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US equities are little changed while the US Dollar is marginally higher along with US Treasury yields. Stocks fell in Asia reflecting ongoing concerns about the Chinese economy and the growing debt crisis in the property sector. The benchmark CSI 300 dropped 0.7% and the Hang Seng fell 1.4% to levels just above the lows for 2023.
News that Zhongrong International Trust, one of China’s biggest shadow banks, has not made payments on several investment products underscore how the challenges in the property sector are spreading into the financial industry. There is growing concern about China’s recovery following a series of weak economic reports. Investors are looking for more aggressive easing by policy makers as the recent incremental measures haven’t been sufficient to restore confidence.
UK annual inflation fell to 6.8% in July from 7.8% in June driven by lower gas and electricity prices. Core inflation was marginally higher than expected and was unchanged at 6.9% from the previous month. Notably, services inflation accelerated to 7.4% and will be a particular focus for the Bank of England (BOE). The market is pricing a further 79bps of tightening, an increase of ~25bp over this week following stronger than expected wages growth and the CPI data. UK gilt yields moved higher across the curve. 2-year gilt yields closed up 7bps at 5.16% while 10-year yields increased 6bps to 4.64%.
In the US, industrial production rose 1.0% m/m in July, well above the consensus estimates of 0.3%. The increase in manufacturing was largely attributable to auto production. Ex autos, output increased 0.1% after 2 consecutive months of declines. Meanwhile housing starts and building permit data was close to consensus estimates.
The FOMC minutes for the July meeting outlined that most participants continue to see significant upside risks to inflation which could require further tightening of monetary policy. The minutes also indicated that the data over coming months would help clarify the extent at which the disinflation process was continuing. There was little change to market pricing for the Fed funds track with 10bps of additional hikes priced over the next two meetings.
US Treasuries yields moved lower initially before reversing higher. The curve is marginally steeper with 10-year yields up 4bp to 4.25% and just below the high point for the year.
In currency markets, the US Dollar is marginally stronger against the majors. After the ~3.5% rebound from the July lows, the US Dollar index is now testing the 200-day moving average. USD/JPY made fresh highs for 2023 above 146.00 which are levels where Japanese authorities intervened to support the Yen last year. The British Pound outperformed amongst G10 currencies following the firming in BOE rate expectation after the inflation data.
NZD/USD gained immediately following the RBNZ monetary policy statement yesterday and extended up towards 0.5990 in offshore trade before fading back to 0.5950. NZD/AUD was little changed at 0.9240 while NZD/GBP extended recent losses towards 0.4665.
The RBNZ left rates unchanged at 5.5% at the August Monetary Policy Statement. It was the second consecutive meeting the Official Cash Rate was left on hold and was unanimously expected by economists. The Monetary Policy Committee remains confident that with policy remaining at restrictive levels for some time, inflation will return to its 1-3% target band. In a modest hawkish tilt, the RBNZ increased its peak OCR to 5.59% in June 2024, up from 5.5% in the May MPS. However, in the accompanying press conference Governor Orr noted that the increase was model driven and there was not a signal for the next rate adjustment.
NZ fixed income markets ended little changed in the local session yesterday. Yields were flat to 1bp higher across the government and swap curves. Yields had drifted modestly lower initially before rebounding following the RBNZ MPS. Australian 3 and 10-year bond futures are close to unchanged in overnight trade since the local close yesterday.
New Zealand debt Management (NZDM) is tendering NZ$500 million of NZGBs today split across 15 May 2029 ($275m), 15 May 2034 ($150m) and 15 April 2041 ($75m). Non-resident holdings of NZGBs increased NZ$2.2 billion in July with tap syndication of the April 2033s providing a boost. Total holdings rose to a record NZ$73.8 billion having increased steadily over the past year.
NZ Q2 PPI and Australian labour market data are released today. Jobs growth in Australia is expected to slow to 15k from its recent monthly trend near 40k and unemployment is projected to increase to 3.6%.
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