Markets Daily
The US dollar and bond yields rose amid hawkish Fedspeak and some solid US economic data. Equities fell slightly.
Currencies/Macro
The US dollar index is up 0.2% on the day as US yields pushed higher following hawkish Fedspeak. NY Fed President Williams stole the limelight, commenting that while it’s not his base case a hike is possible if the data warrants. EUR fell from 1.0690 to 1.0642. USD/JPY rose from 154.07 to 154.68.
AUD rebounded during local trade yesterday, but tracked lower offshore as the USD rose in line with US yields, falling from 0.6457 to 0.6417. Australian employment declined only slightly in March, –6.6k, following an upwardly revised +117.6k in Feb, centred on part-time employment (–34.5k), which effectively took back last month’s gain, while full-time employment continued to rise into the final month of the quarter (+27.9k). The headline result was weaker than the market median (+10k). While March’s employment print marks somewhat of a ‘retracement’ from a particularly strong February, it rounds out a more resilient performance for employment growth over the quarter as a whole.
NZD fell from 0.5933 to 0.5899. AUD/NZD ranged between 1.0869 and 1.0893.
US weekly jobless claims continued to indicate a tight labour market. Initial claims were unchanged at 212k (est. 215k), with continuing claims at 1.812m (est. 1.818m, prior 1.810m revised from 1.817m). The Philadelphia Fed business outlook survey was strong at 15.2 (est. 2.0, prior 3.2) - highest since April 2022. The Conference Board leading index fell 0.3% (est. -0.1%, prior revised +0.2% from +0.1%) to a low since April 2020. Existing home sales in March fell 4.3% (est. -4.1%, prior +9.5%).
FOMC member Williams said that there’s no rush to lower interest rates: “Monetary policy is in a good place. We’ve got interest rates in a place that is moving us gradually to our goals, so I definitely don’t feel urgency to cut interest rates.” When asked about the possibility of a rate hike, Williams said it is not his baseline expectation, but that it is possible. Bostic said he’s comfortable keeping interest rates steady, reiterating he doesn’t think it will be appropriate to cut until near year end.
ECB member Holzmann said that “a hesitant Fed” would limit ECB easing. Vasle said: "the economic situation in the US is at the moment different from the euro area. So, it is a logical consequence that the reaction of monetary policy might also be different. But this divergence has limits. There is a significant probability that the drivers behind a higher or more persistent inflation in the US will also become visible in other parts of the world and also in the euro area".
BoE Governor Bailey said inflation risks are lower than in the US. He expects the April inflation data "will show quite a strong drop because we have a particularly unique energy and household energy pricing system in the UK". BoE member Greene (hawk) again pushed back on any imminent easing.
Interest rates
The US 2yr treasury yield rose from 4.91% to 4.99%, while the 10yr yield rose from 4.56% to 4.65%. Markets price the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 2 May, with an 80% chance of a cut by September.
Australian government bond yields (futures) rose from 3.85% to 3.90%, while the 10yr yield rose from 4.29% to 4.36%. 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 65% chance of a cut by October.
Itraxx Europe tightened 1.8bps to 60.0bps with AB InBev and Hochtief were the best performing contracts and Heidelberg Materials and Saint-Gobain underperformed. CDX IG tightened 0.4bps to 57.4bps; Ally Financial and Allstate had the best performing contracts while TransCanada Pipelines and Energy Transfer were a drag on the index. Cash bonds tightened 0.7ps to 123.7, the best performing sectors were materials and senior financials, while industrials and utilities financials.
Commodities
Crude markets were volatile but directionless as traders watched for headlines from the Middle East. The May WTI contract is unchanged at $82.71, while the June Brent contract is down 0.26% at $87.06. Iran warned Israel against attacking its nuclear facilities, with the head of security for Iran’s nuclear facilities stating that it was “reconsidering the nuclear doctrine and policies of the Islamic Republic of Iran”. The warnings were issued after the UK and US announced new sanctions on Iran’s drone programme. The US allowed a Treasury Department license permitting oil and gas production in Venezuela to expire without renewal given that Nicolas Maduro had not taken steps to allow fairer elections scheduled for July. In addition, sanctions on Iranian oil were included in a Ukraine and Israel funding bill with a possible vote on Saturday. However, clear signs of weakening in global diesel markets weighed on prices. The European, US and Asia diesel prompt contracts have all fallen into contango with the May NY diesel contract dropping to a low back to January.
Metals continued the sharp move higher with copper up 1.67% at $9,743 while nickel is up 1.68% at $18,545. Tin rose another 3.7% to $33,979 bringing gains for the year to 33%. The LME warned that it was watching developments in the tin market closely, noting that it “has the necessary controls in place to ensure continued market orderliness”. Indonesia has reduced tin shipments amid licensing delays while a high-profile corruption probe has involved tin smelter executives and traders. Flows from Myanmar have also been impacted by military developments while unrest in the DRC has also impacted flows there.
Finally note that iron ore markets saw some signs of profit taking as the RBA warned that Chinese steel demand may have peaked. The May SGX contract is down $1.35 at $114.75 though the 62% Mysteel index is up $1.30 at $117.25. The RBA warned that “construction in China has peaked and that demand for steel will decline in the longer term”. In a meeting with United Steelworker union members in Pittsburgh, US President Biden called on the USTR to triple the tariff on Chinese steel from 7.5% to 25% that was levied on top of Trump’s steel tariffs. Chinese steel exports in Q1 were up 28%yy with the level approaching record highs seen back in 2014/2015.
Day ahead
Japan: March's CPI will reflect wages support services inflation, a resurgence in imported inflation is also on the horizon with a weak yen (market f/c: 2.8%yr).
UK: March retail sales are barely registering a pulse as prices remain high and credit constrained (market f/c: 0.3%mth).
US: Chicago Fed President Goolsbee speaks
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