PBoC and BoJ step up verbal intervention to control their depreciating currencies. Softer US consumer spending and PCE deflators support US Treasuries and US equities but drive the USD lower

Data on Friday night showing weaker US consumer spending and inflation saw the market shade down expected US rate hikes, pushing down US Treasury rates from pre-data highs, driving the USD lower and US equities higher.  Against a backdrop of higher risk appetite, the NZD ended the week on a stronger note, recovering the losses seen in the previous couple of days.

There was a plethora of data for the market to absorb on Friday. The key market moving release was data showing US real personal spending flat in May and with downward revisions in April conveying a message of much weaker consumer spending in Q2 – on track for annualised growth of around 1% after the 4.2% splurge in Q1.

The associated PCE deflator data showed slightly weaker than expected inflationary pressure as well – the headline annual increase down to 3.8% compared to the peak of 7% just under a year ago and the core rate down to 4.6%. The inflation measure that Fed Chair Powell said the central bank was close watching was services inflation ex housing and energy services, and that showed an increase of just 0.2% m/m, the weakest reading in ten months. That underlying inflation was falling was supported by the Dallas Fed trimmed mean PCE deflator, with the annualised rate for the month down to its lowest rate in over a year of 3.2%.

While the market slightly pared expected Fed tightening over coming meetings, the 2-year rate still ended the day 4bps higher at 4.9% while the 10-year rate was flat for day at 3.84%, but down from the overnight high of 3.89%. Thus, the 2s10s curve showed further inversion and closed the week at minus 106bps, close to the peak inversion just ahead of the failure of Silicon Valley Bank in March.

The data release supported US equities, with all the key benchmarks gaining by more than 1%, capping off a very strong month and quarter. Apple closed the day with a $3 trillion market cap, the first company in history to attain that mark. The Nasdaq 100 index notched its best first-half of a year, up nearly 39%.

The USD weakened after the report and showed broadly-based losses for the day. The NZD and AUD were two of the best performers against the backdrop of stronger global equity markets.  The NZD finished the week just under 0.6140, recovering its losses from mid-week to finish flat for the week overall. Similar story for the AUD, closing the week around 0.6660 and NZD/AUD relatively flat for the week as well around 0.92.

Both currencies showed no clear ill-effect from ongoing pressure on the yuan.  The PBoC and Japan’s MoF continued to highlight their displeasure with recent currency moves. The PBoC set a stronger CNY reference rate for the fourth day out of five and, late Friday Beijing time, the PBoC said it will adopt “comprehensive measures and stabilise expectations” and will “resolutely prevent risks of big fluctuations”. Japan’s Finance Minister Suzuki was out again trying to talk the yen up after USD/JPY cracked 145 for the first time since November. Both central banks are fighting a losing battle, with their weaker currencies entirely justified by their relatively easier monetary policy settings compared to major developed countries, despite official protestations.

USD/CNH fell towards 7.25 after the stronger fix, before rising to a fresh high for the year of 7.285, before USD weakness prevailed, and it closed the week just under 7.27. It wasn’t a day that traders felt like taking on Japan’s MoF and after its very brief excursion up through 145, USD/JPY trended lower and closed the week at 144.30.

CAD was one of the weakest performers, given its strong link to the soft USD and weaker than expected monthly GDP data offering no support, reducing the chance of the BoC hiking later this month and sending Canadian rates lower.

Slightly softer than expected Euro area CPI data was spoiled by the fact that annual core inflation still nudged up from 5.3% to 5.4%, which will keep the ECB on edge. EUR closed the week back over 1.09, while NZD/EUR rose to 0.5625.  GBP outperformed Friday night for no obvious reason, closing the week around 1.27.

Global forces sent NZ rates higher on Friday, with swap rates closing the day 7-8bps higher. NZGBs outperformed, reversing the underperformance of earlier in the week, with a flattening bias seeing the 10-year rate up only 4bps to 4.62%. NZ consumer confidence improved to 85.5 on the monthly ANZ index, taking it to the top of its range over the past year or so, but still deeply depressed in a historical context.

In the week ahead, the US July 4th holiday might see lighter trading conditions than usual early in the week. The US ISM manufacturing index is the key release tonight, which is expected to show the manufacturing sector still mired in recession. Highlights for the week include the NZ QSBO and RBA rate decision tomorrow, and later in the week the US ISM services and employment report.