Market Wrap.

First cut.

China cut its 5yr LPR by a larger than expected 25bps to 3.95% (markets were poised for 10bps, the 1yr was unchanged, as expected) in order to support the mortgage and property sector after multiple step shift measures to bolster faltering confidence across the economy, which have left markets repeatedly underwhelmed.
Despite an initial poor response from domestic stock markets (Shanghai dropped -0.4%, CSI 300 dropped -0.7%), indices squeezed into their close (Shanghai +0.42%, CSI 300 +0.21%) and market write ups turned to the potential lift from lower mortgage rates.
Countering the last squeeze in stocks (and a decidedly muted response in CNY), Dalian and SGX iron ore futures suffered (SGX May futures fell -5.2% to under USD121/mt., Dalian May futures fell -5.4% to CNY909.5/mt.).

RBA Minutes of their Feb. 5^th-6^th meeting provided an overall balanced profile of risks to the economy, noting weakening consumer and aggregate demand against robust wage growth and services inflation (but lower goods inflation) as they discussed whether to remain on hold of hike 25bps. However, market commentators picked up on the penultimate paragraphs reference of, given still high inflation, whether “it was yet possible to rile in or out further increases in interest rates.” The plural profile of potential movement in rates triggered discussion of whether RBA was still in a broader tightening cycle.

However, the broader balanced approach meant that market impacts were minimal, and Westpac affirmed its stance that rates should remain on hold ahead of a potential Sept. start to easing, though all aspects are data dependent.

NZGB 2054 syndication details, with a NZD4bn cap, were well received (pricing to be on Wednesday 21^st February) and saw some flattening of the NZ curve and outperformance in NZGBs.

Domestic media continue to report on the sharp shifts in rate expectations over the past month ahead of next week’s RBNZ MPS and OCR setting meeting, despite “abysmal” housing sales.

European data releases remained relatively light. However, after ECB’s clearly highlighted their concerns over wage costs, the releases today of Indeed’s regional wage survey and the ECB’s 4Q Wage Rate survey were keenly awaited.
Although the data from Indeed for January (which is building in more national level profiles within the Eurozone) showed some lift in wage growth, this should be ameliorated by some potentially seasonal slippage in 4Q ahead of current wage negotiations in the region.
The ECB’s 4Q Wage Rate Indicator did post a paring back from its recent rising trend with a dip to 4.5%y/y for 4Q’23 from 4.7% in 3Q’23.

BoE Gov. Bailey and key MPC members appeared in front of the Parliamentary Treasury Committee with markets reacting to comments about improving prospects for lower inflation but concerns remaining over wage and services costs.
Although previously stated, Bailey’s comment on being able to cut before reaching target and that rates could be reduced this year, hawkish Greene pointed to the persistence of inflation and upside risks to wage growth.
It is clear that the split MPC still want to see more data before claiming victory in containing inflation.

USD has drifted in European trading from its firmer stance in Asia.
NZD and AUD are both around +0.33% firmer (AUD testing 0.6560, NZD testing 0.6170) with EUR at 1.0805-10 (+0.25%) and GBP 1.2615 (+0.15%) with JPY flat at 150.15.

UK 10yr Gilts are leading yields lower, declining -6bps to 4.05% with 2yr -4bps at 4.575%.
10yr Bund yields are -4bps at 2.37%, 2yr at 2.79% (-2.5bps) whilst US 10yr yields are -1bp at just below 4.27%.

European bourses have stabilised either side of unchanged (DAX -0.2%, CAC 40 +0.3%, FTSE 100 -0.05%) with US futures still around -0.5%.

US data remains light (US January Leading Index) though Canadian January CPI may be of some market interest.

The latest GDT auction result is due during US trading,
NZ releases 4Q PPI tomorrow and AU will receive the Westpac-MI Leading Inde and the keenly awaited 4Q Wage Cost Index.

We Get

AU: Westpac-MI Leading Index & 4Q Wage Cost Index (21^st) Flash PMIs (22^nd), 4Q Const. Work & Jan. CPI Indicator (28^th), Retail Sales & Private credit (29^th), CoreLogic Hse. Px. & (F) Manu. PMI (1^st)

NZ: 4Q PPI (21^st), Trade (22^nd), 4Q Real Retail Sales (23^rd), RBNZ OCR & MPS (28^th), ANZ Biz. Outlook (29^th), CoreLogic Hse. Px., ANZ Cons. Conf., Bld. Consents & RBNZ Gov. Orr Speaks (1^st)

EZ: EZ Cons Conf (21^st) Flash PMIs & EZ (F) CPI (22^nd), Ge (F) 4Q GDP, Ge IFO & ECB CPI Expectations (23^rd), EZ M3 (27^th), Ge GfK Cons, Conf & EZ Econ./Serv./Ind. Conf. (28^th), Ge Unempl. & Ge CPI (29^th), (F) Manu PMIs & EZ CPI (1^st)

UK: Public Finances & CBI Trends (21^st), Flash PMIs (22^nd), GfK Cons. Conf. (23^rd), CBI Ret. Sales, (26^th), BRC Px. (27^th), Lloyds Biz. Barometer & Cons. Credit (29^th), Nationwide Hse. Px. (tbc), (F) Manu. PMI (1^st)

US: Leading Index (20^th), FOMC Mins. (21^st), Chic. Fed. Natl. Activity, Claims, Flash PMIs & Existing Home Sales (22^nd), New Home Sales & Dallas Fed (26^th), Dur. Gds. Orders, FHFA & CoreLogic Hse. Px., Rich. Fed & Conf. Bd. Cons. Conf. (27^th), 2^nd 4Q GDP, Adv. Gds. Trade & Ret./Wholesale Inv. (28^th), Pers. Income/Spending/PCE, Claims, Chic. PMI., Pending Home Sales & Kansas Fed (29^th)

Westpac publications

RBA Feb. 5^th-6^th Policy Meeting Minutes : Plus ca change?
Luci Ellis

A longer meeting, but an expected outcome as the case to hold outweighed the case to hike. The minutes did not add much information given RBA communications in past two weeks.
Westpac continue to see September as the most likely data for the first cut, whilst duly noting considerable uncertainties and data dependency.

US Economic Update: IS disinflation, the last mile.
Elliot Clarke

Splitting up US CPI between shelter and everything else highlights the FOMC have been successful in reining in demand-led inflation. The last mile for FOMC is close to being achieved.

G10 FX Model & Themes : The curious case of the steady AUD TWI.
Richard Franulovich

Model

USD (-19%) & CHF (-20%) shorts extend, CAD (+18%) & NOK (+21%) oil led longs persist. AUD sidelined (+2%), NZD (-12%) & EUR (-8%) remain short. Modest longs for GBP (+8%) & JPY (8%).

Themes

AU Terms of Trade eased in past 18-months but remain above long-run averages. AUD WTI contained (full 60-65 range) for over 3-years, below equilibrium, capped by structural headwinds.
AUD beta to commodity prices (a bulks story) declining for years, responding more to interest rate spreads.
US has also had an export driven ToT lift, as shifted to net energy exporter (though less impact for relatively closed US economy), but AUD has still underperformed.
Of more note, AU investment has been low whilst US has lifted notably. More likely need a USD driver (lower) than AUD (lift) to sustain any AUD upside.

AU Economics Deeper Insight : Electricity supply investment, an update.
Andrew Hanlan

Refresh on AU Electricity Supply Investment shows investment project pipeline of AUD105bn has shifted to “definite” or “committed/under construction” from “potential” projects. .

AUD vs GBP Snapshot : Corporate focus in one page snapshot of AUD vs GBP views.
Sean Callow

AUD seen as high-beta anti-USD currency trade clear in Dec. 2023 and so with USD revival, AUD back to lows since Sept.
UK data have been mixed recently and BoE divided on their implications. Westpac see MPC starting cuts in June, 75bps into year end, with RBA seen easing in Sept.
Though risks remain (in both directions), AUD/GBP could push to 0.53 (1.88-1.89) into June.

#pboc

Stay informed with Westpac IQ

Latest articles

Around the Grounds

FinanceAM

What's Priced In

Browse topics