Newsquawk Independence Day (Mini) Market Wrap: Cash stocks and bonds closed with futures flat, while oil gains again on supply factors

RBA: The RBA kept rates unchanged at 4.10% vs near-evenly split analysts' expectations between a 25bps hike and a hold, while the language remained hawkish as it noted that the Board remains resolute in its determination to return inflation to the target and further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but added that will depend upon how the economy and inflation evolve. Furthermore, the central bank noted that a significant source of uncertainty continues to be the outlook for household consumption and the Board remains alert to the risk that expectations of ongoing high inflation will contribute to larger increases in both prices and wages. Australian Government bond yields, after initially falling, pared some of the moves, while money markets remain priced towards a 4.60% terminal rate with the August 1st meeting implied hike probability at 60%.

CHINA: Overnight, the PBoC set the USD/CNY midpoint well beneath expectations and the prior at 7.2046 (exp. 7.2386, prev. 7.2157), helping support the Yuan. Meanwhile, Reuters reported, citing sources, that China's major state-owned banks cut USD deposit rates by as much as 150bp from July 1st. Ahead of US Treasury Secretary Yellen's trip to China on July 6th-9th, Yellen said she had frank and positive discussions Tuesday with China's ambassador, where they discussed maintaining open lines of communication and she raised issues of concern and conveyed the importance of the two countries working together. Elsewhere, on the recent export controls (On Monday, China's Commerce Ministry banned the exports of Gallium and Germanium-related products, from August 1st - metals used for chips), China's Foreign Ministry said China's export controls are in accordance with the law and it not targeting any specific country, while sources suggested China's commerce ministry is to meet with major producers in Beijing on July 6th. Note a Chinese senior official, close to China's commerce ministry, told the FT, "There will be more retaliatory measures against the snowballing semiconductor export controls from western countries", with lithium perhaps a sector to watch after German Economy Minister Habeck flagged the sector as big risk were it to come under export controls. Note the July 10th China trip for EU diplomat Borrell has been pushed back - albeit details on the reason for the delay are light. 

FOMC MINUTES PREVIEW: The minutes are likely to exhibit some of the growing splits within the committee which have already been reflected in public official commentary. Given the Dot Plot, which pencils in two more hikes by year-end, it's likely a majority are leaning towards a July hike (as money markets are pricing at an 80%+ probability), although how much this is telegraphed in the minutes remains to be seen with policymakers publicly saying their decisions are data-dependent, and those looking for any guidance for September and beyond will likely be disappointed with Powell keeping all options on the table in his more recent commentary. Of course, we will be looking for any preferences expressed for the rate path, albeit Powell has been reluctant to accept publicly that they are now in an "every other meeting", suggesting that they could hike at consecutive meetings again if needed, so it appears unlikely the minutes will box policymakers into a specific strategy. The minutes will likely show at least a few participants calling for caution in further hikes with the Dot Plot showing two members who have pencilled in no more hikes at all - we know one of those is (non-voter) Bostic. We could also see some reluctance expressed to not hike at the June meeting itself, with the Dot Plot seen at the time as an appeasement for the Hawks, albeit several officials have given weight to two further hikes as a modal outcome: San Francisco Fed's Daly (typically dovish) said later in June that two more hikes this year is a very reasonable projection. However, money markets themselves are reluctant to fully bake in two more hikes with the terminal rate currently priced at 5.40% in November - note we get the key June NFP report this coming Friday and June CPI next Wednesday. For the full primer, please click here. 

FX: The Dollar traded sideways, along with the Euro but Yen saw gains. The Japanese Finance Minister Suzuki said Japan is keeping in close contact with the US on a Vice Ministerial level regarding FX, something that Saxo Bank suspects is sending signals that a co-ordinated intervention may be coming with USD/JPY above 144.00, with participants sceptical on moves above 145.00, but more broadly, analysts note a move above 150 will only embolden the case for intervention. AUD saw gains vs the Dollar but notable weakness vs the Kiwi after the RBA opted to keep rates unchanged against split expectations for another hike or leaving rates unchanged. That particularly supported NZD which was the outperforming currency on US Independence Day. CAD & NOK saw gains as oil prices rose while GBP saw gains vs the buck and the Euro. The Rouble was flat vs the Dollar after CBR First Deputy Governor Yudaeva said the Bank sees no need to return to mandatory foreign currency sales in light of recent Russian Rouble weakening; USD/RUB tested 90.0000 to the upside, a level not seen since March 2022. BRL was weaker vs the buck, while MXN saw gains. Brazil President Lula said he backs a common currency for trade between Mercosur countries, while noting there is room for Mercosur to increase trade with Chile, Columbia, Ecuador and Peru. The PLN outperformed in CEE while HUF underperformed, with CZK seeing mild weakness after CNB's Kubicek noted the current 7% main rate is restrictive enough to bring inflation back to target, although Governor Michl inferred it may need another hike. TRY remained under pressure despite CBRT providing FX to private banks to meet the needs of protected accounts and deactivitng protocol enabling FX sales via State Banks with the Turkish Treasury. The Yuan gained on a firmer Yuan fixing from the PBoC and on reports China's major state-owned banks cut USD deposit rates by as much as 150bp from July 1st, according to Reuters sources.

FIXED INCOME: With cash US Treasuries closed, futures trade was particularly light in the US with contracts tracking their European counterparts on abysmal volumes, making it hard to read too much into the moves. Initial selling in spillover from EGBs was seen as Europeans arrived, taking some cues from the renewed upside in energy prices no doubt as the recently announced extension of Saudi and Russian oil supply cuts continue to provide support. T-Notes bottomed at 111-25+, which matches last Friday's post-SVB lows, before recovering later in the European morning, with UK gilts seeing a particular recovery after a well-received green Gilt auction from the DMO. T-Notes ultimately peaked at 112-02 before paring back beneath the round figure as Europe began closing shop. The return of liquidity on Wednesday is accompanied by the June FOMC minutes and NY Fed's Williams (voter, dovish), although Thursday's ADP, JOLTS, and jobless claims, in addition to Friday's NFP, will be where the powder is kept dry for.

OIL: Oil prices rose gradually through the European session on Tuesday as the recent production cuts from Saudi and Russia continue to provide near-term support. WTI and Brent futures peaked at USD 71.36/bbl and 76.29/bbl, respectively, failing to breach their Monday peaks of USD 71.77/bbl and 76.60/bbl. It's also worth flagging again the power outages and affected operations in Kazakhstan that were first reported on Monday, with CPC, which accounts for 1% of global oil deliveries, announcing Tuesday that loading points at Tengiz and in Atyrau oil fields are working below full capacity and using reserve power supplies. Reports suggested the blackouts reduced 13% of the nation's oil production on Monday, which equates to around 0.25% of global production.

04 Jul 2023 - 18:00- Fixed IncomeEconomic Commentary- Source: Newsquawk