Markets Daily
FX markets gyrated but were little changed net, AUD back to 0.6555. The February Eurozone services PMI improved. Major US equities surged to record highs. The data calendar is quiet, featuring the Germany February IFO business survey, while Japan is closed for a holiday. Fed comment includes Governor Waller.
Yesterday
Australia’s official data calendar was quiet though we did see the flash February S&P Global/Judo Bank PMIs. This survey showed the manufacturing index weakening to 47.7 from 50.1 but the services index improving to 52.8 from 49.1. AUD traded a very tight range, 0.6542-61, despite potential inspiration from upbeat regional equities. Most eye-catching was the Nikkei 225 which finally closed above the 1989 high. The ASX 200 underperformed the region, finishing about flat.
Currencies/Macro
The US dollar was volatile in London and NY trade, eventually steadying with only small net changes against G10 FX. EUR/USD spiked to highs above 1.0880 after the European PMIs but later faded to 1.0820, net unchanged over the day. GBP/USD rose a net 20 pips to 1.2660 with a range of 1.2612 to 1.2709. USD/JPY rose 0.2% to 150.55, less than might have been expected given the rise in 2-year Treasury yields and the sharp equity rally. AUD/USD roundtripped from 0.6555 to 0.6595 and back. NZD/USD steadied up 0.3% at 0.6195. AUD/NZD thus fell 25 pips to 1.0575, printing lows since May 2023.
The flash February S&P Global Eurozone manufacturing PMI fell to 46.1 from 46.6 but the services index was better than expected, rising to 50.0 from 48.4. The report noted price pressures and high services wages.
The flash February S&P Global UK services PMI was firm at 54.3, unchanged from January. The manufacturing index was also stable at 47.1 (January 47.0). The report noted broadening optimism but also burgeoning supply chain issues and upticks in pricing pressures.
US weekly initial jobless claims were 201k (est. 216k, prior 213k), with continuing claims at 1.862m (est. 1.884m, prior 1.889m). The flash February S&P Global manufacturing PMI rose to 51.5 (est. 50.7, prior 50.7), although services eased to 51.3 (est. 52.3, prior 52.5), leaving the composite at 51.4 (est. 51.8, prior 52.0). The pace of employment growth moderated and cost pressures eased along with supply chain issues. Existing home sales in January rose 3.1%.
Fed Vice Chair Jefferson said they need to be cautious about the extent of eventual rates cuts: “We always need to keep in mind the danger of easing too much in response to improvements in the inflation picture. Excessive easing can lead to a stalling or reversal in progress in restoring price stability.”
The ECB minutes highlighted confidence in the effectiveness of their tight policy stance, and that the inflation outlook is likely to be lowered in the March Staff updates. There were concerns over the fragility of disinflation, and it was agreed that it was both premature to discuss easing and that it would be dangerous to ease too early.
BoE MPC occasional hawkish dissenter Greene noted that growth and services inflation are progressing in the right direction, but that UK still has supply constraints that could reignite inflation. She stressed that they need more time and data to ensure CPI progress before easing.
Interest rates
The US 2yr treasury yield rose from 4.66% to 4.71%, while the 10yr yield gyrated around 4.32-4.34%. Markets price the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting in March, with an 80% chance of a cut by June.
Australian 3yr government bond yields (futures) rose from 3.72% to 3.78%, while the 10yr yield rose from 4.17% to 4.20%. Markets currently price the RBA cash rate to be unchanged at the next meeting on 19 March, with a 60% chance of a cut by August.
New Zealand rates markets price the OCR, currently at 5.50%, to have a 30% of a hike at the next meeting on 28 February, and a 60% chance of one by May.
Credit has joined the move with both Main and CDX ~2bp tighter on the day at 54.5 and 50.5 respectively (clear ytd lows) and IG cash has attempted to join in (0-2bp better). Primary activity has continued with the US in the driver’s seat. Investment grade supply now exceeds USD50bn in 3 days (USD53.4bn). In Europe, 3 issuers priced EUR3.4bn.
Commodities
The surge in risk sentiment lifted crude to fresh 3-month closing highs with signs of tightness in the physical and refined products markets adding to the positive mood. The April WTI contract is up 0.76% at $78.50 while the April Brent contract is up 0.7% at $83.60. The EIA reported crude stocks rose by 3.51mn though distillate again fell by 4mb. US crude production remained unchanged at 13.3mb but US crude exports jumped to the highest since mid-January and are expected to rise further in the weeks ahead amid US refinery maintenance. The fall in distillate inventory is the fifth consecutive fall and the largest since May last year. The emergency shutdown of the BP Whiting in February has arguably added to the tightening in refined product markets though a staggered restart is expected from March 1. Energy Aspects reported that Turkish terminal operator GTS has banned Russian oil product imports either directly or via ship-to-ship transfer after media scrutiny. Diesel will be the hardest hit with the port of Dortyol importing 33kbpd in 2023 and exporting 27kbpd and 95% of that going to EU countries.
Gas prices in Europe fell to fresh lows back to 2021 though Bloomberg reported that Chinese LNG importers are turning to the spot market given the collapse in prices in Asia with Shenzhen Energy and China Gas holdings said to be in talks for additional spot cargoes.
Metals were dragged higher by nickel which is up 2.8% at $17,400, up 6% over the last two days and copper is up 0.8% at $8,608 though aluminium fell 0.8% to $2,201. Vale was ordered to halt operations at its nickel and copper operations at the Onca Puma and Sossego mines having failed to comply with environmental conditions. The Onca Puma mine has in the past accounted for as much as 10% of Vale’s nickel output. The orders follow the forced closure of First Quantum’s Cobre Panama copper mine in January.
Iron ore bounced back over $120 with Port Dampier clearing ships ahead of ex-Tropical Cyclone Lincoln’s expected landfall at Carnarvon Saturday. The March SGX contract is up $1.20 from the same time yesterday at $120.95 while the 62% Mysteel index is up 65c at $120.70. Lincoln is expected to redevelop into a tropical cyclone today and impact the far west of the Pilbara before tracking south towards Perth. All anchorages at Port Dampier were reported as cleared by Thursday evening. Port Dampier is used by Rio.
Day ahead
Japanese markets are closed for a holiday (Emperor’s Birthday).
Germany’s February IFO business climate survey is expected to be broadly stable, the current assessment seen at 86.8, the expectations index at 84.0.
The February UK GfK consumer sentiment survey is seen little changed at–18. It has not been in positive territory since 2016.
The Fed’s Cook, Kashkari and Waller are due to speak, some of the comment during the Sydney morning.
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