US equities edge higher in quiet markets. Traded volumes were the lowest since October last year. US Treasury yields higher with yield curve continuing recent flattening trend

In rare day devoid of any US economic data, equities inched higher into end of last week with the S&P briefly making a 10-month high in intra-day trade. Traded volumes were the lowest since October last year with many working from home given air quality issues for New Yorkers and as investors begin to look ahead to the key risk events in the week ahead. The VIX, a measure of implied volatility for the S&P, moved below 14%, the lowest level since the COVID spike higher in 2020. Despite subdued activity, the S&P closed higher for the fourth consecutive week while the Nasdaq has made the largest streak of weekly gains since 2019.

China inflation data remained subdued in May with CPI rising 0.2% over the year while producer prices declined 4.6% on the back of lower commodity prices and weak domestic and international demand. This is the latest sign that the economy is cooling following soft manufacturing, exports and housing data. Industrial production, fixed asset investment and retail sales data will be released this week amid growing speculation that the PBOC might cut interest rates or reduce the reserve requirement ratio for banks to support the economy. The PBOC has left the medium-term lending rate (MLF) unchanged since September and are expected to leave the rate unchanged this week.

US treasuries moved higher in yield with the 2-year up close to 8bps ending the week close to 4.60%. Yields dipped briefly in tandem with Canadian bonds following the release of labour market data in Canada, which was weaker than expected, but Treasury yields resumed the upward trajectory soon after. The yield curve flattened, with relatively larger moves in the front end and belly, taking 2s10s and 5s30s spreads to multi month lows. The market is anticipating upcoming supply with 3-year 10-year maturities offered this evening followed on Tuesday by 30-year Treasuries.

Currency markets were largely subdued into the weekly close. The US Dollar was marginally stronger against the Euro and Yen. The Norwegian Krone was the best performing developed market currency after core inflation rose unexpectedly to a record high taking gains over the week to more than 2% against the US Dollar. NZD/USD traded higher in quiet currency markets moving up toward 0.6130. After a week of underperforming on the cross relative to the AUD, NZD/AUD stabilised with some technical indicators suggesting the cross has moved a long way in quick order and may be due a consolidation.

NZ fixed income markets traded lower in yield on Friday in a largely parallel shift. Australian 3 and 10-year bond futures were little changed since the NZ close while the move higher in US rates suggesting a modest upward directional bias for NZ rates.  It is a quiet start to the week from a data perspective with a largely clear calendar apart from domestic card spending for May. And the public holiday in Australia also likely to dampen market activity.

Further ahead, GDP and Current account data will be the main domestic catalysts alongside migration and food price data. There are several key risk events on the global calendar with the release of US CPI followed by the rates decisions from the US Federal Reserve (Fed), European Central Bank (ECB) and Bank of Japan (BOJ). The Fed is expected to pause the hiking cycle when it meets Thursday morning (NZT) after ten consecutive rate hikes.  There is about 8bps of tightening priced currently suggest a roughly 30% of a 25bps move according to derivative markets. The FOMC will also update its economic projections and expectations for the evolution of the Fed Funds rate.

The BOJ is expected to keep policy settings steady with the July meeting viewed as more likely to adjust the yield curve control (YCC) program according to recent press reports. The market is pricing a 25bps hike by the ECB and the focus will be on the outlook with a follow up 25bp hike priced by September.