Modest risk-off tone in the air; US equities weaker, US Treasury yields lower, credit spreads wider and oil prices weaker. NZD and AUD the best performers. Rates rise post-CPI

There is a modest risk-off tone in the air, with US equities weaker, US Treasury yields lower, credit spreads wider and oil prices weaker. Currency movements haven’t been affected by the risk-off move, with the USD broadly weaker overnight. The NZD and AUD have been the best performers over the past 24 hours, with higher rates post the NZ CPI supporting a move for the NZD above 0.59, which has been sustained overnight.

Newsflow has been minimal overnight.  Risk appetite is a bit weaker. US equities opened on a positive note, before a steady decline took the S&P500 down as much as 0.9%, where some support was met, and the index is now down only 0.4%.

US Treasury yields steadily fell from the Asia open and the US 10-year rate is down 8bps on the day to 4.58% while the 2-year rate is down 6bps to 4.93%, both retracing from the 2024 highs reached during the previous session.  A positive sign for the Treasuries market was that the 20-year note auction was expected to tail, but even with rates lower ahead of the event, the Treasury managed to sell $13b of the notes nearly 3bps below prevailing rates.

Oil prices are weaker, not helped by the risk off tone and the weekly US EIA report showing crude inventories rising to their highest level since June.  Brent crude is down nearly 3% to USD87.50 per barrel.

In the UK, annual headline and core CPI inflation both fell, to 3.2% and 4.2% respectively, although both figures were a tick higher than expected. Somewhat disappointingly, services inflation was barely lower and was 2-ticks higher than expected at 6.0% y/y. Speaking after the release, BoE Governor Bailey said the UK is still in the midst of a “pronounced period” of disinflation and the UK remained “pretty much on track” compared with the BoE’s February inflation forecast, adding that he expected a further sharp drop to price growth in next month’s numbers, noting the sharp reduction in household energy costs. He reiterated that each policy meeting is “in play” as policymakers judge progress towards the BoE’s 2 per cent target each time it meets.

Market reaction was temporary, with global forces taking over.  The first full UK rate cut isn’t priced until September, although August remains well priced at 21bps, while almost two full cuts are priced this year.

Currency markets have been immune to the whiff of weaker risk appetite, with the USD broadly weaker after its recent strong run. EUR has been the strongest performer overnight, up 0.4% to 1.0670. Most of the run-up in the euro was ahead of ECB President Lagarde speaking in Washington, but she said she was clearly seeing signs of a euro area recovery. She said the Bank was looking at the exchange rate very carefully and the impact of the euro on inflation would be taken into account.

Commodity currencies have been well supported overnight. Yesterday, NZ CPI inflation data were in line with expectations, up 0.6% q/q and 4.0% y/y, the lowest annual increase in nearly three years. Core inflation figures were mixed, with some showing a stalling of the recent downward trend, but the average of six measures we look at showed annual inflation falling to a 2½-year low of 4.2%.  A snag was that services and non-tradeables inflation remained too high for comfort. The market took notice of this, putting some upward pressure on NZ rates and the NZD, seeing nothing in the data that would have the RBNZ scurrying to bring forward its rate cut agenda.

NZGB yields closed the session up 6-7bps across the curve., while swap rates were up 5-6bps. Market pricing for rate cuts this year was pared by 9bps to just a cumulative 33bps, or just over one full rate cut.

The data supported a move in the NZD to back over 0.59 and there has been a further small push higher overnight to 0.5920. There was some spillover into the AUD, which pushed up to 0.6440 this morning. NZD/AUD broke up through 0.92, although trades just below the figure this morning. NZD cross rates are all modestly higher for the day.

Finally, the US political season is gearing up.  Anti-China rhetoric is popular and President Biden proposing to raise tariffs on steel and aluminium imports from China.  A senior official noted that the higher tariffs would only affect 0.6% of US demand for steel, so there was little market reaction.  But the WSJ notes Biden’s move comes as the administration is studying raising tariffs on a range of Chinese exports to the US including electric vehicles, batteries and solar products.

In the day ahead, Australia’s employment report is expected to show a pullback following the blockbuster February report, with modest employment growth of 10k, driving the unemployment rate up 2-ticks to 3.9%.  Only second tier US data are released tonight including the Philly Fed’s business survey, jobless claims and existing home sales data.

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