Market Headlines
The Russian invasion of Ukraine yesterday, and consequent sanctions imposed by countries, were the focal points for markets. US Q4 GDP second estimate was left unchanged at an annualised 7.0%. Weekly initial jobless claims were in line with expectations at 232k, although continuing claims were lower than expected at 1.486m (est. 1.58m). New home sales in January were as expected at 801k (est. 803k, from an upwardly revised 839k). Chicago Fed national activity survey rebounded to +0.69 (est. of 0.16, prior +0.07). Kansas Fed activity survey rose to 29 (est. 25, prior 24).
Fedspeak continued to endorse a rate hike in March. Mester said a March hike is still appropriate, barring an "unexpected turn in the economy." She noted that geopolitical events are adding to inflation and growth risks near term, but her outlook is still for a strong expansion in the economy this year. Bostic said he is very open to four or more rate hikes this year, with the Ukraine situation not “modally” affecting expectations for March. Barkin said "time will tell" if the developments in the Ukraine will alter the FOMC's outlooks.
Risk sentiment deteriorated further following news that Russia had invaded Ukraine. The S&P500 was down 2.6% at one point but has rebounded during the past few hours to +0.3%. Bond yields also fell and then rebounded, while the defensive US dollar rose sharply.
The US dollar index is up 0.8% on the day, making a two-year high. EUR fell from 1.1260 to 1.1106 – a two-year low. USD/JPY rose from 114.41 to 114.65. AUD fell from 0.7200 to 0.7095 before rebounding to 0.7165. Underperformer NZD fell from 0.6730 to 0.6631 before rebounding to 0.6695. AUD/NZD rose from 1.0680 to 1.0729 before slipping to 1.0700.
US 2yr treasury yields fell from 1.57% to 1.46%, currently 1.54%, the 10yr yield down from 1.96% to 1.85% before retracing to 1.96%. 10yr linker break-even inflation spiked from 2.57% to 2.71% (a three-month high) before retracing. Markets still expect a 25bp hike in March but have largely abandoned expectations of a 50bp move. Australian 3yr government bond yields (futures) ranged between 1.64% and 1.72%, while the 10yr yield ranged between 2.16% and 2.25%. The first RBA rate is 80% priced for June 2022.
Commodities: Brent crude oil futures rose 5.7% to $102 - a fresh high since 2014, copper fell 0.7%, gold rose 0.9%, and iron ore fell 1.3% to $137.
Overnight Currency Range
AUD/USD 0.7094 0.7233
EUR/USD 1.1106 1.1207
GBP/USD 1.3272 1.3553
USD/JPY 114.40 115.69
NZD/USD 0.6630 0.6775
USD/CAD 1.2728 1.2877
USD/CNH 6.306 6.335
AUD/JPY 82.02 83.17
AUD/NZD 1.0666 1.0722
AUD Thoughts
Economic data is expected to take a backseat over the coming days as the full impact of the Russian invasion of Ukraine plays out.
That said, US personal income and outlays for January are due this evening. Personal spending numbers are likely to show a reprieve for real goods consumption after the strong retail sales figures for the month. Real services spending growth may have slowed somewhat amidst the Omicron wave. The savings rate may show a decline due to a fiscal headwind from the cessation of child benefit checks.
The US core PCE price index tonight is likely to show a firm monthly gain with growing breadth, like what was apparent in the CPI. Health care services inflation, which constitutes an elevated share of the core PCE price index, may show an acceleration.
AUD/USD cleared the order book overnight as it traded to a low of 0.7094. Bids are expected to congregate back toward the lows while offering interest lies above 0.7200.
Event Risk Data Today
NZ: The trade deficit is anticipated to remain wide in January given the ongoing strength in imports (f/c: -1250mn). Real retail sales in Q4 are estimated to have risen 5.0%. Continued activity restriction limited the recovery in spending. RBNZ Governor Orr speaks at Waikato University on inflation and the pandemic.
US: Personal income in January is estimated to have fallen 0.3%, spending +1.6%. Weakening purchasing power is becoming a concern, and strength in services is necessary for GDP growth to be above trend. The core PCE deflator is estimated to have risen from 4.9% to 5.2% y/y. PCE inflation has reached a 40–year high, and price pressures will only slowly abate through 2022. Also released are durable goods orders for January, and consumer sentiment (Michigan Univ.).