June 28, 2023

Markets Today – Better in the U.S.A.

Better than expected US data releases and hawkish ECB talk are two main macro themes from the price actions overnight. US equities embraced the positive vibes from Asia and then better than expected US data releases provided an additional tail wind. In contrast, European equities were little changed with hawkish ECB talk dampening the mood. The belly of the curve led a rise in UST yields while the USD lost a bit of ground.

Todays podcast


  • US data releases extend streak of positive surprises. Consumer confidence best since early 2022
  • ECB speakers talk tough in Sintra
  • US equities embrace positive vibes from Asia. Europe doesn’t
  • Belly of the curve leads rise in UST yields. EU core yields also higher
  • EU FX leads gains against USD. AUD a tad higher, JPY weaker again (USD/JPY above ¥144)
  • Iron ore spearheads gains in commodities supported by positive soundbites from China’s Premier Li Qiang
  • Coming up: AU Monthly CPI, CH Industrial Profits, Sintra talkfest, US Trade Balance

Events Round-Up

CA: CPI (y/y%), May: 3.4 vs. 3.4 exp.
CA:  Core CPI (avg, y/y%), May: 3.9 vs. 4.0 exp.
US: Durable goods orders (m/m%),     May: 1.7 vs. -0.9     exp.
US: Durables ex transport (m/m%),    May: 0.6 vs. 0.0 exp.
US: New home sales (k), May: 763 vs. 675 exp.
US: Conf. Board cons. Confidence, Jun: 109.7 vs. 104.0 exp.

Well, they look to the east, they look to the west
The third world wonders, which way’s the best..
Man there ain’t no choice
It’s better in the U.S.A. (It’s better in the U.S.A.) – Glenn Frey

Better than expected US data releases and hawkish ECB talk are two main macro themes from the price actions overnight. US equities embraced the positive vibes from Asia and then better than expected US data releases provided an additional tail wind, US Consumer confidence reading is now the best since early 2022. In contrast, European equities were little changed with hawkish ECB talk dampening the mood. The belly of the curve led a rise in UST yields while the USD lost a bit of ground. European FX led the charge against the greenback, the AUD is a tad stronger while JPY extended recent weakness.

Overnight US data releases stretched the recent string of better-than-expected data releases. New homes sales recorded the fastest annual rate in more than a year, up 12.2% on the month vs expectations for a 1.2% decline, May (preliminary) durable goods orders also topped estimates with the headline print showing a decent at 1.7% vs a -0.8% consensus. The key non-defence, ex-air capital goods orders were also stronger again at +0.7% m/m (consensus 0%) though here last month’s 1.3% gain was cut back to +0.6%.

Then topping the bill, the US Conference Board consumer confidence for June improved markedly, jumping from 102.5 to 109.70 – the best level since very early in 2022. The improvement was in both the current situation (to 155.3 from 148.9) and in the expectations component (to 79.3 from 71.5). The latter is derived from participants views on their outlook for income, business and labour market conditions.

US data releases are feeding the theme of “sectoral recessions” playing with different lags, making the Fed job to tame inflation harder. US housing was the of the first sectors to get hit from tighter Fed policy, but now is showing signs of life again, manufacturing is still in recession but the services sector continues to enjoy a decent expansion. Meanwhile the resilience of the labour market and consumer are feeding not detracting from inflationary pressures. Overall, the data is telling us the Fed needs to keep its foot on the tightening pedal.

Meanwhile back in the old continent, the message coming from Sintra, Portugal, is that the ECB still has work to do with a slowdown in economic growth part of the solution to the objective of bringing inflation to heal. ECB President Lagarde warned that rising wages are going to sustain inflation “This is weighing on productivity growth and… the motivation for firms to hoard labour may not disappear quickly” (a familiar theme down under too).  Lagarde then added that “We need to ensure that firms absorb rising labour costs in margins. This hinges on our policy dampening demand for some time so that firms cannot continue to display the pricing behaviour we have recently seen.”. Worth adding here too that this is an emerging debate with many analysts and central bank speakers, noting the need to stop firms protecting margin via higher prices, thus the only way central banks can stop the spiral of higher prices, is by curtailing demand.

Lagarde also commented the market must avoid expectations of a rapid policy reversal which suggests the ECB may intend to hold rates at the peak for longer. Interest rate derivative markets weren’t much changed and almost fully price a 25bps hike in July and a total tightening of 50bps.

Asian equities closed with handsome returns aided by positive soundbites coming from China . Speaking during our time zone yesterday Chinese Premier Li Qiang said that growth has picked up this quarter and more stimulus was in store, adding that China will roll out more practical, effective measures to expand domestic demand and stoke market vitality. Yesterday the Hang Seng index closed 1.88% higher while China’ CSI 300 gained 0.94%.

European and US equity markets opened higher, embracing the positive vibes coming from Asia, but after that it was a story of contrasting fortunes. Hawkish ECB rhetoric dampened the mood in Europe with the Stoxx 600 index reversing initial gains, ending the day little change. In contrast, US equities extended their gains with the string of better-than-expected US data releases providing an extra tailwind. The NASDAQ closed 1.65% stronger while the S&P 500 gained 1.15%.

Ahead of the US data releases, UST yields drifted lower, but then positive data surprises triggered a moved higher in yields. The belly of the curve led the move up with the 5y tenor climbing 6bps to 4.031% over the past 24 hours, the 2y Note edged up by 2bps to 4.764% and the 10y gained to 4.2bps to 3.764% currently, close to the overnight high of 3.7710%. European bond yields also closed higher with 10-year Bunds up 5bps to 2.35% and 10-year Gilts up 7bps to 4.38%.

Moving onto FX, the USD has lost a bit of ground over the past 24 hours with the improvement in risk sentiment playing a part alongside positive China soundbites while the move up in core yields appears to have had a greater impact on European currencies . The BBDXY and DXY indices are down ~0.2%, largely reflecting euro gains partly offset by extension of recent JPY weakness. The euro is up 0.5% to 1.0961, GBP is +0.28% to 1.2747 with smaller European FX pairs also showing similar gains.

Yesterday the PBoC set a stronger CNY fix for a second consecutive day, the CNY and CNH have endured a swift depreciation trend from 7.20 to 7.25 and now the Bank is signalling some discomfort on the pace of depreciation. The stronger fix contributed to a sharp move lower in USD/CNH from levels near 7.25 to 7.2273.   It remains to be seen to what extent the PBoC is uncomfortable with the actual level of CNH/CNH, for one a weaker currency is helpful for the external side of the economy, China doesn’t have an inflation problem and one of its major competitors, Japan, is also dealing (engineering) a lower currency. History shows the PBoC will need to deliver a long series of strong fixes to instigate a reversal in CNY/CNH fortunes, we now have two, so there is a long way to go still, specially once we consider the fact that the Fed still has tightening bias while the PBoC has an easing one.

JPY is the weakest G10 currency over the past 24 hours and USD/JPY now trades above the ¥144 handle. The move up in core yields alongside improvement in (equity) risk appetite are supporting a weaker JPY given the BoJ ultra-easy policy. We are now approaching FX intervention territory with the market bracing for an MoF announcement as an when USD/JPY climbs above ¥145.

The AUD made small inroads against the USD over the past 24 hours, the stronger CNY fixed helped the pair trade to an intraday high 0.6721 but in the end the moved proved short lived. The Aussie starts the new day at 0.6686, up 0.2% relative to levels this time yesterday.

Looking at commodities, is worth noting that Iron ore has extended its month to date gains, up 3.22% over the past 24 hours. Metal prices have also performed while gold (-0.5%) and oil prices (-2.5%) have lost ground. Iron ore is up 14.4% month to date, comfortably leading the gains within the commodity space in June. Iron ore is telling us China stimulus is coming and should be good news, while oil prices are highlighting concerns over global slowdown.

Coming Up

  • This morning Australia publishes the May monthly CPI and China releases industrial profits also for May. Later today Germany and France get consumer confidence readings. The ECB Sintra kumbaya continues with a blockbuster panel discussion including BoE Governor Bailey, ECB President Lagarde, fed Chair Powell and BoJ Governor Ueda.
  • We expect Australia May CPI to show a decline in y/y inflation to 5.9% from 6.8%, but my colleague Taylor Nugent has cautioned not to be head-faked by base effects with much of the yoy decline driven by base effects associated with fuel volatility (May fuel prices were -5.2% m/m compared to +11.0% in May 2022). More important for the RBA will be the details on services inflation. The recent RBA Minutes noted the excl. fuel, fruit/veg and travel measure when discussing the CPI indicator. We think a print of 6.4 y/y or above on this measure would demonstrate upside risk to the RBA’s inflation forecasts. For more details click here for Taylor’s note.
  • As for the Sintra Blockbuster panel discussion, not sure we will get any new views from the Central Bank leaders but given contrasting strategies between the BoJ and the rest, it will be interesting to see how BoJ Governor Ueda justifies its ultra-easy policy stance notwithstanding the fact that Japan is also experiencing similar inflationary pressures as other DM economies.
  • Tonight the US releases May wholesale and retail inventories figures as well as advance goods trade balance (May -$93.6b vs -$96.8b prev.).

Market Prices

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets.  Read our NAB Markets Research disclaimer.