Markets Daily
Further gains in the US dollar and bond yields were helped by hawkish comments from Fed Chair Powell and solid US industrial production data.
Currencies/Macro
The US dollar index is up 0.1% on the day, and at a fresh six-month high, supported by higher US bond rates after Fed Chair Powell said more patience is required to regain confidence that inflation is moving lower. EUR ranged between 1.0601 and 1.0654. USD/JPY rose from 154.30 to 154.79 – a fresh 34-year high.
Underperformer AUD fell from 0.6425 to 0.6389 - a fresh five-month low. Stronger China Q1 GDP provided no support for AUD yesterday, with markets instead fixated on the PBOC acceding to market pressures and setting a higher reference for USD/CNY, weighing on regional currencies. NZD fell from 0.5895 to 0.5868 – a fresh five-month low. AUD/NZD fell from 1.0910 to 1.0882.
Fed Chair Powell indicated they could wait longer than previously expected to cut interest rates following a series of surprisingly high inflation readings: “The recent data have clearly not given us greater confidence and instead indicate that is likely to take longer than expected to achieve that confidence. Given the strength of the labour market and progress on inflation so far, it is appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us”.
US industrial production in March rose 0.4%m/m (as expected, prior revised to +0.4%m/m from +0.1%m/m), with a notable rise in manufacturing of 0.5%mm (est. +0.2%m/m. prior revised higher to +1.1%m/m from +0.8%m/m. Capacity utilisation was at 78.4% (est. 75.5%, prior revised to 78.2% from 78.3%). Housing starts fell 14.7% (est. -2.4%) and building permits fell 4.3% (est. -0.9%).
Canada’s CPI in March rose 0.6%m/m and 2.9%y/y (est. 0.7% and 2.9%, prior 2.8%y/y), with trimmed core at 3.1%y/y (est. 3.2%, prior 3.2%).
The ZEW investor surveys were stronger than expected. German expectations rose to +42.9 (est. +35.5, prior +31.7), current conditions to -79.2 (est. -76.0, prior -80.5). Eurozone expectations rose to +43.9 (prior +33.5), current conditions to -48.8 (prior -54.8).
UK unemployment in February was at 4.2% (est. 4.0%, prior 3.9%), but average weekly earnings were firm at 5.6%y/y (est. 5.5%, prior 5.6%).
The IMF upgraded its global growth forecasts, consistent with a global soft landing. 2024 was increased to 3.2% from 3.1%, and 2025 was increased to 3.2%. The US is the main contributor to the upgrades.
Interest rates
Powell’s comments and US data helped US treasury yields rise to highs since November. The US 2yr treasury yield rose from 4.92% to 4.97% via 5.01%, while the 10yr yield rose from 4.61% to 4.67% via 4.69%. Markets price the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 2 May, with a 45% chance of a cut in July.
Australian government bond yields (futures) rose from 3.85% to 3.89%, while the 10yr yield rose from 4.32% to 4.37%. Markets currently price the RBA cash rate to be unchanged at the next meeting on 7 May, with a 60% 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 55% chance of a cut in August.
Despite geopolitical concerns, European primary markets were busy with six names issuing across the corporate and financials sector with covered bond issuance from Banca Monte dei Paschi and Equitable Bank. It was relatively quiet in the US with the only high grade issuance coming from Johnson Controls and Hana Bank. Itraxx Europe widened 2.7bps to 62.8bps with Zurich Insurance and Equinor were the best performing contracts and Lufthansa and Unibail- Rodamco- Westfield underperformed. CDX IG widened 0.3bps to 57.8bps; United Health and Johnson Controls had the best performing contracts while Ally Financial and Lincoln National were a drag on the index. Cash bonds widened 0.5ps to 124.2, the best performing sectors were industrials and utilities, while subordinated financials and communications.
Commodities
Crude markets marked time as traders waited for a response from Israel to the first ever wave of direct drone and missile strikes from Iran over the weekend. The May WTI contract is down 0.15% at $85.28 while the June Brent contract is down 0.18% at $89.94. Top Israeli military officials stated that “missiles into the territory of the State of Israel will be met with a response”. However, the “higher for longer” message from Fed Chair Powell and jump in the US$ capped recent moves. Bloomberg also noted that refiners in China and Korea were reducing run rates on lower margins and maintenance. API also reported a 4.09mn rise in crude inventory though gasoline again fell by 2.5mb. The May June European diesel spread flipped into contango. Excluding expiry days, that’s the first time that has happened in 11 months suggesting the impact of reduced Russian supplies is becoming more muted and that demand is slowing as economic activity wanes. On that point. France reported road diesel sales declined by 12% in March.
Metals were mixed with copper down just over 1% at $9,474 though aluminium held at fresh 14 month closing highs. Rio’s head of copper, Bold Baatar told the CRU World Copper Conference in Santiago that “the focus is on organic growth [and] supply growth”. Rio is looking to reach 1mtpa of copper production in 5yrs, up from 700kt with projects in Mongolia, Utah and a joint venture with Codelco in Chile all adding to global supply. Aluminium was more contained after the aggressive moves higher seen the previous session following the US sanctions on trading Russian aluminium, copper and nickel. The new rules prohibit delivery of new supplies from Russia into the LME on or after April 13 while the US is also banning the import of all three metals from Russia. The price for spot versus 3-month aluminium spread on the LME surged as traders reacted to the fact that the changes do not prevent Russia from selling its metals to buyers outside the US or UK.
Finally note that iron ore showed some signs of settling back from the recent aggressive run up from below $100 to above $110. The May SGX contract is down $1 from the same time yesterday at $110.85 while the 62% Mysteel index is down $3.1 at $109.25. While Q1 China GDP beat expectations, steel production in March came in at 88mt, down almost 8% from the previous month. Meanwhile Vale announced iron ore production came in above expectations at 70.8mt though Rio missed expectations shipping 78mt. BHP will report tomorrow.
Day ahead
Aus: March's Westpac–MI Leading Indexcould reflect a pull-back in commodity prices.
NZ: Q1 CPI will show domestic forces driving prices with headline and core rates still above the RBNZ's mid-point (Westpac f/c: 4.2%yr, market f/c: 4.0%yr). March's REINZ house sales are expected to lift following a surge in listings. Prices will likely be capped as a result.
Eurozone/UK: The UK's March CPI will show continued strength in services driving headline inflation (market f/c: 3.1%yr). The final estimate for Europe's March CPI will be released (market f/c: 2.4%yr).
US: The FOMC’s Beige Book provides an update on economic conditions across the regions. Mester will also speak today.
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