US treasury yields moved lower led by the front end. Curve maintains recent steepening move. Soft consumer and producer price data in China raise concerns

U.S. equites were little changed in the absence of major economic data to provide direction as markets look ahead to key US inflation data later this week and the start of US earnings season. Commentary by Federal Reserve officials was consistent with recent messaging that interest rates will need to be raised further to get inflation back to target but had limited impact on market pricing which continues to imply a near 90% chance of a 25bps hike at the July FOMC.

US treasury yields moved lower led by the front end. 2-year yields fell 9bps matching Fridays lows at 4.86% reached following the non-farm payrolls report. 10-year yields slipped back below 4%. The curve has maintained the recent steepening trend. Last week, the 2s10s curve reached pre banking stress levels of inversion near -110bps. The spread has now retraced by over 20bps to -87 bps currently.

European bond markets were little changed.  10-year bunds were steady at 2.63%. Bank of England Governor Bailey said that the full impact of rate hikes has yet to hit the economy and that inflation is likely to drop markedly this year. Gilts yields were marginally lower with 2-year bonds falling 3bps to 5.33% while 10-year yields fell 1bps to 4.63%.

China consumer price data was flat on an annualised basis in June, which was softer than expected, and the lowest rate in more than 2 years. In addition, producer prices fell more 5.4% annualised which was fuelled by drops in international commodity prices and is the fastest contraction since late 2015. Weak price pressures have contributed to concerns that the economic recovery is weakening and suggests that further stimulus will be required by the Peoples Bank of China following modest 10bps cuts to policy rates in June.

In currency markets, the US Dollar initially strengthened against developed market currencies as the weak China inflation data weighed on risk sentiment. China sensitive assets like AUD/USD temporarily dipped towards 0.6630 aligned with falls in iron prices on concerns about slowing demand at a time when supply is elevated with vessel-tracking analysis pointing to near-record flows from Australia in June.

The US Dollar was not able to maintain earlier gains and reversed course as treasury yields declined, with the US Dollar index slipping below the post-payroll lows from last week. The Norwegian Krone was an outperformer following strong inflation data, which unexpectedly accelerated to a record level, increasing the likelihood of further tightening by the central bank.  USD/JPY continued to move lower, slipping below 142.00 having traded close to 145 a week ago.

NZD/USD started the week on the back foot falling below 0.6170 overnight aligned with falls in AUD/USD and the weak China data. The reversal in the US dollar fortunes saw NZD/USD stage a decent recovery back towards the highs near 0.6220 from last week. NZD/AUD is higher, trading back above 0.9300.

It was a calmer session to start the week in domestic rates markets yesterday after the position unwinding driven yield spike from Friday. Front end rates retraced some of Friday's move higher which looked stretched relative to domestic fundamentals. However, the belly and longer maturity yields traded to new highs for the cycle underperforming the front end and steepening the yield curve.  Australian 3-year and 10-year futures are around 6bps lower in yield since the local close yesterday. There is no domestic data of note today.

In Australia, the June NAB Business Survey is released as well as consumer confidence data. Consumer confidence has held at depressed levels through 2023 and it will be instructive to see what extent the decision by the RBA to hold rates in July has impacted sentiment. Later this evening, the larger than expected rebound in the ISM services index is likely to support an improvement in the headline NFIB small business sentiment index.