Markets Daily
Mixed US data left the US dollar flat to a little firmer on Friday, with bond yields higher and equities softer ahead of what could be a hawkish Fed outcome this week. AUD edged down to 0.6560. Today’s calendar highlight is China’s January-February industrial production and retail sales data.
Friday
Australian federal treasurer Jim Chalmers warned that the budget bottom line was less favourable than in the December fiscal update, with iron ore prices sharply lower and the job market softening. He said that there would be some cost-of-living relief in the May budget which is still on track for a second consecutive annual surplus. AUD/USD traded a tight 0.6610 to 0.6632 range. One-month realised volatility continues to slide, down to about 6% from 10-11% in December 2023. Regional equities were mixed again, China under renewed pressure but Japan snapping its losing streak. The ASX 200 closed -0.2%.
Currencies/Macro
The US dollar was either unchanged or firmer against G10 FX on Friday. Outperformer EUR held around 1.0890. GBP/USD is a touch lower at 1.2735. USD/JPY followed Treasury yields higher, +0.5% to 149.10. AUD/USD slipped 20 pips to 0.6560. Underperformer NZD fell -0.7% to 0.6090. AUD/NZD rose 40 pips to 1.0775.
US import prices in February were as expected at +0.3%m/m, but ex-petrol rose 0.2%m/m (est. -0.2%m/m, prior +0.6%m/m). Export prices rose 0.8%m/m (est. +0.4%m/m, prior +0.9%m/m). Industrial production rose +0.1%m/m (est. flat, prior revised down to -0.5%mm from -0.1%m/m). March consumer sentiment (University of Michigan) fell to 76.5 (est. 77.1, prior 76.9). Inflation expectations were unchanged – the 1yr at 3.0%, and the 5yr at 2.9%. The New York Fed’s Empire State manufacturing survey fell to -20.9 in March (est. -7.0, prior -2.4).
Several ECB members, including Chief Economist Lane, reiterated the need for more data, and that June was the most likely time for them to have sufficient data to decide on a possible rate cut.
Interest rates
The US 2yr treasury yield rose from 4.68% to 4.73%, while the 10yr yield rose from 4.28% to 4.31%. Markets price the Fed funds rate, currently 5.375% (mid), to be unchanged at this week’s meeting, with a 55% chance of a cut by June.
Australian 3yr government bond yields (futures) rose from 3.70% to 3.73%, while the 10yr yield rose from 4.15% to 4.17%. Markets price the RBA cash rate to be unchanged at tomorrow’s meeting, with a 65% 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 an 60% chance of cut by August.
Credit indices were softer to close the week with Main out a bp to 53.5 and CDX half a bp wider to 50 with US IG cash also 1-2bp softer and primary activity slowing into week’s end. Europe saw just the 3 issuers (all banks) price EUR1.55bn and the US did not see any supply to round out the week. The US has now seen ~USD89bn of supply in March with a further USD30bn expected in the coming week.
Commodities
The potent combination of OPEC+ earlier in the month announcing it would extend its cuts, the IEA last week shifting its forecast balance for the year “from a surplus to a slight deficit”, the EIA reporting that crude inventory fell for the first time since January and further rounds of attacks on Russian refineries and storage facilities saw crude markets close last week at almost 5-month highs. WoodMac noted that about 40-50kbpd of Russian gasoil/ diesel had been removed as a result of the attacks of the Ryazan refinery and the explosions and fire at the Norsi refinery had seen about 60kbpd impacted. However, neither are fully offline so about 50kbpd may be impacted in total. WoodMac noted that the “latest wave of Ukraine drone attacks on the Russian refinery system is likely to have a more meaningful impact”. The April gasoline contract rose 7.7% last week to hit fresh highs back to September. The US sanctioned another oil tanker involved in shipping Iranian commodities. Bloomberg reported that the Lady Sofia is headed to China after a ship-to-ship transfer near Singapore from another sanctioned vessel. Bloomberg also noted that prices of sour crude spiked in the US after the DOE announced plans to buy more crude for the SPR in the summer. Gulf of Mexico produced Mars blend is now trading at a 90c premium to WTI from a 40c discount. The DOE announced Friday that it would solicit bids for 3mb for delivery August and September.
Metals had a huge move higher last week with copper leading the charge. Copper closed up 2.1% Friday, closing at a fresh high back to April of last year at $9,074 and up 5.7% on the week. That was despite another huge rise in copper inventory in Shanghai warehouses, taking it to the highest level since Feb 2020 and up by a factor of more than 8 so far this year. Last week the China Nonferrous Metals Industry Association released a statement pledging to control capacity by rearranging maintenance work, reducing runs and delaying the startup of new projects though the group stopped short of outright production cuts. Rusal’s full year results announced Friday showed that almost a quarter of its revenue was generated from China last year given that aluminium prices in China were higher that global markets. China accounted for 23% of 2023 sales versus just 8% the year before. The AFR reported that BHP had stood down 25% of its West Musgrave nickel and copper project in WA with the workforce being cut from 400 to 300. BHP recently announced a A$2.5bn impairment charge on its Australian nickel assets due to a slump in the price.
Iron ore continued its dramatic slump last week with the April SGX contract down $2.10 from the same time Friday at $99.55 while the 62% Mysteel index fell $3.40 to $101.00. There was little fresh news driving the iron ore market though signs of persistent pressure from the ongoing property crisis was a major driver. We noted Friday that major steel mills in the Guangdong province will cut production “after local construction steel prices plunged”. Six mills including one controlled by Baowu Steel will shut blast furnaces or rolling mills for maintenance during the next four weeks, cutting output by between 20% and 50%. Further, CISA reported that steel mill stockpiles climbed to the highest since February 2023 in early March. China will report industrial production for February including steel production today.
Day ahead
At 11:30am Syd, China releases combined January-February activity data (the two months combined due to the distortions caused by lunar new year timing). Industrial production is forecast to have risen 5.3% versus Jan-Feb 2023, retail sales +5.6%, fixed asset investment +3.2% but property investment -8%.
Eurozone: CPI for February will be finalised, last at 2.6% y/y.
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