Markets Daily
The US dollar and bond yields extended Friday’s rise, with some help from a firm US services survey. AUD slipped to 0.6480, including fresh lows since November. Today’s calendar is dominated by the RBA policy decision, quarterly statement and Governor Bullock media conference. We also see Australia Q4 retail sales.
Yesterday
The early focus was Fed Chair Powell’s interview with US 60 Minutes, recorded last Thursday. He reiterated that the US economy was in good shape and that while rates are expected to be cut, a March move seems unlikely. This encouraged Treasury yields to extend Friday’s rise, the 2-year up about 7bp to 4.44%, supporting the USD. This saw AUD/USD dip below 0.6500, with China’s ongoing equity rout not helping the mood. The Aussie low of 0.6486 was its weakest point since 17 November, though it later recovered to 0.6515, about flat net. For December, Australia’s international trade in goods surplus printed at a still sizeable $11.0bn, narrowing from $11.8bn the month prior. Imports have exhibited an uneven profile recently. A sharp jump in September, +8%, followed by a sharp fall in November, -8.4%, and then the third step, a correction in December, up 4.8% (a rise of $1.65bn). Export earnings rose 1.8% (+$0.85bn) in the month, eclipsing our expected 1% increase. Resources ex-gold rose by a lacklustre 0.4% ($0.1bn) in December, associated with a 1.2% lift in commodity prices for total resources. The volatile gold segment was the source of strength, up 20%, +$0.5bn.
Currencies/Macro
The USD posted sound gains, notably against a soft British pound. GBP/USD fell 1 cent or -0.8% to 1.2530. EUR/USD lost half a cent or -0.5% to 1.0740. USD/JPY found support from rising US yields, up 0.3% to 148.70. AUD/USD fell about -0.5% to 0.6480, with a low of 0.6469 (fresh low since 17 November). NZD/USD dipped just -0.2% to 0.6050, leaving AUD/NZD down 25 pips at 1.0710.
The US January services ISM index rose to 53.4 (est. 52.0, prior 50.5). The employment index jumped to 50.5 (est. 49.4, prior 43.8), with new orders lifting to 55.0 (est. 54.8, prior 52.8) while prices paid squeezed uncomfortably to 64.0 (est. 56.7, prior 56.7).
We also saw the final January readings of various S&P Global/Markit PMIs. The US final S&P January services PMI at 52.5 was a tad softer than the flash estimate of 52.9. Eurozone final S&P January Services PMI was unchanged from the flash of 47.9. Though there was a notable lift in Italian services PMI to 51.2 (est. 50.8, prior 49.8) it was offset by a minor miss in the Spanish update (52.1, est. 52.3, prior 51.5). The UK final S&P January services PMI was lifted to 54.3 (flash 53.8).
Chicago Fed president Goolsbee played a very straight bat and adhered to the message delivered by Powell that the strength of data lately meant that they need to remain cautious and await more data. Minneapolis Fed president Kashkari said that the FOMC has time on its side to assess data before easing. Both referred to the progress in their move towards the inflation target while suggesting reasons why there could be problems in easing too early.
Bank of England chief economist Pill said he seeks further progress/inflation declines while noting progress and confidence that the BoE can reduce rates and yet remain restrictive, but not yet.
Interest rates
US 10yr Treasury yields extended Friday’s payrolls-driven rise, 14 basis points higher on the day at 4.16%. 2yr yields rose about 11bp to 4.47%. 10yr Gilt yields closed +9bps at 4.00%, 2yr +9bps at 4.48% with 10yr Bund yields +7.5bps at 2.31% and 2yr closing +5bps at 2.60%. Markets price only about 15% chance of the Fed cutting rates in March, the first move only fully priced by June. Australia 3yr bond futures implied yields rose 8bp to 3.73%, with the first RBA easing priced by August.
Credit spreads have seen a subdued open this week with Main a bp wider to 59.5 and CDX out half a bp at 55 while US IG cash was little changed as US supply gets underway after a quiet February open last week.
Commodities
Crude markets managed to eke out small gains despite hawkish comments from Powell and a surge in the US$. The March WTI contract is up 0.8% at $72.85 while the April Brent contract is up almost 1% at $78.09. Fed Chair Powell pushed back on rate cut expectations in a Sunday interview. NSA Jake Sullivan also appeared to push back on a Middle East peace agreement in a Sunday interview noting that “the ball is in Hamas’ court at this time” and “I cannot tell you [an agreement] is round the corner”. US Secretary of State Blinken started yet another Middle East trip in Riyadh Monday hoping to deliver a truce in the Israeli-Hamas war. In fuel markets, European gasoil futures jumped sharply on news 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 weekend Ukrainian drone attack. Bloomberg calculations based on industry data showed Russian weekly oil processing dropped to the lowest in almost two months. The February ICE gasoil contract is up 2.5% while the New York heating oil contract is up 2.6%. The March gasoline contract jumped 3%. Exxon also confirmed that scheduled maintenance at the Fos-sur-Mer oil refinery in France had started and will last for several weeks.
Meanwhile US Assistant Secretary of State for Energy Resources Geoffrey Pyatt told a media briefing that “I’ve found our allies...to be quickly reassured when you explain to them what this [freeze on new LNG export facility approvals] is – which is a pause”. He added “there is no reason for concern among our allies”. Venture Global signed a new 20yr deal to deliver up to 3mt per year of LNG to the Grain LNG import facility in the UK.
In metals markets, the threat of steady Fed policy for longer pushed prices lower across the board with copper down 1.3% at $8,374 while aluminium was also down 1.3% at $2,204. Nickel fell by a larger 1.7% to $15,960. Peru announced that a total of 2.76mt of copper was produced in 2023 according to the Energy and Mines Ministry, up 12.7% due to fewer disruptions at MMG's Las Bambas mine and the startup of Anglo’s Quellaveco operations. Bloomberg noted that the China Smelters Purchase Team held an online meeting recently to discuss how to deal with a sharp drop in copper concentrate treatment charges. A floor was proposed on treatment charges at $50 though analysts noted that prices have been seen as low as $20 with Shanghai Metals confirming a price of $27.94 late January. The benchmark for spot TCs was settled for this year at $80 but the price has slumped due to the closure of First Quantum’s Cobre Panama mine plus Anglo-American cutting production guidance. Bloomberg noted that China’s smelting capacity is set to increase by 3mt in 2026, adding to overcapacity issues.
Iron ore markets remained soft as traders looked towards the LNY shutdown approaching at the end of the week. The March SGX contract is down $2.10 from the same time yesterday while the 62% Mysteel index is up 20c at $127.80.
Day ahead
Markets and economists agree that the RBA will leave policy unchanged at 4.35%. Back in November, the RBA Board opted to raise the cash rate by 25bps from 4.10% to 4.35%, in what was considered a response to a “material upward revision to the outlook for inflation”. Since then, the data flow has consistently pointed to a more promising outlook for inflation. At 4.1%yr and 4.2%yr, both headline and underlying inflation have printed meaningfully lower than the RBA’s forecast for December 2023 (4.5%yr for both). Also, domestic demand and consumer spending have been noticeably weaker than expected. The Board’s perception of these developments in the decision statement, Statement on Monetary Policy (both 2:30pm Syd) and Governor Bullock’s media conference (3:30pm) will be of key interest.
At 11:30am Syd we see inflation-adjusted Q4 retail sales, having already seen the (very volatile) monthly nominal data. Westpac expects that the poor performance of consumer spending persisted in Q4, forecasting flat volumes (median 0.1%qtr).
New Zealand markets are closed for Waitangi Day.
Japan: Negative real cash earnings should continue to weigh heavily on household spending in December (market f/c: –2.0%yr).
Eurozone: Growth in retail sales is struggling to make headway as economic pressures linger (market f/c: –1.0%).
In the US, the FOMC’s Mester, Kashkari and Collins are all due to speak.
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