Global equity indices were mixed overnight as markets look ahead to key US inflation data this evening. European stocks gained and Italian banks recovered some of the big falls from Tuesday after the Government partially backtracked on plans for a windfall tax. US equities are marginally lower with the S&P down 0.2%, US treasury yields little changed and the US Dollar is broadly stable.
Commodity prices remain in focus. Brent crude reached nearly $88 a barrel, which is the highest level since January and up close to 20% since the end of June on tightening supply from major producers. News of potential supply disruptions due to industrial action in Australia also sent European natural gas prices sharply higher. The S&P GSCI, a broad production-weighted commodity index, is up 13% from the lows in June.
There were further signs of deflationary pressures in China with consumer and producer prices both falling in July from a year ago. CPI fell 0.3% y/y which is the first decline since February 2021. Producer prices also fell for a 10th consecutive month contracting 4.4% y/y. China’s deflationary pressures provide a stark contrast with inflation trends of other large economies that undertook significant stimulus during the pandemic. It is a further sign of weak consumer demand after imports fell more than expected earlier this week and places additional pressure on policymakers to step up monetary and fiscal support.
In the absence of economic data for direction, US 10-year treasuries were marginally lower in yield at 4.02%. The market focus was on the auction of $38 billion 10-year notes after supply concerns last week was a contributing factor to yields pushing up to 4.20%. The auction was well supported with bid cover ratio of 2.56. The treasury curve flattened on the day with the 2-year yields increasing 5bps to 4.80%. German 10-year bunds were up 3bps to 2.5% reversing some of the previous days large rally.
In currency markets, the US Dollar was little changed on the major crosses with EUR/USD confined to a narrow trading range around 1.0980. The Norwegian Krone outperformed amongst G10 currencies supported by higher oil prices.
A stronger than expected USD/CNY fix and reported selling by Chinese state banks yesterday provided support to the AUD and NZD in the Asian session. NZD/USD reached highs up towards 0.6100 in early Europe but has since retraced back to 0.6060. The moves in NZD and AUD were closely aligned with the NZD/AUD cross stable at 0.9270.
The RBNZ’s 2- year Inflation expectations survey increased marginally to 2.83% in Q3 from 2.79% in the previous quarter. It appears the recent increase in fuel prices following the unwind of fuel subsidies is not impacting inflation expectations. The RBNZ announced that it was looking to broaden the survey coverage and expand the sample size to increase the statistical quality given the current small number of respondents.
There was limited reaction to the inflation expectations data in domestic fixed income markets with an earlier rally fading as the day progressed. NZGBs were 1-2bps lower in yield across the curve. NZ rates have widened against Australia recently and we see scope for the spread to compress from here. Australian 3 and 10-year bond futures are close to unchanged in overnight trade from the local close yesterday.
New Zealand Debt Management are tendering NZ$500 million NZGBs today split across May 2026 ($275m), May 2032 ($150m) and April 2037 ($75m). This is a step down in interest rate risk that needs to be absorbed by the market from last week where longer maturities were on offer. Inflation indexed bonds are not being tendered and haven’t been issued since May.
The US CPI report for July will be the focus this evening. Consensus estimates are 0.2% m/m for both headline and core. This would see annual CPI inflation edge up to 3.3% from 3.0%, while core annual inflation would remain at 4.8%. Core inflation was soft last month at 0.16% m/m a repeat would suggest inflation is moderating more quickly than expected.
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