US treasury yields marginally lower but remain close to cycle highs. US Dollar stable. But the MSCI World Index declined 2.5% during last week which is the largest fall since the US banking crisis in March

Risk sentiment remains fragile. The MSCI World Index declined 2.5% during last week which is the largest fall since the US banking crisis in March. Global equities have retraced 5% off the July highs. The S&P was flat on Friday while European and Asian equities fell amid growing concerns about the Chinese economy. The Hang Seng Index traded to fresh lows for the year below 18000 and is now down 10% in 2023, a significant underperformance relative to other major stock indices. The US Dollar ended the week little changed while US treasury yields declined but remain close to cycle highs.

Chinese policy makers have unveiled a series of reforms to boost investor confidence in its capital markets.  China’s Securities Regulatory Commission said it would cut transaction fees, extend trading hours, and encourage share buybacks to help underpin stock prices. It remains to be seen if the measures will improve investor confidence. Meanwhile, the PBOC continues to pushback against Yuan weakness. It set the daily reference rate much lower than expected compared with analysts’ estimates while authorities have reportedly asked state banks to step up support of the Yuan. The Yuan made marginal gains but remains near its weakest level since November against the US Dollar.

In Japan, core inflation which excludes both fresh food and energy increased to 4.3% from 4.2% in June equalling the multi-decade highs reached in May.  Services prices increased 2%. This is the fastest pace in 30 years, as the Bank of Japan continues to assess if the increase is sustainable before further normalising its ultra-easy monetary policy stance. JGBs yields were marginally lower across the curve with benchmark 10-year bonds down 2bp to 0.62%.

UK retail sales underperformed expectations likely linked to unseasonable weather and consumers becoming increasingly cautious.  This was the first time in 4 months that retail sales were weaker than consensus estimates and may suggest households are being impacted by higher prices and that the Bank of England’s cumulative rate hikes beginning to impact consumer behaviour. Yields on 10-year UK gilts fell 7bp to 4.67%.

In the absence of US economic data, US Treasuries were little changed with 10-year bonds down 2bp at 4.26%. The market is taking a pause after the steady move higher in yields which saw 10-year reach a peak of 4.34% during last week which equalled the multi-years highs reached in October 2022. Market pricing for near-term Fed policy is little changed and continues to imply a cumulative 9bps of tightening across the next two meetings. However, one of the drivers of higher treasury yields has been reduced cuts being priced for 2024 given the ongoing resilience in the US economy.

Currency markets were quiet into the weekly close with the US Dollar index continuing to consolidate the nearly 4% gains from the recent lows in July. EUR/USD was stable near 1.0870 while USD/JPY dipped briefly below 145 with the Yen outperforming relative amongst G10 currencies. NZD/USD dipped towards 0.5910 and threatened to retest the 2023 lows before recovering and ended the week near 0.5920.

After a steady move higher in yields during last week, NZ fixed income markets reversed course in the local session on Friday. Yields were 3bps lower in a parallel shift across the government and swap curves aligned with moves in offshore markets. Australian bond futures ended the offshore session ~2bps lower in yield from the local close on Friday.

It is a relatively quiet week ahead from an economic data perspective. Preliminary global PMIs for August will be the focus ahead of Fed Chairman Powell’s speech on the US economy at the Jackson Hole Economic Symposium. NZ Trade data for July is released today and we anticipate a July deficit of around $1b, as exports fall 4% y/y and imports drop 8% y/y.