Global equities ended the week on a soft note. In the US, the S&P was marginally down while the Nasdaq fell 0.7% to a 1-month low. The MSCI World Index lost ground for a second straight week and is now 4% below the highs from late July. The Shanghai Composite fell 2% after data showed a steep drop in new bank lending with ongoing stress in the housing market and deflation threatening the economic outlook in China. Above expectations US PPI data contributed to higher bond yields and modest gains for the US Dollar.
US PPI data for July raised concerns that the downshift in core prices from recent months has stalled. Core producer prices increased 0.3% m/m which was above consensus estimates of 0.2% m/m and the annual rate was unchanged from June at 2.4% y/y. The increase in core prices was almost entirely due to the services component while goods prices were close to flat. Excess capacity in the Chines manufacturing sector, which effectively sets the global price for many traded goods, points towards further pressure on goods prices ahead.
The University of Michigan consumer sentiment index was in line with expectations at 71.2. The closely watched five-to-10-year inflation expectations fell to 2.9% from 3.0%. Inflation expectations have retraced from 3.1% in May but remain at levels that are too high for the US Federal Reserve. Longer term expectations are closely related to current headline inflation, which has been falling sharply, suggesting lower expectations should follow.
US Treasuries moved higher in yield in a largely parallel shift across the curve. 2-year yields had drifted lower initially and then spiked higher following the upside surprise to PPI to end up 5bp at 4.89%. 10-year yields closed at 4.15%, 20bp above the weekly yield lows and not far off the 2023 highs reached after the upward revision to the US Treasury’s borrowing programme. The 30-year bond outperformed in the selloff with the 10s30s curve flattening back towards 10bp.
Yields were 13-16bps higher across the UK gilt curve with 10-year bonds ending the week at 4.52% following stronger than expected data. Q2 GDP increased 0.2% q/q beating consensus estimates of flat growth. Market pricing for the terminal Bank of England (BOE) base rate increased to 5.74% from 5.65% the previous day implying two further 25bps rate hikes. 10-year bund yields rose 10bps to 2.62% while JGBs ended unchanged at 0.58%.
The US Dollar made gains against G10 currencies underpinned by the firm PPI data. EUR/USD slipped below 1.10 while USD/JPY made highs near 145.00, a key psychological level and just below the upleg highs from June at 145.07. A move above this level will likely see increasing discomfort from Japanese policy makers. The British Pound outperformed following the GDP data and BOE repricing while the Norwegian Krone was the weakest G10 currency following below consensus inflation data.
NZD/USD slipped below 0.6000 on Friday evening and made marginal new lows for the year near 0.5980. The move aligned with the broader US dollar though weak NZ data also undermined sentiment. NZD/AUD was stable near 0.9210 while NZD/GBP extended its downtrend and reached the lowest level in more than 3 years near 0.4710.
NZ government bond and swap curves steepened in the local session on Friday. The front end was little changed and supported by weak manufacturing and food price data while 10-year bonds were up 5bp to 4.83%. The manufacturing PMI fell to 46.3, which is the lowest level of activity since August 2021. Food prices fell 0.5% in July which will reduce upside pressure to Q3 CPI. Estimates had been rising on account of increasing fuel prices and threatened to be well above the RBNZ’s projections from the May Monetary Policy Statement. 10-year Australian bond futures are 6bps higher in yield and 3-year are 3bps since higher the local close on Friday pointing to upside pressure for NZ yields to start the week.
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