Yesterday

Australian total employment surged 88.4k/0.7% in June while hours worked was flat. Employment is up 438.0k or 3.3% in the year. Full-time employment continues to dominate, up 52.9k in the month, to be up 5.2% in the year. Part-time employment lifted 35.5k but is still down -0.8% in the year. Robust demand continues to draw more workers into the workforce, with participation rising 0.1ppt to a record high 66.8% and a 34.1k rise in the labour force. With such strong growth in employment, and a relatively more modest rise in the labour force, the unemployment fell 0.4ppt to 3.5%, a 48-year low. AUD/USD rose only 15 pips, finishing about flat on the day at 0.6760. Regional equities were mixed.

Currencies

The US dollar index is up 0.6% on the day, making a fresh 20-year high, though it shed some gains after the Fed comments. EUR/USD bounced off 0.9952 – a 20-year low – to be down 40 pips over the day at 1.0020. GBP/USD lost 65 pips to 1.1825, with a low of 1.1760. USD/JPY continued its stunning rise, up 1.2% to 139.00, with a high of 139.39, another high since 1998. AUD/USD roundtripped from 0 6750/60 to 0.6682 (two-year low) and back. NZD/USD similarly roundtripped from 0.6130 to 0.6061 (a two-year low) and back, leaving AUD/NZD at 1.1020.

US PPI rose 1.1%m/m and 11.3%y/y in June (est. +0.8% and 10.7%). The core measure rose 0.3%m/m and 6.4%y/y (est. 0.5% and 6.6%). Weekly initial jobless claims rose 244k (est. 235k, prior 235k), with continuing claims at 1331k (est. 1380k, prior 1372k).

Fed governor (and hawk) Chris Waller played down risk of a 100bp July hike, at least until he sees more data on retail sales and housing. The CPI data was a "major disappointment," but not a big surprise. He had already penciled in a 75bp hike and the data merely assured it. He suggested market pricing may have overreached. He does not expect a recession given the strength in the labour market, but the economy could slow. He will support ongoing hikes until he sees "significant moderation" in core PCE prices toward the 2% goal. St. Louis Fed president Jim Bullard (another hawk) favoured sticking with a 75bp hike for July, rather than a larger move: “So far, we’ve framed this mostly as 50 versus 75 at this meeting. I think 75 has a lot of virtue to it” (because it brings the rate to roughly neutral). “As of today, I would advocate 75 basis points again at the next meeting.”

Interest rates

US bond yields were mixed, as markets started to price the possibility of a 100bp hike at the next FOMC meeting, although Fedspeak did calm these expectations. 2yr government bond yields rose to 3.20% before settling unchanged at 3.13%, and 10yr government bond yields rose to 3.03% before settling 2bp higher at 2.96%.

Australian bonds continue to take trend from US price action, after yields rose following the domestic labour market report which showed a tight labour market. The market is now full priced for a 50bp hike at the August RBA meeting, and 200bp higher by the year end. Cross market spreads were roughly unchanged overnight, with the AU-US 10yr bond spread remaining at 51bps.

Commodities

Oil continued its aggressive decline though losses were pared into the end of the session. The August WTI contract is actually up 7c at $96.37 while the Sep Brent contract is up 19c at $99.76 though Brent traded at a 4-month low of $94.50 earlier in the session. Inventory levels of crude and liquids are rising in the US and record high gasoline prices are crimping demand. Renewed Covid outbreaks in China have added to demand concerns too. However, heat waves across Europe and the US are driving demand for energy higher and questions remain over whether Russia will ‘weaponize’ energy supplies with maintenance on the Nord Stream pipeline due to end Thursday next week.

The collapse in metals continued last night with aluminium down 1.2% to $2,327, copper down 3% to $7,104, zinc down 3.4% to $2,852 and nickel down 9.3% to $19,190. After being down 25% last quarter, the LMEX is down 10% so far this quarter emphasising just how aggressive the correction in metals has been. There was little fresh industry news with the focus in Europe’s energy crises, US recession risks, aggressive Fed tightening and the rampant US$ all being factors behind the weakness in metals.

Finally note that iron ore crashed below $100 as concerns about the property sector in China dominated. The August SGX contract is down $8.20 at $100.50 while the 62% Mysteel index is down $8.75 at $99.95. Wires reported a sharp rise in unfinished property loan defaults in China with researcher China Real Estate Information Corp reporting that at least 100 projects in more than 50 cities had been impacted, up from 28 as of Monday. While delayed projects account for circa 1% of China’s total mortgage balance, it’s a worrying trend driving the CSI 300 Banks index down 3.3% yesterday. Weak Chinese iron ore imports added to the weakness in the market with Q2 imports down 3.7%yy and year to date imports down 4.5% versus last year.

Day ahead

China releases Q2 GDP and June monthly activity data at 12pm Syd/10am Sing. GDP growth will be hit hard by COVID-zero lockdowns over Q2 (market f/c: -2.0%qtr; +1.2%yr). Partial reopening will help June retail sales (market f/c: +0.3%yr versus May -6.7%yr). Reopening should also help June industrial production, seen picking up to 4.0%yr from 0.7%yr in May. Fixed asset investment is seen up 6%ytd.

Eur: The trade deficit is set to remain wide given the strength of energy prices (market f/c: -€35bn).

US: Elevated gasoline prices are set to buoy retail sales in June although broad-based inflation and higher rates are also affecting spending capacity (market f/c: 0.9%). With import prices expected to remain elevated given ongoing supply issues (market f/c: 0.7%), industrial production will likely remain weak in June (market f/c: 0.1%); for similar reasons, weakness in the New York Fed Empire State manufacturing index is anticipated in July (market f/c: -2.0). Business inventories are expected to continue building at a robust pace (market f/c: 1.4%). However, another historically weak print is anticipated for the July University of Michigan sentiment survey given ongoing inflation pressures and aggressive financial tightening (market f/c: 50.0).

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