Markets Daily

A solid US November employment report sparked a rise in US yields, though a slide in consumer inflation expectations reinforced Fed easing expectations. Equities rallied but AUD slipped to 0.6570. This week’s calendar is crowded but there is little today.

Friday

Australia’s calendar was quiet though we did see the Statement on the Conduct of Monetary Policy agreed between the Treasurer and the RBA Board. This marks the next step in the response to the RBA Review earlier this year. The changes are in line with the Review recommendations. We expect the February post-meeting communication to include unattributed votes and much more detailed forecasts. Most regional bourses rallied, the ASX 200’s 0.3% gain an underperformance. The exception was Japan, where further (more modest) upward pressure on Japanese government bond yields and the yen upset the Nikkei 225.

Currencies/Macro

The US dollar rose against all G10 currencies except CAD on Friday on the better profile of data and the rebound against JPY. EUR/USD was volatile, closing at 1.0762 (-0.3%) but off a spike low of 1.0724, GBP closed -0.35% at 1.2550. USD/CAD chopped around 1.3580. AUD/USD was around 0.6600 pre-NFP and opens the week around 0.6570. NZD/USD slipped about 55 pips or -0.9% to 0.6120, leaving AUD/NZD up 40 pips at 1.0745.

US November non-farm payrolls rose 199k (consensus 185k) though the prior two months were revised down a combined -35k. November unemployment declined to 3.7% (consensus unchanged at 3.9%) and underemployment pared back to 7.0% from prior 7.2%. The participation rate ticked up to 62.8% (prior 62.7%), but the pullback in unemployment was more pronounced. Average weekly hours worked also rose to 34.4 (est. unch. at 34.3) though average hourly earnings were unchanged (as expected) at 4.0%y/y.

US preliminary December consumer sentiment (University of Michigan) firmed to 69.4 (est. 62.0, prior 61.3) on higher expectations of 66.4 (est. 57.0, prior 56.8) and current conditions at 74.0 (est. 68.5, prior 68.3). Inflation expectations surprised with 1yr pulling back to 3.1% (est. 4.3%, prior 4.5%) and 5-10yr slipping to 2.8% (est. 3.1%, prior 3.2%).

UK November BoE/Ipsos 12 month Inflation Expectation pulled back to 3.3% (prior 3.6%).

German final November CPI was unchanged from preliminary levels with headline CPI at 3.2% and EU harmonised 2.3%.

Interest rates

The US 2yr treasury yield bounced from 4.63% pre-data to 4.72% while 10yr yields firmed from 4.18% pre-NFP to 4.225%. Though markets are not pricing any move at this week’s FOMC meeting, March 2024 pricing was pared back to around 70% for a cut, and December 2024 Fed pricing pared back some 16bps to -111bps or 4.22%.

Australian 3yr government bond yields (futures) pared -7bps to imply 3.97%, while 10yr yields also firmed +6bps to 4.36%. Market pricing in February 2024 and March 2024 is effectively for zero change.

New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged on 28 February, with no further rate hikes in this cycle, and around 30bps cut for August 2024.

Credit spreads were firm with Main marginally tighter at 66.5, CDX in a bp to 61.5 to be just off its ytd lows, and US IG cash was 1-3bp better on the combination of sound underlying sentiment and lack of primary activity (no supply in either Europe or the US on Friday) as the year draws to a close. The majority of the remaining supply for the year is expected to be completed early this week ahead of the Fed.

Commodities

Crude markets managed a small bounce on Friday as equity markets hit 21-month highs though we still closed lower on the week, for the seventh consecutive weekly loss. The US DoE announced it will purchase 3mmb of crude for March delivery and will hold monthly tenders through at least May to refill the SPR. The DoE has bought close to 9mmb in 2023 and has secured nearly 4mmb on exchange returns so far this year. Venezuelan President Maduro threatened to annex the disputed oil region of Essequibo which is claimed by Guyana after holding a referendum last week which, if he follows through, would likely see US sanctions reinstated. Guyana is intensifying border security measures while Brazil has increased its military presence along its borders. The US has called on Venezuela to respect the territory as Guyana’s until the matter is settled. Guyana has denounced Venezuelan aggression and vowed to resist the claim. Exxon and Chevron are significant operators in the region. Reuters reported that the Venezuelan President Maduro and Guyana President Mohamed Irfaan Ali will meet on Thursday to discuss the dispute. Bloomberg reported that Europe is poised for an influx of US diesel this month according to data from Kpler as a result of worsening bottlenecks in the Panama Canal. And the EU reached a deal Friday that would allow member states to ban Russian LNG without EU wide sanctions.

Metals ended the week on a positive note with copper bouncing 1.15% to $8,438 and nickel up 1.8% to $16,805. There was little fresh news though the ‘Goldilocks’ NFP report and risk on move helped lift sentiment. First Quantum called on Panama to clear “illegal roadblocks” noting that the “access road to the mine and the international port must be urgently cleared”. Over the weekend however the Panama government formally ordered First Quantum to end all operations at the Cobre Panama mine. Anglo American shares plunged 18% Friday after it announced plans to cut copper production in mines including the Los Bronces mine in Chile. Chinese press noted that a Politburo meeting was held December 8, vowing that fiscal policy will be stepped up “appropriately” under the slogan of “using progress to promote stability” though monetary policy was ‘downgraded’ to “targeted” rather than forceful.

Iron ore markets closed the week on a high with the Politburo meeting lifting sentiment further. The January SGX contract is down 15c from the same time Friday morning at $134.60 though the 62% Mysteel index rose $1.35 to $137.30. The FT reported that the authorities have told steel manufacturers that annual production caps would not apply this year while the weaker yuan has allowed excess steel supply to be exported, helping iron ore prices to surge against expectations. Chinese iron ore imports in November came in at 102.74mt up 7.3% versus the 5yr seasonal average. China will report industrial production and fixed asset investment for November on Friday. Mysteel will also hold its annual steel conference in Shanghai on Friday.

Day ahead

A huge week for central bank meetings – Fed, Bank of England, ECB – starts with a quiet calendar.

NZ: November’s REINZ house sales and REINZ house prices are expected to reflect a strengthening housing market, though interest rates are still a suppressing factor.

UK: Following recent rapid falls, December’s Rightmove house prices are expected to be near lows.