Markets Daily
US inflation data was stronger than expected, causing bond yields and the US dollar to rise sharply. Equities tumbled and AUD sank to 3-month lows under 0.6450. Today’s calendar features UK January CPI and more Fedspeak.
Yesterday
The Westpac Melbourne Institute Australia Consumer Sentiment Index rose 6.2% to 86 in February, from 81 in January. This is the biggest monthly gain since April last year, when the RBA paused its rapid series of interest rate rises. But sensitivity to the interest rate outlook was clear in the breakdown within last week – responses following the RBA decision were a startling 15% lower than pre-meeting. The NAB business survey indicated that Australia’s economic slowdown rolls on, as conditions moderate to below average levels. The business conditions index was down 2pts to +6. The business confidence index ticked up 1pt to +1. The return of several Asian markets didn’t inspire much AUD movement ahead of US CPI, the Aussie edging down just 15 pips to 0.6515. The ASX 200 closed -0.2%.
Currencies/Macro
The US dollar made broad gains against all G10 currencies after the CPI data. EUR/USD sank from 1.0795 to 1.0710, printing three-month lows. Sterling outperformed, GBP/USD -0.3% on the day to 1.2590. USD/JPY jumped from 149.30 pre-CPI to 150.80, its first trade above 150 since 17 November. AUD/USD had drifted up to 0.6530 pre-CPI, quickly sliding to 0.6460, later extending to 0.6443, a low since 14 November. NZD fell from 0.6120 to 0.6055. AUD/NZD rose as high as 1.0693 after soft NZ inflation expectations data but eventually returned to 1.0650.
US CPI in January rose 0.3% m/m and 3.1% y/y (est. +0.2% m/m and 2.9 %y/y, prior 3.4% y/y). Core (ex-food and energy) rose +0.4% m/m and 3.9% y/y (est. +0.3% m/m and 3.7% y/y, prior 3.9% y/y). Notably, the shelter component rose 0.6%m/m, with owner equivalent rent up 0.6% m/m and rent up 0.4% m/m. Vehicle insurance rose 1.4% m/m.
The January NFIB small business sentiment survey index fell to 89.9 (est. 92.3, prior 91.9), most components falling.
UK labour data was more resilient than expected. Unemployment in December fell to 3.8% (est. 4.0%, prior 3.9%), employment rose 72k (est. 50k), and average weekly earnings rose 5.8%y/y (est. 5.6%, prior revised to 6.7% from 6.5%). January payrolls rose +48k (est. -18k, prior revised to +31.k from -24k).
Interest rates
The US 2yr treasury yield jumped from 4.45% to 4.66% following the US CPI data, while the 10yr yield jumped from 4.15% to 4.31%. Markets price the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting in March, with a 100% chance of a cut by June.
Australian 3yr government bond yields (futures) jumped from 3.74% to 3.87%, while the 10yr yield jumped from 4.17% to 4.29%. Markets currently price the RBA cash rate to be unchanged at the next meeting on 19 March, with a 70% chance of a cut by August.
New Zealand rates markets price the OCR, currently at 5.50%, to have a 20% of a hike at the next meeting on 28 February, and a 40% chance of one by May.
The weakness in risk markets extended to credit with Main a bp wider to 58, CDX now out 2bp at 55.5 and the CPI release brought a quick halt to primary expectations with three potential issuers said to step down once the data hit the screens.
Commodities
Optimistic demand forecasts from OPEC helped crude markets higher with the March WTI contract up 1.5% to $78.07 while the April Brent contract is up 1.1% at $82.94. The gains were despite stronger than expected US CPI, the rise is US yields and the US$. OPEC is forecasting global oil demand to rise 2.3mbpd this year after rising 2.4mbpd last year. Most of the extra demand is set to come from non-OECD, accounting for 2 of the 2.3mbpd increase with China expected to grow by 0.6mbpd, India by 0.2mbpd, other Asia by 0.3mbpd and the Middle East by 0.4mbpd. The OPEC forecasts are larger than IEA forecasts with director Fatih Birol telling Bloomberg he expects an increase in world consumption of between 1.2 to 1.3mbpd in 2024, a “significantly weaker” pace of growth than last year as global growth slows in China and elsewhere. Bloomberg noted that US sanctions mean a “chunk of the vast fleet of tankers that Russia used to deliver its crude oil is grinding to a halt under the weight of sanctions”. About half of the 50 tankers that the US treasury began sanctioning on October 10 have failed to load cargoes since they were listed according to ship-by-ship tracking by Bloomberg. Bloomberg also noted that gasoline margins in northwest Europe rose to the highest since September last year this last week with the premium for the Eurobob oxy gasoline contract to Brent trading at the strongest margin for this time of year since at least 2010.
Metals were hit by the stronger than expected US CPI and the rise in the US$ with copper down 0.3% to $8,209 and zinc down 0.5% to $2,308. Nickel rose 1.6% to $16,300 on news of further consolidation in the industry. Peru produced 255,144mt of in December, up 1.3%yy, meaning output rose 12.7% in 2023 versus 2022.
Iron ore markets saw subdued Chinese holiday trade with the March SGX contract down 40c from the same time yesterday at $128.15. RBC is expecting iron ore to be supported in the first half of 2024, helped by a pickup in blast furnace utilisation post the LNY holidays, and seasonally weak shipment volumes and low stockpile levels.
Day ahead
Eurozone Q4 GDP's second estimate will provide more colour on the growth mix. The advance reading was an unimpressive 0.0%qtr, +0.1%yr. December's industrial production is likely to confirm the broad-based weakness in production (market f/c: -0.2%mth, -4.0%yr).
UK's January CPI will be crucial to understanding how services inflation is evolving. Consensus is for overall inflation to hold around 4%yr while the core rate is also stubborn, seen at 5.2%yr versus 5.1%yr in December and services inflation is seen up 6.8%yr.
Fed officials Goolsbee and Barr will speak.
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