Markets Daily
A modest upside surprise on US February CPI boosted US yields and the US dollar but equities still posted strong gains, the S&P 500 closing at a record high. AUD trimmed its decline to 0.6605. Today’s light calendar includes NZ February prices data and UK January GDP.
Yesterday
The NAB Australia business conditions index rose by 3pts to +10 in February, reversing the January drop. That has the index in line with the readings for November and December, which are sharply lower than a year earlier. Business confidence is understandably at low levels in the current environment. The confidence index declined in February, down by 1pt to 0, which is a well below average reading. AUD/USD had another quiet local session, trading a mere 0.6609-0.6621 range. The ASX 200 closed up a muted 0.1%, paying little attention to either the ongoing slide in Japanese equities as BoJ tightening fears linger (Topix -0.7%) or the squeeze in Hong Kong (+2.5%).
Currencies/Macro
The US dollar rose modestly against about half of the G10 and was about flat against the rest. EUR/USD was little changed and in the middle of its relatively tight range for the day at 1.0925. GBP/USD trimmed its decline to just 20 pips at 1.2790. USD/JPY spiked to 148.12 on the CPI data, later consolidating up 0.5% or 70 pips at 147.65. AUD/USD was volatile around the CPI data but eventually only 10 pips lower on the day at 0.6605. NZD/USD remained under pressure at 0.6150 (-0.3%). AUD/NZD rose 20 pips to 1.0740.
US February headline CPI rose +0.4%m/m (est. +0.4%m/m) to 3.2%y/y (est. 3.1%y/y, prior 3.1%) and ex-food and energy rose +0.4%m/m (est. +0.3%m/m) to 3.8%y/y (est. 3.7%y/y, prior 3.9%). The main upside drivers were shelter and gasoline (some 60% of the headline CPI rise) with motor insurance also cited. US February NFIB Small Business Optimism index fell to 89.4, est. 90.5, close to cycle lows of 89.0, with weakness noted in new orders and investment.
The UK Jan/Feb labour report carried an official warning over its quality due to poor respondence. January unemployment rose to 3.9% (prior 3.8%) and employment slipped -21k (est. +5k). January average hourly earnings ex-bonus, seen as more reliable, declined to 6.1%y/y (est. unch. 6.2%y/y). Germany’s final February CPI was unchanged from its preliminary levels with headline at 2.5%y/y.
ECB hawk Holzmann cautioned against premature easing and cutting prior to the US Fed. He pushed against an April move, stating data dependency ahead of a possible June easing. BoE Governor Bailey noted concerns over persisting second round inflation risks and continued tight labour markets, despite progress towards their inflation goal.
Interest rates
The US 2yr treasury yield rose from a dip to 4.51% to 4.59%, while the 10yr yield rose from 4.08% to 4.15%. Markets price the Fed funds rate, currently 5.375% (mid), to be unchanged on 20 March, with an 80% chance of a cut by June.
Australian 3yr government bond yields (futures) rose from 3.58% to 3.64%, while the 10yr yield rose from 3.95% to 4.02%. 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 August.
New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged at the next meeting on 10 April, with over 90% chance of a cut by August.
Credit indices followed the equity risk-on move with both Main and CDX ~1bp tighter to 52 and 48.5 respectively and US IG cash also 1-2bp better as primary activity slowed, but remained in play despite the CPI backdrop. Europe saw 4 issuers (ex-SSA) price ~EUR2.8bn while the US saw four issuers price USD5.1bn.
Commodities
Crude markets remained capped by supply concerns as the OPEC monthly confirmed that Iraq is pumping roughly 200k above its quota while Bloomberg tanker tracking data confirms Russia is ramping up crude exports in March. The April WTI contract is down 0.24% to $77.74 while the May Brent contract is down 0.17% to $82.07. OPEC left its forecast for the growth rate in world oil demand at 2.25% and a still robust 1.8mbpd y/y increase in 2025, with half of that growth coming from Asia. The EIA STEO, also released Tuesday, upped its forecast for US crude production to 13.19mbpd this year, up from 13.1mbpd while the forecast for next year was increased to 13.65mb, up 1.2% from the previous forecast. API reported that gasoline inventory fell another 3.8mb while distillate fell 1.2mb. Ukraine mounted one of its most wide-ranging attacks inside Russia in months, hitting energy sites and another major oil refinery. Bloomberg shipping data had Russian crude exports surging to the highest for the year so far. Wires reported that at least 12 people died in two separate accidents at Chinese coal mines on Monday with an explosion at a mine in the Anhui province and a coal bunker collapse in the Shanxi province.
Metals were mixed with copper unchanged at $8,648, nickel up another 0.78% to a fresh high back to October while zinc fell 0.66% to $2550. Bloomberg reported that the China Nonferrous Metals Industry Association met last week and called on members to “make every effort” to lift overseas aluminium sales and offset the slowdown in consumption at home. Alumina jumped as much as 7.7% after the Australian company agreed a Scheme Implementation Deed under which Alcoa will acquire it. US lawmakers are set to present a new bill to Congress pushing for deep-sea mining. The Responsible Use of Seafloor Resources Act of 2024 pushes for “financial, diplomatic, or other forms of support for seafloor nodule collection, processing and refining”.
Iron ore markets showed some signs of basing with better news from troubled Chinese construction companies helping sentiment. The April SGX contract is down 25c from the same time yesterday at $107.35 while the 62% Mysteel index is up $2.20 at $110.75. Still, iron ore port inventory has risen in 11 of the last 12 weeks and is up 30% from the 3yr low seen in September last year. Iron ore prices have dropped by circa 25% from the highs in early January. While Country Garden was reported as having missed an onshore coupon payment on Tuesday, China Vanke was said to be in debt for equity swap talks with banks to allow it to stave off its first ever bond default. Moody’s cut Vanke to junk status.
Day ahead
New Zealand: The selected price indices for February will provide an update on roughly 45% of quarterly CPI.
Eurozone January industrial production is expected to show a retraction after the unprecedented bounce witnessed year-end 2023 (market f/c: -1.8%mth vs +2.6% in December).
Following on from the contraction reported at the end of 2023, UK Jan monthly GDP should remain subdued as elevated interest rates continue to weigh on the economy (market f/c: +0.2%mth, -0.1% 3mth/3mth).
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