Another round of weaker US data - services PMI shows another steep drop; new home sales plunge further. Brent crude hits USD100 per barrel in further upside on fear of Saudi Arabia production cut

Weaker US data overnight got the market’s attention causing some choppy trading conditions. Equity markets remain on the soft side while the US 10-year Treasury rate continues to trade just over the 3% mark. The weaker US data knocked the USD off its perch and it shows broadly based losses, helping the NZD to push above 0.62 and the AUD above 0.69.

There hasn’t been much news to digest overnight apart from some economic data releases. PMI data for August were a mixed bag. The euro area composite was below 50 for a second consecutive month, suggesting a contracting economy, led by Germany and France – with likely worse to come as surging energy costs bite and the ECB continues to raise rates to beat down inflation. The UK services PMI surprised to the upside, holding steady around 52.5, while the manufacturing index plunged over 6pts to 46.0.

The US PMIs are more volatile than the more widely followed ISM indices which are released early next month, but they showed further falls, with another surprising particularly large drop for the services index, down over 3pts to 44.1. The composite index fell to 45.0, its second consecutive sub-50 reading and the weakest result in more than two years, a warning sign that the US economy might not be as robust as the Fed thinks. Certainly, housing market data continue to disappoint and suggest a deep downturn underway, this time new home sales fell 12.6% m/m in July, much weaker than the modest fall expected. Another regional Fed manufacturing index also fell, the Richmond index down 8 pts to minus 8.

Market conditions have been choppy with the weak US data triggering a notable market reaction.  The 10-year Treasury rate was trading at 3.07% ahead of their release, and fell as low as 2.98%, before rebounding again to 3.05%, about 4bps higher since the NZ close. US equities are trading relatively flat, with the S&P500 sustaining the more than 3% loss of the past couple of trading sessions.

The USD is broadly weaker, giving up some of its strong gains over the past week and for the day is down 0.4% on the DXY index. The NZD blasted up through 0.62, reaching about 0.6245 but the USD move is showing signs of fading and the NZD currently trades down at 0.6210, but still up 0.7% from this time yesterday. The AUD saw a similar move and currently sits at 0.6920. EUR has been a laggard in the move but is still up modestly to 0.9960, while GBP has been better, up 0.4% to 1.1820. Apart from a flat NZD/AUD at 0.8970, NZD crosses are modestly higher.

Oil prices are near 4% with Brent crude trading above USD100, making further gains since Saudi Arabia threatened to cut production. Yesterday we noted that Saudi Arabia wasn’t happy with the recent fall in oil prices, with the oil minister stating that futures prices don’t reflect the underlying fundamentals of supply and demand. Yesterday Brent crude was trading down around USD93 per barrel before his comments, so the market has taken them seriously.

For the domestic rates market, NZDM launched its 2035 inflation-indexed bond tap and concurrent repurchase of the 2025 inflation-indexed bond.  There was further upside pressure on domestic rates, the market continuing to be driven by global forces, with moves in the order of 6-9bps across the NZGB and swaps curves. The 10-year NZGB closed at 3.80%, the highest level since the end of June. The 2-year swap rate closed at 4.18%, the highest level since late-June. Since the NZ close the Australian 10-year bond future is up about 5bps in yield, likely to add further upside pressure to local rates on the open.

In the day ahead, watch out for some hawkish headlines from the Fed’s Kashkari, ahead of US durable goods orders and pending homes sales data tonight. The market could well be a holding pattern, ahead of Fed Chair Powell’s Jackson Hole speech at the end of the week.