Markets Daily
The US dollar fell against all major currencies, undermined by soft US January retail sales data and a dip in bond yields. AUD rose to 0.6520. The S&P 500 closed at a record high. Today’s calendar includes UK January retail sales and US February consumer sentiment.
Yesterday
Australia January seasonally adjusted employment was about flat, +0.5k, a poor follow-up to December’s –63k. The unemployment rate ticked up to 4.1% from 3.9%, a high since January 2022. The participation rate remained at 66.8%. Rates markets reacted sharply, pricing for the December RBA meeting -10bp to 3.90% (current effective rate 4.32%). AUD/USD fell only a little over 20 pips from around 0.6500, later edging back to 0.6485/90. Helping the Aussie’s mood was regional equity sentiment. The ASX 200 closed up 0.8%, Japan’s Nikkei 225 +1.2%, while Taiwan reopened after lengthy LNY holidays with a catch-up 3.0% bounce.
Currencies/Macro
The US dollar fell against all G10 currencies on the day, the sharpest move coming after soft retail sales data. EUR/USD rose 0.4% to 1.0770. Sterling underperformed, GBP/USD dipping on soft UK GDP data before following the weak dollar trend to a 0.25% gain over the day at 1.2600. USD/JPY fell 60 pips or -0.4% to 150.00. AUD/USD rose 30 pips or 0.5% over the day to 0.6520, including a 20 pip bounce on US retail sales. NZD/USD rose 0.3% to 0.6105. AUD/NZD rose to 1.0680 (net +15 pips) as RBNZ Governor Orr offered nothing new for Kiwi bulls.
UK Q4 GDP contracted -0.3%qtr, -0.2%yr. Consensus was -0.1%, sparking some sterling selling. Given the Q3 -0.1%qtr contraction, the UK is in a ‘technical’ recession.
US retail sales in January fell -0.6% (est. +0.2%) with the core control group down -0.4% (est. +0.2%, previous +0.8%). Industrial production in January fell -0.1% (est. +0.2%), with the prior month revised down from +0.1% to 0.0%.
In contrast to the soft retail sales and industrial production data, lower-tier data was mostly upbeat: import prices in January rose 0.8% (est. 0.0%), the February Philadelphia Fed business survey index rebounded to +5.2 (est. -8.1, prior -10.6), and February NAHB homebuilder confidence rose to 48 (est. 46, prior 44). The NY Fed’s Empire State manufacturing survey improved to -2 in February from the hard-to-believe -44 reading in January.
Weekly initial jobless claims were benign at 212k (est. 220k, prior 220k), while continuing claims rose to 1895k (est. 1880k, prior 1865k).
The Atlanta Fed's GDPNow model prediction for Q1 was lowered to 2.86% (annual) from 3.42%. Real personal consumption expenditure, real private domestic investment, and real net exports contributions fell.
RBNZ Governor Orr spoke on inflation and the monetary policy remit, delivering little fresh material for markets.
Interest rates
The US 2yr treasury yield roundtripped from 4.58% to 4.50% (on retail sales data) and back, while the 10yr yield dipped to 4.18% on the data before recovering to 4.24%. 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) fell from 3.87% to 3.81%, while the 10yr yield fell from 4.29% to 4.22%. Markets currently price the RBA cash rate to be unchanged at the next meeting on 19 March, with an 80% chance of a cut by August.
New Zealand rates markets price the OCR, currently at 5.50%, to have a 25% of a hike at the next meeting on 28 February, and a 55% chance of one by May.
Credit spreads outperformed with Main half a bp tighter at 57, but CDX was in 1.5bp to 52.5 and making new series lows while IG cash was also 1-2bp better despite the persistent supply. Europe saw 5 issuers price EUR7.25bn. In the US, 6 issuers priced USD6.8bn on an all-corporate slate.
Commodities
Crude rose helped by the post retail sales risk on move despite the IEA warning on demand. The March WTI contract is up 2.1% at $78.28 while the April Brent contract is up 1.65% at $82.95. The February IEA Oil Market Report noted that “global oil demand is losing momentum, with annual gains easing from 2.0mbpd in Q323 to 1.8mbpd in Q423, noting a “sharp drop in China” demand and that the “pace of demand is set to decelerate further to 1.2mbpd in 2024, compared with 2.3mbpd last year”. On the supply side, the IEA noted “January posted a sharp decline of 1.4mbpd mm after an Arctic blast shut in production in North America and as OPEC+ deepened output cuts”. However, “record output from the US, Brazil, Guyana and Canada will help boost non-OPEC+ supply”. India confirmed it will begin talks to become a full member of the IEA, having been an associate member since 2017. Full members are required to hold oil stockpiles equivalent to 90 days of imports to be deployed in case of emergency. The US DOE bought another 2.95mb of oil for the SPR for June delivery. Since 2023, the DOE has purchased 23.08mb at an average price of $76.34 and “will continue to evaluate options to refill the SPR”.
Tensions in the Middle East and OPEC+ efforts to curb supply helped offset the more bearish IEA report. Hezbollah fired a barrage of rockets into northern Israel in retaliation for the recent killing of a commander in the elite Radwan Force, adding to tensions in the region. Iraq and Kazakhstan pledged compliance with OPEC+ oil targets after failing to fully cut production in January, with Kazakhstan’s energy minister stating they would “compensate for the overproduced volumes over the next four months”. Russia almost reached its target for voluntary cuts in January, for the first time since making the pledge last year.
In gas markets, the US House voted to pass legislation to overturn the Biden administration’s freeze on new LNG export plants. Meanwhile, FERC approved the Oneok gas pipeline that would export to a Mexican liquefaction terminal.
Metals rose, helped by risk on moves in equities and news that BHP would take a $2.5bn impairment charge on its Australian nickel assets, adding to the string of recent write-downs and closures. Copper is up 1.5% at $8,322 and zinc rose 2.3% to $2,365. BHP will report earnings on Tuesday next week, Rio will report on Wednesday and FMG + Vale on Thursday.
Iron ore markets rose in light LNY trade with the March SGX contract up 55c at $129.70. BHP train drivers called off their strike set for today after reaching an in-principle agreement.
Day ahead
Mainland China markets remain closed for the sixth day of LNY holidays, reopening Monday. All other Asian markets have reopened.
UK January retail sales should reflect tight financial conditions impacting consumer spending. Volumes ex-auto fuel are expected to rise 1.7%mth after December’s -3.3%mth, leaving the annual rate weak, -1.5%yr.
US: January housing starts are expected to dwindle as the cost of financing dissuades builders from starting new projects. Building permits face the same fate. The February University of Michigan consumer sentiment survey is well worth watching after a steep rebound in December and January. Consensus is for a modest further rise to 80.0 from 79.0. The inflation expectations outcome will also be noted.
Regional Fed presidents Bostic and Daly will speak.
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