Markets Daily
Bond yields, US equities and the US dollar rose slightly further, as markets prepared for this week’s major central bank decisions. AUD held around 0.6555. Today’s calendar features the RBA policy decision and Governor Bullock media conference plus the Bank of Japan decision.
Yesterday
AUD/USD traded quietly, mostly inside 0.6555-70. China’s Jan-Feb industrial production rose 7.0%yr, retail sales 5.5%yr, fixed asset investment 4.2%yr but property investment -9.0% versus Jan-Feb 2023. Regional equities were mostly quite upbeat, including Japan’s Topix +1.9% but the ASX 200 rose only 0.1%.
Currencies/Macro
The US dollar outperformed or was flat against the G10. EUR/USD fell 20 pips to 1.0870. Sterling was little changed at 1.2725. USD/JPY ticked up slightly to 149.15. AUD/USD returned to 0.6555, in narrow ranges. NZD/USD is little changed at 0.6085. AUD/NZD ranged sideways around 1.0780.
US homebuilder confidence (NAHB) rose to 51 in March (est. 48, prior 48), the highest since July 2023 and back in expansionary territory (just). Most of the strength was in the present single-family sales index.
ECB member de Cos (Spain) said: "the announcement last week that we have completed our goal of getting inflation to 2% is compatible with a cut in interest rates soon, and that could probably happen in June".
Interest rates
The US 2yr treasury yield rose from 4.71% to 4.74% (a four-month high), while the 10yr yield rose from 4.29% to 4.34% (also a four-month high). Markets price the Fed funds rate, currently 5.375% (mid), to be unchanged at this week’s meeting, with a 50% chance of a cut by June.
Australian 3yr government bond yields (futures) ranged between 3.69% and 3.72%, while the 10yr yield rose from 4.13% to 4.16%. Markets price the RBA cash rate to be unchanged at today’s meeting, with a 60% 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 a 60% chance of cut by August.
Credit spreads recovered from a soft close last week with Main half a bp tighter to 53, CDX in a bp to 49 and US IG cash was also 1-2bp better as we saw a solid open for primary markets in what is likely to be a disrupted week given the CB meeting schedule. Europe saw 8 issuers price EUR11.5bn while in the US, 8 issuers priced USD6.7bn.
Commodities
Crude markets surged to fresh highs back to October with better-than-expected Chinese activity data plus rising estimates of the impact of Ukrainian drone attacks on Russian refineries lifting sentiment. The April WTI contract is up 2.3% to the highest level since mid-October while the May Brent contract is up 2% to $87.02. China processed a record amount of fuel in January and February, with 118.76mt of crude refined, up 3% to a fresh record high. Crude trader Gunvor estimated that about 600k of Russia’s daily refining capacity has been knocked out by Ukrainian drone strikes, noting that “this is going to hit distillate exports straight away” and that this will “probably take down [Russian] exports by a couple hundred thousand barrels”. The April European gasoil contract rose 2.6%, trading above the highs seen back in September last year. Iraq also said it will reduce oil exports in coming months to compensate for producing above its limits in Jan and Feb.
Copper hit fresh highs back to April 2023 even as global copper inventory reached highs since April 2021. Copper is up another 0.33% at $9,102 while aluminium is last largely unchanged at $2,276. However, zinc fell 1.27% to $2,528 while nickel fell 1.35% to $17,830. SMM reported that nearly half of the idled aluminium capacity in China’s Yunnan province will be restarted after local increases to power supplies. The broker estimated that 520kt of 1.17mt that has been idled since November will be restarted.
Iron ore showed signs of stabilising just above $100 as Chinese activity data came in above estimates. The April SGX contract is up $3.80 from the same time yesterday at $103.35 while the 62% Mysteel index rose $3.90 to $104.90. Chinese steel production in January and February came in very much in line with expectations at a combined 168mt up 1.6%yy. However, of more interest will be production post-LNY with press widely reporting that steel mills have brought forward maintenance due to weak prices and rising inventory.
Day ahead
At the March Board meeting, Westpac anticipates that the RBA will leave the cash rate unchanged at 4.35%. The Board will meet to discuss recent economic data. That includes the Q4 National Accounts, which confirmed that the Australian economy had a soft finish to 2023 – both household consumption and domestic demand near–flat in the quarter. Additionally, the Q4 Wage Price Index revealed an underlying slowdown in private sector wages growth, as labour market conditions ease and inflation continues to decelerate. The Board will be comforted by these developments, given its aim to align demand with supply and ensure inflation trends toward, and eventually reaches, target. We continue to expect the RBA to remain on hold until September, when the Board should be sufficiently confident that the restrictive policy setting can be reduced at an incremental and measured pace. The statement is due at 2:30pm Syd, Governor Bullock’s media conference at 3:30pm.
Given the current fragility of the economy, Westpac expects that the Bank of Japan won’t deliver any material changes to its policy setting just yet, keeping the policy rate at –0.10% and 1% reference rate for the 10-year JGB yield cap. But forecasters are divided, with some seeing one or both policy being changed today and many expecting action no later than the April meeting.
Eurozone: The recovery in ZEW expectations may well be supported by stronger prospects for rate cuts over coming months.
US: Another volatile start to the year should see housing starts and building permits rebound sharply in February (market f/c: 7.4% and 2.0% respectively).
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