Softer than expected US economic data increased expectations of the Fed remaining on hold in September which underpinned equities and contributed to lower treasury yields

US equities gained for the fourth consecutive day and treasury yields declined as soft GDP and labour market data added to signs the economy is slowing decreasing the likelihood of further tightening by the US Federal Reserve. The S&P made modest gains and is back above 4500. The US Dollar is weaker against European currencies. 

Inflation slowed less than expected in Germany and rose to a 3-month high in Spain ahead of the Eurozone wide CPI release this evening.  This contributed to concerns that stubborn price pressures will push the European Central Bank to hike rates again in September. German CPI rose 6.4% y/y in August compared with consensus estimates of 6.3% while inflation excluding food and energy was steady at 5.5%.

Bund yields rose following the inflation data before partially retracing and ended the session 3bps higher across the yield curve. Market pricing for the ECB now implies a greater than 50% chance of a 25bps rate hike at the September meeting and a total 23bps of tightening by the end of this year.

US economic data was generally softer than expected. Q2 GDP rose at a revised 2.1% annual rate which was below the previous estimate of 2.4%. There were also downside revisions to the GDP deflator, from 2.2% to 2.0%, and core PCE price index from 3.8% to 3.7%.

Meanwhile, the ADP Research Institute reported an increase of 177k jobs in August which was below expectations and the slowest pace in 5 months. This downside surprise is fairly modest and this series hasn’t been a reliable indicator for payrolls. However, it follows JOLTs data earlier this week showing fewer job openings and provides a further indication that the labour market is easing ahead of key payrolls data at the end of the week.

US treasuries extended the recent move lower in yields after the economic data reduced expectations for another Federal Reserve interest-rate hike. The move was led by the short end with two-year yields declining as much as 5bps points to 4.84% before partially retracing the move.  2-year yields are close to 25bps below the 5.10% peak from last week.  10-year yields are little changed at 4.12% having traded as high as 4.16% ahead of the data. Bloomberg Fixed Income Indices project a 0.12-year month end duration extension for the treasury index which may contribute to demand.

The US Dollar was generally weaker particularly against European currencies. The euro gained initially following the firmer regional inflation data before getting an additional boost from the US economic data. EUR/USD is back above 1.09, more than a big-figure higher from the lows below 1.08 last week. USD/JPY is little changed near 146.15.

NZD/USD spiked above 0.6000 in line with the weaker US Dollar, but the move proved short-lived and the kiwi retraced to be largely unchanged in the offshore session. There was similar price action in the AUD which resulted in the NZD/AUD cross remaining stable near 0.9210. The NZD underperformed on the European crosses.

The RBNZ announced yesterday than it had sold a net NZ$4 billion during July to build foreign reserves noting also that it wasn’t an intervention. An updated FX reserves framework was published in January which outlined that an increase in reserves was required. Despite the transaction, the NZD outperformed within the dollar bloc currencies and on the major cross rates in July.

NZ fixed income markets moved lower in yield in the local session yesterday taking direction from offshore moves in the absence of domestic data. 10-year government bonds fell 6bps to 4.94%. The NZ market outperformed relative to Australia despite a downside surprise to July inflation data. Australian 3 and 10-year bond futures are about 3bp lower in yield terms since the local close yesterday.

New Zealand Debt Management is tendering NZ$500 million of NZGBs today split across 15 May 2028 ($225m), 15 May 2031 ($175m) and 15 May 2041 ($100m).

The domestic focus on the day ahead will be the ANZ Business Outlook.  This survey has indicated resilience recently which contrasts with other measures like the NZIER QSBO. It is a busy international economic calendar. In the US, the core PCE deflator is expected to print 0.2% m/m for the second consecutive month. The focus in Europe will be preliminary CPI data for August.