Markets Daily
The US dollar was soft for most of the overnight session, but rebounded in late dealings as risk appetite and stocks took a hit on rising Mideast tensions. Bond yields were mixed, ahead of important US payrolls data. Fedspeak emphasised patience, and jobless claims data was slightly cooler.
Currencies/Macro
The US dollar index was down 0.3% at one stage overnight, extending the softer momentum that developed after the previous’ day’s weaker than expected services March ISM. But the US dollar index clawed back to be largely unchanged in late offshore dealings, as risk appetite took a knock on surging energy prices amid rising mid-east tensions. The S&P500 fell 1.2%. EUR rose from 1.0840 to 1.0877 but finished back where it started at 1.0837. USD/JPY ranged sideways between 151.51 and 151.77 for most of the session, but slipped to 151.35 in late trade.
The AUD rose from 0.6580 to 0.6619 offshore and starts the day lower at 0.6586 after risk appetite took a hit in late trading offshore. NZD rose from 0.6020 to 0.6047. AUD/NZD rose from 1.0913 to 1.0956 – a fresh five-month high.
US weekly initial jobless claims rose slightly to 221k (est. 214k, prior 212k), with continuing claims at 1791k (est. 1811k, prior 1810k).
FOMC member Harker (non-voter) said inflation was still too high: “We’re not where we need to be. Inflation is still too high, particularly for the ALICE communities — the asset-limited communities, and income constrained.” Barkin (voter) said: “No one wants inflation to reemerge. Given a strong labour market, we have time for the clouds to clear before beginning the process of toggling rates down. I am optimistic that keeping rates somewhat restrictive can bring inflation back to our target”. Goolsbee said of the recent inflation data bump: “My overall assessment is that these two months should not knock us off the path back to target”. Mester (voter) wanted to see two more months of data to assess inflation. Kashkari (non-voter) pondered a no-cut scenario: “In March I had jotted down two rate cuts this year if inflation continues to fall back towards our 2% target. If we continue to see inflation moving sideways, then that would make me question whether we needed to do those rate cuts at all.”
Interest rates
The US 2yr treasury yield fluctuated between 4.64% and 4.70%, currently 4.66%, while the 10yr yield traded between 4.31% and 4.38%, currently 4.31%. Markets price the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 2 May, with a 60% chance of a cut by June.
Australian government bond yields (futures) ranged between 3.67% and 3.72%, while the 10yr yield ranged between 4.14% and 4.19%. Markets currently price the RBA cash rate to be unchanged at the next meeting on 7 May, with a 75% 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 August.
Credit indices reflected the shift in broader risk markets with Main 1.5bp tighter to 53.5, while CDX has given up early gains of a similar amount to now be 2bp higher at 54 (above Main) with US IG cash also moving late in the session to be 1-2bp wider. Primary activity was solid in Europe with 7 issuers pricing EUR4.9bn with corporate issuers heavy in the mix (EUR3.4bn) while in the bank space we saw BMO print a EUR1bn 3yr FRN at E+47 (BBSW+73), however the US was quieter.
Commodities
Brent crude pushed above $90 as traders focussed on risks that Middle East tensions would add to supply pressures. The May WTI contract is up 1.5% to $86.72 while the June Brent contract is up 1.75% to $90.91. News that the Israeli army had cancelled all leave and warnings from the Israeli PM that the country would harm “whoever harms or plans to harm us” added to the momentum in prices. Bloomberg noted that Brent’s rally above $90 brought 32,000 lots of June expiry call options between $90 and $91 sending implied volatility to the highest in over a month. JP Morgan noted that recent Ukrainian drone strikes threatened to take a significant amount of Russia’s oil refining capacity offline as the attacks extended much further into the country. About 670kbpd of capacity is offline following the drone attack on the 340kbpd Taneco refinery this week, which is 1,200km away from Ukrainian lines. That radius includes 19 refineries with a combined capacity of 3.8mb or more than half of Russia’s capacity!
Metals continued their breakout move with copper up another 1.26% at $9,379 while aluminium rose 0.66% to $2,445. Copper is up 5.8% over the last week and aluminium is up 6.1%. Adding to the pressure on copper, Codelco signalled that output in 2024 was still running well below 2023 levels with 326kt of copper produced in Q1 down from 352kt in the same period a year ago. The chairman stated that “we are recovering, and we will continue to do so” with annual production guidance of between 1.33mt and 1.39mt, a slight increase from last year’s level. Chilean port workers also staged protests on Thursday, disrupting the loading and unloading of ships at the Ventanas port. Countering signs of demand in the futures market, the spread between spot and the 3m LME copper contract fell to a fresh 3 decade low at -$116.50 suggesting that physical demand was low. At the same time, global copper inventories are all but hitting the highest level in 4 years.
Finally note that iron ore markets hit 10-month lows as rising exports and faltering Chinese demand signals weighed on prices. The May SGX contract is down 5c from the same time yesterday at $97.75 while the 62% Mysteel index fell another $1.90 to $97.45. Spot steel prices continued their steady march lower with rebar used in construction hitting lows back to August last year, down 8% in the last two months. China will publish its first batch of March trade data including iron ore imports on Friday next week.
Day ahead
Australia: The goods trade surplus likely narrowed in February, given the drag on export earnings from lower commodity prices over the month (Westpac f/c: $9.7bn; market f/c: $10.5bn).
Japan: February’s household spending will continue to paint a weak picture for consumption, likely confirming a full year of declines (market f/c: –2.9%yr).
Eurozone: Declines in retail sales are set to persist as intense financial pressures continue to loom over households (market f/c: –0.4%).
US: Growth in nonfarm payrolls is widely expected to moderate in February, moving more in line with most other indicators reflecting a softening labour market (Westpac f/c: 180k; market f/c: 215k). With robust participation, the unemployment rate may hold flat at its current rate (Westpac f/c: 3.9%; market f/c: 3.8%); but, as it continues to grind higher over the year, growth in average hourly earnings will soften (market f/c: 0.3%). The FOMC’s Barkin, Logan and Bowman are also due to speak.
China: National holiday for the Qing Ming Jie festival.
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