack on the Tower 22 outpost near the Syrian border by the Islamic Resistance of Iraq, hitting 85 targets at 7 facilities in Iraq and Syria with US NSA Jake Sullivan describing the attacks on militants as “the beginning, not the end”. On Saturday, the US and UK launched strikes against 36 Houthi targets in Yemen. A Houthi spokesperson said the attacks “will not pass without a response and consequences".
In addition, wires reported that a sizeable amount of refining capacity is likely to be offline in Russia at the Lukoil facility in Volgograd following a fire blamed on a Ukrainian drone attack. The plant processes about 5% of Russia’s total crude oil and supplies both domestic and foreign markets. One US based oil products analysts estimates that “as much as 30% of production capacity could be taken offline”. The drone attack follows explosions at Novatek’s condensate processing plant on the Baltic coast and Rosneft’s refinery near the Black Sea, with Sergey Vakulenko, a 25yr veteran at a Russian oil firms including Rosneft noting that “More than half of Russian refining capacity is within the attack range of Ukrainian drones”. Kpler noted that oil tanker transits through the Red Sea were down 23% last month compared with November, while the drop was even more pronounced for LPG and LNG which was down 65% and 73% respectively. Despite all the above, WTI’s prompt timespread flipped into a contango of 2c suggesting the market is well supplied. Exxon and Chevron surpassed earnings forecasts as larger than expected oil output from shale fields helped offset the impact of lower crude prices. Exxon expects to close on the $60bn Pioneer deal by the middle of the year while Chevron continues with the $53bn Hess deal. Chevron is targeting 10% growth in Permian production in 2024.
Metals fell Friday with the jump in US yields, the stronger US$ and weaker demand from China ahead of the end of week LNY holiday all weighing on sentiment. Copper fell 0.8% to $8,464 while aluminium fell 0.47% to $2,236. On the week, nickel fell a hefty -3.4% and zinc -4.9% pointing towards a weaker demand backdrop. In industry news, Southern Copper lowered its annual production guidance amid lower ore quality and water restrictions in Mexico. The world’s fifth largest copper producer expects to produce 935,900 tonnes of copper this year, down from 946,700 at its previous earnings report. Rio won a legal case against Rusal after a court dismissed legal action from Rusal’s Australian subsidiary, Alumina and Bauxite, which argued Rio had breached contractual obligations by taking control of its 20% share in the Gladstone alumina refinery. Bloomberg ran a story headlining that the “Nickel industry has imploded” with many mines closing following a flood of supply from Indonesia which now accounts for half of global supply. Production in Indonesia tends to be cheaper due to heavy Chinese investment, inexpensive labour, cheap power and readily available raw materials.
Iron ore markets slumped further as the focus turned to the LNY holidays and waning demand in China. The March SGX contract is down $2.35 at $126.90 while the 62% Mysteel index is down $5.20 at $127.60. Alliance Bernstein is forecasting iron ore shipments to rise 4.7% in the first quarter of this year versus last year, adding to the weaker price action.
Day ahead
Fed Chair Powell’s interview on monetary policy and inflation with US 60 Minutes will produce numerous headlines at 11am Syd.
At 11:30am Syd, Australia’s December goods trade balance is expected to normalise with a +4% increase in imports, rebounding after a sharp fall of -7.9% in November. We see exports up 1%, for a surplus of $10.5bn (market median also $10.5bn, versus $11.4bn in November).
January ANZ job ads are continuing a well-established downtrend, with more declines expected throughout the year. The Melbourne Institute inflation gauge is meaningfully above official gauges, at 5.2%yr in December.
NZ: In January, ANZ commodity prices are expected to rebound further, particularly in dairy prices.
China: The January Caixin services PMI will capture optimistic views, somewhat at odds with the NBS.
Eurozone: February Sentix investor confidence is expected to reflect fragile sentiment as global uncertainties persist. December PPI is moving past its nadir at a steady pace.
US: In January, the ISM non–manufacturing index will be of particular interest, especially the employment and price gauges (market f/c: 47.2). The Fed’s Senior Loan Officer Opinion Survey indicates that loan demand is crimping as standards tighten. Fed chair Powell speaks to CBS News on monetary policy and inflation, among other topics (around 11am AEST today).
Global: The final estimates for the January S&P Global services PMI for Japan, Eurozone, UK, and US will be released.
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