Markets Daily
Bond yields fell on relief US PCE inflation data was not stronger than expected, but the US dollar is slightly higher. Fedspeak was moderately dovish.
Currencies/Macro
The US dollar index is up 0.2%, following a volatile session. EUR fell from 1.0856 to 1.0796. USD/JPY extended the day’s decline, led by hawkish comments from the BoJ's Takata, from 150.10 to 149.21, the yen outperforming all G10 on the day.
AUD was volatile between 0.6487 and 0.6531 but is little changed at 0.6498. On the data front Q4 capex spending rose 0.8% in the December quarter, to be 7.9% higher over calendar year 2023, while January retail sales lifted by 1.1%, undershooting market expectations of a 1.5% gain. NZD ranged between 0.6077 and 0.6112. AUD/NZD rose from 1.0675 to 1.0695.
US core PCE inflation in January matched expectations at 0.4%m/m and 2.8%y/y (prior 2.9%y/y). Personal income was strong at +1.0%m/m (est. +0.4%m/m), while spending was sluggish at +0.2%m/m as expected). Weekly initial jobless claims were higher than expected at 215k (est. 210k), with continuing claims at 1.905m (est. 1.875m, prior 1.860m). The Chicago PMI fell to 44.0 (est. 48.0, prior 46.0) with softer employment and production and a slight rise in prices paid.
FOMC member Bostic repeated his view that it will probably be appropriate to begin cutting this summer based on his outlook for inflation: “The last few inflation readings — one came out today — have shown that this is not going to be an inexorable march that gets you immediately to 2%, but that rather there are going to be some bumps along the way…The slope of the line is still going down…I’m of the view that it will probably be appropriate if things go the way that I expect to see us start to reduce rates in the summertime.” Daly said: “There is no imminent risk to the economy faltering. We are ready to make moves and adjust as the data demands us to do. It would be appropriate as inflation comes down to bring the nominal rate of interest down to make sure we’re not holding on even tighter. We want to avoid holding on all the way to 2%, putting policy very tight and then cause an unnecessary downturn.” Goolsbee said the question now is how long rates should remain restrictive.
European national CPI releases for February showed Germany’s CPI slipping to 2.5% (est. 2.6%, prior 2.9%) with the EU harmonised version (HICP) as expected at 2.7% (prior 3.1%). France’s CPI fell to 2.9% (est. 2.8%, prior 3.1%), with HICP at 4.1% (as expected. prior 3.4%).
Interest rates
The US 2yr treasury yield fell from 4.65% to 4.60% via 4.70%, while the 10yr yield fell from 4.28% to 4.22% via 4.32%. Markets price the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 21 March, with a 70% chance of a cut by June.
Australian 3yr government bond yields (futures) roundtripped from 3.70% to 3.75% and back, while the 10yr yield roundtripped from 4.14% to 4.20% and back. Markets currently price the RBA cash rate to be unchanged at the next meeting on 19 March, with a 90% chance of a cut by September.
New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged at the next meeting on 10 April, with a 100% chance of cut by October.
Credit indices moved in line with the broader market which saw Main take back early losses to close half a bp tighter at 55.5 while CDX was a bp better to 52.5, however US IG cash was flat to a bp wider. Primary activity continued into month end with Europe seeing 7 issuers price EUR6.25bn with corporate issuers dominating (BPCE EUR1.25bn 9nc8yr the only bank in play). Engie was the largest issuer with its EUR2bn 3 tranche offering (7/12/20yr) and on the local front, MELAIR added to an active airports sector, pricing EUR650M 10.25yr at MS+128 (BBSW+180). By way of comparison, MELAIR priced its EUR 10yr in May last year at MS+158, and Brisbane Airport were taking IOIs yesterday for a domestic 10yr deal with IPT at +185. The US saw another 4 IG issuers price USD2.9bn which sees February issuance come in just shy of USD200bn (USD198bn). Issuers included US property group, Prologis with a USD1bn, 2 part deal (5/10yr), and BMO with a USD1bn 60nc5yr AT1 to yield 7.7%.
Commodities
Crude markets marked time into month end with expectations that Saudi would keep prices stable for Asian clients in April for a third month adding to the bid tone. The April WTI contract is last up just 3c at $78.57 while the May Brent contract is up 5c at $82.20. There was little fresh news in the market, though signs of physical tightness remain with the Brent prompt time spread out to a 4 ½ month high at $1.54 while the WTI equivalent is at 85c having been in contango early in February. Bloomberg oil strategist Julian Lee reported that US sanctions are “quietly turning up the heat on Russia’s oil exports – to the point where they may soon be at risk of curtailment”. Since US Treasury started targeting individual vessels back in October, a total of 40 vessels have been sanctioned, and almost all of them have failed to load cargo since.
Metals markets were better bid, with risk on moves in global markets lifting sentiment. Copper is last up 0.4% at $8,478 while nickel gained 1.4% to $17,840 and aluminium jumped 1.6% to $2,225. The rise in nickel is despite an Indonesian venture backed by China’s CNGR Advanced Material applying to list nickel cathodes for delivery to the LME. CNGR is the first of likely several to apply despite calls from the likes of BHP for the exchange to address “shortcomings” in its regulations given the “increasingly well-known range of ESG and responsible sourcing challenges” in Indonesia. The Indonesian Government official who has overseen the dramatic rise in nickel production argued that nickel prices are unlikely to rise much above $18,000 despite prices having have hit 3-month highs following a spate of mine and processing closures and write-downs.
Iron ore markets finished the month with a better tone, the March SGX contract up $2.60 from the same time yesterday at $117.85 while the 62% Mysteel index rose 20c to $117.30. There was little fresh news though a Politburo meeting on Thursday vowed to meet economic targets for the year, avoid risks and maintain social stability. The meeting was hosted by President Xi and the report from the standing committee meeting will be voted on at the National People’s Congress which starts March 5.
Day ahead
Aus: The February CoreLogic home value index is expected to show a slightly firmer result, but the pace is still down vs. 2023.
NZ: The February ANZ consumer confidence is expected to be gradually improving but still low. January building permits are expected to show the downtrend remaining in place, with the annual total the lowest since 2019 (Westpac f/c: 3.0%). RBNZ Governor Orr will speak to the Canterbury Chamber of Commerce on this week’s MPS.
Japan: The January jobless rate is expected to reflect a tight labour market (market f/c: 2.4%).
China: The February NBS manufacturing PMI is expected to highlight high-tech industry as a bright spot, but employment measures point to enduring uncertainty over household incomes (market f/c: 49.0). The services print will point to incoming weakness (market f/c: 50.7).
Eurozone: The February CPI will provide the ECB comfort as disinflation persists, services will be of interest (market f/c: 2.5%). The January unemployment rate is expected to show a tight market creating the sufficient conditions for strong wage growth (market f/c: 6.4%).
US: The February ISM manufacturing is expected to show demand remains the key headwind for manufacturers (market f/c: 49.5). The final estimate for the February University of Michigan sentiment is expected. The FOMC's Williams, Waller, Bostic, Daly, and Kugler will speak.
Global: The final estimate for the February S&P Global manufacturing PMI is expected for Japan, Eurozone, UK, and US.
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