US bond yields fell substantially despite only minor data, weighing on the US dollar. AUD/USD traded above 0.6600 for the first time since August. Today’s data includes Australia October retail sales and US November consumer confidence, while RBA Governor Bullock takes part in an HKMA-BIS panel.
Yesterday
Australia’s data calendar was empty but there was plenty of news about the RBA from the government. Legislation to reform the RBA was announced though with no real surprises given substantial previous commentary. The surprise was in Treasurer Chalmers’ selection of a Bank of England official to be RBA deputy governor, Andrew Hauser. He has lengthy experience in financial markets. AUD/USD traded a range of 0.6567 to 0.6595, for no net change at 0.6580. US equity futures joined the sour mood in Asia-Pacific stocks, though most moves weren’t especially large. The ASX 200 closed -0.75%, one of the weaker performances.
Currencies/Macro
The US dollar fell against all G10 currencies on the day. EUR/USD rose 15 pips to 1.0955. GBP/USD rose 0.2% to 1.2630. USD/JPY followed the fall in Treasury yields, down from 149.45 to 148.65. AUD/USD rose a net 20 pips to 0.6605, its first trade above 0.6600 since 10 August. NZD/USD rose from 0.6075 to 0.6100, also printing highs since August. AUD/NZD is little changed at 1.0830.
US new home sales in October fell -5.6% (est. -5.1%, prior revised down to +8.6%), the decline attributed to high mortgage rates. Inventory rose for a third month, and the median home price slipped to $409k from $422k. The Dallas Fed manufacturing index was little changed in November at -19.9 (est. -16.0, prior -19.2), the production component falling into contraction territory.
ECB President Lagarde reiterated vigilance was needed against inflation that remains too high, with risks that it could rise again in the near term. She also said bond holdings relating to the PEPP (Pandemic Emergency Purchase Programme) might be reviewed soon.
Interest rates
The US 2yr treasury yield initially rose to 4.98% but then began a steady descent, to 4.88%. The 10yr yield also rose early, to 4.51%, only to roll over to 4.39%. Markets are pricing the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 14 December, with a 50% of a rate cut by May 2024.
Australian 3yr government bond yields (futures) fell from 4.24% to 4.15%, while the 10yr yield fell from 4.58% to 4.48%. Markets are pricing no change at the next meeting on 5 December, but a 50% chance of one in February 2024. New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged on 29 November, and in February, with a 40% chance of a rate cut by July 2024.
Primary markets saw an uptick after the Thanksgiving shortened week; in Europe ANZ placed a GBP1.0bn covered and Roche placed EUR1.5bn across two lines, US markets saw an active session with Citibank NA issuing USD2.5bn across two lines, The Home Depot Inc issuing USD2.0bn and Brookfield placing USD700M. Itraxx Europe widened 1.5bps to 69.7bps with Unibail-Rodamco-Westfield amongst the worst performers. CDX IG widened 0.6 bps to 63.8bps; Dominion Energy and Verizon had the best performing contracts while Whirlpool and Ally Financial were a drag on the index. Cash bonds widened 0.2bps to 142.7, the best performing sectors were technology and communications, while utilities and materials were the worst performing.
Commodities
Crude markets slipped again as traders focused on the chances of OPEC+ extending and deepening cuts into 2024. The January WTI contract is down 62c at $74.92 while the January Brent contract is down 55c at $80.03. Bloomberg ran a story suggesting that Saudi Arabia is “asking others in the coalition to reduce their oil-output quotas in a bid to shore up global markets but some members are resisting, delegates said”. Eurasia group said that “if the group does not announce an additional cut of about 1mbpd on top of an extension of the Saudi voluntary measure, the risk is that the $80 per barrel floor that has largely held so far will shift downward to the mid or even low $70s”. Weak industrial profits data in China for October hit sentiment too. However, a storm on the Black Sea suspended loadings at the Novorossiysk and the CPC terminal used by Kazakhstan.
Metals were lower again with copper down 0.6% at $8,375 and nickel down another 0.7% to $16,025. Tin slumped another 3.8% to $22,979 and is down by a hefty 7.6% over the last 5 sessions, hitting lows back to March of this year. Nickel is down 12.3% so far this month. Goldman noted that the “combination of hitting the capacity cap and Yunnan winter cuts means that onshore primary [aluminium] production will likely grow 2% next year”. Chinese production year to date is up 3.4%yy. Goldman sees a shortage of 1.23mmt of primary aluminium next year, almost double the deficit in 2023 with the price rising to $2,600 in 12 months. France was said to be moving to save a struggling nickel processing plant in New Caledonia due to weakening prices. Finance Minister Bruno Le Maire said, “I want us to get a primary agreement in the early days of January”. Uganda will start issuing certification for exports of tin and a tin refinery in the west of the country is awaiting a licence to start operations.
Iron ore markets softened as China’s NDRC said it had conducted research on steel, iron ore and other commodity indices. Coming on top of an announcement yesterday that it was “studying and strengthening the supervision of iron ore at port, strengthening industry self-discipline, setting up reasonable and relevant rules for the use of storage yards, speeding up the turnover of goods, resolutely preventing the use of hoarding and speculation, and effectively maintaining market order”, it emphasised the lengths that the authorities are going to. The December SGX contract is down 25c at $131.40 while the 62% Mysteel index is down by $1.10 to $133.75. China will report its PMIs Thursday and Friday. Goldman sees a balanced market into 2024, noting greater risk to the upside than downside for iron ore prices. Citi noted that “any dip in iron ore from here through to at least the Chinese New Year could represent a buying opportunity”.
Day ahead
RBA Governor Bullock will speak as a panel participant at the HKMA-BIS “high-level” conference in Hong Kong, from 12:18pm Syd.
At 11:30am Syd, Australia October retail sales are expected to be more subdued after the 0.9% bounce in September, which was partly attributed to transitory factors including unseasonal early spring warmth and the new iPhone model. Westpac forecasts a 0.2%mth rise, keeping the annual rate consistent with contraction in inflation-adjusted, per capita retail spending. Note however that the ABS plans to discontinue this survey in 2025 as it now accounts for only 33% of household consumption.
The Conference Board measure of US November consumer confidence index may continue to reflect potential optimism after a pause in rate hikes (market f/c: 101.0). An unstable outlook for manufacturing may feature in the November Richmond Fed index (market f/c: +1).
Chicago Fed president Goolsbee (dove) and Fed governor Waller (hawk) are due to speak.
