![Chart](/sites/default/files/2023-05/nzd-faltering-488337_m.jpg)
The ISM US services sector survey was stronger than expected which underpinned expectations the US Federal Reserve will keep interest rates higher for longer. Treasury yields increased supporting the US Dollar while equities retreated with the S&P falling 0.8%. Euro Stoxx ended the day 0.7% lower marking its sixth successive day of declines and is testing the base of the trading range near 4200.
The August ISM services index increased to 54.5 from 52.7, easily beating consensus estimates of 52.5 and underscoring the resilience in the US economy. This takes the index to the highest level since February. Key subcomponent indices covering employment, new orders and prices paid all rose strongly though the employment gauge has overstated job growth in recent months.
Market expectations for the peak Fed funds rate firmed marginally. Although pricing for the September FOMC overwhelmingly favours a pause, the chance of a 25bp hike at the November meeting is now above 50%.
German factory orders fell 11.7% in July raising further concerns about the manufacturing sector. However, the drop reflected the impact of a large order in the aerospace sector that boosted June’s numbers. After stripping out the impact of large-scale items, industrial orders rose 0.3% in the month.
ECB Governing Council member Knot said interest-rate markets are maybe underestimating the likelihood of a September hike and that it would be a close call. Knot’s comments were made just ahead of the week-long quiet period before the upcoming monetary policy meeting.
Market pricing now sees a ~30% chance of a 25bp hike up slightly from the previous day. Front end German bund yields moved higher following Knot’s comments and ended up 9bps to 3.1% while 10-year bund yields increased 4bps to 4.65%.
As expected, the Bank of Canada held rates steady at 5.0%, following two increases in June and July. In its decision to hold rates, the bank pointed to recent evidence that excess demand in the economy is easing and to the lagged effects of monetary policy. Policy makers remain concerned about
the persistence of underlying inflationary pressures and are ‘prepared to increase the policy rate further if needed.’
US treasuries extended the recent move higher in yields. The move was led by the front end with 2-year yields increasing 5bps and moving back above 5% following the ISM services data. Longer maturities lagged the move with 10-year yields up 3bp and the 30-year bonds down 1bp. 10-year yields have rebounded more than 20bps off the lows from late last week and are moving back towards the August highs.
The US Dollar initially rallied following the ISM data but slipped back to be little changed and is consolidating at the highest levels since March after strong gains in recent sessions. EUR/USD was underpinned by Knot’s comments trading up towards 1.0750 before retracing aligned with the Dollar bounce post data. GBP/USD underperformed and fell to a 3-month low following comments by Bank of England governor Andrew Bailey that the UK economy is now ‘much nearer the top of the cycle’.
NZD/USD retested the YTD low near 0.5860 in the local session yesterday and again overnight with price action driven by broad US Dollar moves. NZD underperformed relative to the AUD with NZD/AUD slipping trading below 0.9200.
Asian policy makers have been pushing back against currency weakness. In Japan, said Masato Kanda, vice finance minister for international affairs said speculative moves could be seen in the foreign exchange market and warned that Tokyo was prepared to act if needed. Meanwhile the PBOC set the fix with the largest deviation relative to analyst expectations since the survey began in 2018. The PBOC has undertaken a range of measures aimed at supporting the yuan set against the backdrop of growing headwinds for the Chinese economy.
NZ fixed income markets moved higher in yield in the local session yesterday taking direction from offshore moves in the absence of domestic data. 10-year government bond yields increased 3bp to 5.01%, up from 4.85% at the start of the week. Bonds cheapened relative to swaps ahead of the weekly bond tender today. Australian 3 and 10-year bond futures are little changed since the local close yesterday.
New Zealand Debt Management is tendering NZ$500 million of NZGBs today split across 15 May 2030 ($225m), 15 May 2032 ($175m) and 15 April 2037 ($100m). In other primary market developments, New Zealand Local Government Funding Agency Limited (LGFA) has launched taps of the 15 April 2025 and 15 May 2030 maturities, the latter a sustainable finance bond. Books will close at 11:30 (NZT) today.
The domestic focus today will be further ‘partial’ Q2 GDP indicators ahead of the full release on 21 September. After the RBA left rates on hold earlier in the week, Governor Lowe may provide further details on the bank’s thinking in his final speech in the role.
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