March 3, 2023

Markets Today: (No) Resistance

The run of worse than expected (global) inflation-related news continues to ripple through markets, the latest culprits being core Eurozone CPI and revised US Q4 unit labour costs.

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Overview:  US yields pushing well above 4 percent

  • US Treasury yields sail above 4%, EU CPI, revised US labour costs latest culprits
  • US equities (were) headed for third successive down day but turn higher on Fed’s Bostic
  • USD stronger across the board, AUD back down near 0.67
  • ISM Services tonight the week’s key release
  • Also Caixin Services PMI, Tokyo CPI, AU Home Loans, final S&P Global PMIs

The run of worse than expected (global) inflation-related news continues to ripple through markets, the latest culprits being core Eurozone CPI and revised US Q4 unit labour costs. 10-year US Treasuries were already pushing above 4% during yesterday’s Tokyo session and bearish curve steepening has been the order of the European and US trading days, US 2s currently +3bps and 10s +8bps (to 4.07%) relative to Wednesday’s New York close. Yields are though back slightly from the highs following comments from Atlanta Fed president Raphael Bostic (see below), the latter also a catalyst for a smart intra-day turnaround in US stocks where the major indices are all currently in the green with an hour of NYSE trade to go.  The US dollar is stronger against all G10 currencies – featuring losses of between 0.5% and 0.7% for the Aussie, Kiwi, Euro, and Sterling, albeit also back from their intra-day lows post Bostic. US ISM Services top Friday’s dance card and where there will be as much interest in the ‘Prices Paid’ sub-series as the headline reading.

While no great surprise after this week’s higher than expected Spanish, French and German CPI, Eurozone core CPI at 5.6% in February up from 5.3% in January and (officially) 5.3% expected,  still managed to make a negative impression on bond markets. Headline CPI at 8.5% was down from 8.6% but 0.2% stronger than the beginning-of-week survey median.

Perhaps more disconcerting, at least for the US bond market, was the revised Q4 data on Unit Labour Costs, now put at 3.2%, a very hefty upwards revision from 1.1% originally reported and meaning that productivity in Q4 is now calculated at just 1.7% (annualised rate) down from 3.0% first reported.

Atlanta Fed President Raphael Bostic has spoken in the last 90 minutes or so and said he is ‘firmly in the quarter-point move’ camp. He says the Fed could be a position to pause by ‘mid to late summer’ but that ‘ I do think we’re in a period now where it is appropriate for us to be cautious….(because) there is a plausible case to suggest we’re going to see some more robust slowdown’  In an essay published earlier on the Atlanta Fed’s website, Bostic wrote that he wanted a 5.0-5.25% policy rate (i.e. only another 50bps from here).

Earlier Thursday, Boston Fed President Susan Collins said in a radio interview policymakers need to keep raising interest rates to get inflation under control, though exactly how much higher borrowing costs need to go will hinge on incoming data, and that ‘then I do believe that it will be important to hold there for some time because it takes a while for the effects of tighter financial conditions to work through the economy’. Very much ‘on message’.

Bostic is not a 2023 FOMC voter yet his remarks, which crossed the wires at about 5:30 AEDT, look to have been the catalyst for the early afternoon rally of more than 0.5% in the S&P 500 and NASDAQ, so both more than reversing morning losses to currently sit up 0.4-0.5% with an hour of NYSE trade still ahead. This follows an up-day for European stocks (e.g.  Eurostoxx 50 +0.6%).

US Treasury yields reached an intra-day high of 4.09% at 10 years before peeling back slightly post Bostic (4.07% now) and 2s a high of 4.94% but are back down to 4.90% for a net gains of just 2.5bps on Wednesday’s NY close

In currencies, it’s been onwards and upwards for the US dollar in conjunction with the US 10-year yield sailing up through 4%. USD indices are just back from their highs – again post Bostic – but BBDXY is still up just over 0.4% on the day and the narrower DXY 0.5%.  Every G10 currency is weaker against the greenback, EUR and SEK faring worst at -0.7% while AUD has (just) been spared a revisit to sub-0.6700 (low of 0.6707) and currently sits 0.5% down on 24 hours ago at 0.6727.

Yesterday in Australia, Dwelling approvals fell -27.6% m/m in January (Consensus -7% and NAB -8%). A reversal in volatile attached (apartment) approvals, which fell 40.8% after a 41.9% rise in December drove the decline, but more surprising was the weakness in detached house approvals which fell 13.8% m/m. We caution against overinterpreting given January seasonality can be difficult to adjust for, and we would note that a 14% m/m fall in January 2022 was almost fully unwound in the following month.  In trend terms, house approvals are now 43% below their peak in February 202. We get January Home Loan data today (see below).

Coming Up

  • The February US ISM Services report stands proud as Friday’s – and indeed the week’s – key economic release. After all, services make up more than 80% of the US economy and the early January (weak) and February (strong) reports have been directly responsible for much of the market volatility across rates, FX, and equities in the first two months of 2023.
  • After the rise from 49.2 in December to 55.2 in January, consensus for tonight’s February reading is 54.4, signalling a still healthy rate of service sector growth. Most market estimates fall in the 54.0 – 55.5 area, though run as low as 52.4 and high as 56.6.  The Prices Paid sub-series will be of equal interest, after markets reacted more to the rise in this component of the Manufacturing ISM on Wednesday than the headline reading. It was last at a (still very high) 67.8.
  • Keen interest too, during our time zone, in whether the Caixin Serves PMI mirrors the strength evident in Wednesday’s official version (56.3 from 54.4).Consensus is 54.5 up from 52.9 in January.
  • Australia has January Home Loans data.  New housing loan commitments fell 4.3% m/m in December, its eleventh consecutive month of decline, to be at its lowest level since October 2020. We expect that trend to continue, pencilling in a 3.0% fall in January.
  • Also up is the Feb ANZ NZ Consumer confidence, Tokyo February CPI and nationwide unemployment, and final February S&P Global PMIs (UK, EZ, US, etc).
  • Note too, China’s annual National Party Congress kicks off on Sunday, and while we aren’t expecting any major fiscal policy pronouncements we might get some hint of official GDP growth ambitions for this post-zero covid calendar year (in which case, expect something with at least a ‘5’ in front of it).

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