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Markets consolidated the previous day's sharp moves, with minor movement in bond yields and the US dollar following the ECB's on hold decision.


The US dollar index is unchanged on the day, having earlier made a fresh five-month high. EUR fluctuated between 1.0699 and 1.0757 as the ECB sent a clear signal for a potential first rate cut at its next meeting in June. USD/JPY fluctuated between 152.76 and 153.32 – a fresh 34-year high. 


Outperformer AUD rose from 0.6520 to 0.6553, clawing back more of its US CPI inspired decline than most. NZD rose from 0.5980 to 0.6015. AUD/NZD cycled 10pts either side of 1.0900. 


The ECB remained on hold, as was widely expected (deposit rate at 4.00%, main refinancing rate at 4.50%). It did signal an easing bias, but was otherwise non-committal. Guidance in the statement read: "The Governing Council’s future decisions will ensure that its policy rates will stay sufficiently restrictive for as long as necessary. If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction."


US PPI in March rose 0.2%m/m and +2.1%y/y (est. +0.3%m/m and +2.2%y/y), with ex food and energy at +0.3%m/m and +2.4%y/y (est +2.4%y/y). Weekly jobless claims data showed little sign of moderation in labour market strength. Initial claims rose 211k (est. 215k, prior revised to 222k from 221k), with continuing claims at 1.817m (est. 1,800m, prior revised from 1.791m to 1.789m).

FOMC member Williams said the central bank has made “tremendous progress” toward better balance on its inflation and employment goals, but added there’s no need to cut in the very near term: “There’s no clear need to adjust policy in the very near term. As we collect more data, we’ll be able to assess have we got that confidence that inflation is moving back to 2%...The economy has come a long way toward achieving better balance and reaching our 2% inflation goal. But we have not seen the total alignment of our dual mandate quite yet.” Collins said recent data have eased concerns about an “imminent need” to adjust interest rates, though she still expects cuts to begin later this year: “Overall, the recent data have not materially changed my outlook, but they do highlight uncertainties related to timing, and the need for patience — recognizing that disinflation may continue to be uneven. This also implies that less easing of policy this year than previously thought may be warranted.”


Interest rates

The US 2yr treasury yield fluctuated between 4.92% and 5.00%, currently 4.94%, while the 10yr yield ranged between 4.51% and 4.59%, currently 4.57%. 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 in July.


Australian government bond yields (futures) ranged between 3.80% and 3.87%, while the 10yr yield ranged between 4.25% and 4.32%. Markets currently price the RBA cash rate to be unchanged at the next meeting on 7 May, with a 65% chance of a cut by November.


New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged at the next meeting on 22 May, with a 70% chance of a cut in August.


Itraxx Europe widened 1.3bps to 56.4bps with Santander and Generali the best performing contracts and Lufthansa and VW weighing on the index. CDX IG tightened 0.3bps to 52.8bps; Paramount Global and Freeport had the best performing contracts while D.R Horton and General Motors were a drag on the index.   Cash bonds tightened 1.6bps to 118.6, the best performing sectors were utilities and industrials while financials, both senior and subordinated were the worst performing.



Crude markets marked time as traders wrestled with the sharp rise in US crude inventories versus the risks of an imminent drone or missile attack on Israel by Iran or its proxies. The May WTI contract is down 1.38% at $85.02 while the June Brent contract is down 0.29% at $90.22. Adding to the headwinds on crude are the overbought conditions, the break higher in the US$ and the pricing out of rate cuts post the stronger than expected CPI release. However, many in the market are still looking for further strength over the summer with Rystad forecasting the supply demand balance will be tight which could push oil up to $100. Macquarie warned though that they think “it will be difficult to maintain Brent above $90 into 2H24 without actual supply disruption associated with geopolitical events”. The OPEC monthly report noted “robust oil demand” in the summer months with global oil demand expected to grow by 2.2mbpd yy in Q2 and 2.7mbpd yy in Q3. The report notes that this will warrant “careful market monitoring, amid ongoing uncertainties, to ensure a sound and sustainable market balance”. In gas markets, Russia again attacked underground gas storage facilities in Ukraine sending gas prices higher in Europe. The May TTF contract jumped 8% on the news though the national energy company Naftogaz Ukrainy reported the facilities were still operating.


Metals showed some signs of profit taking with copper slipping below $9,400 to $9,361 while nickel fell 3.45% to $17,730. BHP’s Escondida mine reported 97,500t of copper production in February, unchanged from January but up strongly from a year ago. However, Cochilco announced 103,700t produced in February, down slightly from the previous month and unchanged year on year. CNMC Copper Mines will almost double its copper output from the Luanshya mine in Zambia. Once it completes a $500m rehabilitation, the mine will produce 83ktpy. The mine has been flooded for 23 years. Bloomberg noted that China is reducing its copper smelting output with data from Savant confirming about 8.5% of the country’s smelters were inactive in Q1, up from 4.1% in the same quarter last year. For March alone, the inactivity rate rose to 9% and “accelerated to as much as 13% in the final days of the month”. Savant noted that “April figures must be watched closely to establish whether this is a trend that will be sustained”. 


Finally note that iron ore markets probed 1-month highs helped by news that local governments were further easing housing rules. The May SGX contract is up $1.50 from the same time yesterday at $107.95 while the 62% Mysteel index is up $2.35 at $108.50. A total of 15 cities have lowered the base for mortgage rates on first time home purchases as of Wednesday according to the Economic Observer. Morgan Stanely joined Goldman, upping their China growth forecast, expecting the economy to expand at 4.8% up from 4.2% on better-than-expected export growth. China will report its first batch of March trade data including iron ore imports today and Q1 GDP and March IP next week.


Day ahead

NZ: March’s selected price indices will likely signal some upside risk to the RBNZ’s inflation forecast. An increase in retail card spending is expected in March, but the longer-term trend will remain broadly flat (Westpac f/c: 0.8%mth). The manufacturing PMI has lifted off recent lows but remains in weak territory.


China: The trade surplus is expected to return to an elevated level in March, supported by robust demand from Asia (market f/c: US$69.1bn).


US: The level of consumer sentiment will likely remain little-changed in April; sensitivity around the inflation outlook will remain key over the coming months (market f/c: 79.0). March’s import price index should continue to reflect global goods disinflation dynamics (market f/c: 0.3%mth). The FOMC’s Collins, Schmid, Bostic and Daly are all due to speak.

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