Consolidation everywhere as markets await US CPI. Various NZ economic data released continued the recent theme of an economy going backwards and inflation pressure receding

It has been a typically quiet start to the week with little newsflow to drive markets.  Global equity markets are flat, US Treasury yields are down slightly, and currency movements have been modest.  The NZD is flat, consolidating just over the 0.60 mark.

Trading conditions have been quiet, with the market focused on the US CPI release on Wednesday night.  The figures could have a significant impact on the market on any small deviation from the consensus, given the heightened sensitivity of markets to inflation and the outlook for Fed policy.

Overnight there have been no notable economic releases. The NY Fed’s survey of consumer inflation expectations showed a lift in the one-year ahead rate to 3.3% after hovering near 3% over the past four months, consistent with the lift in the University of Michigan survey on Friday. The data tend to be contemporaneously correlated with actual inflation, which recently lifted, and the data conveys little information about the future.

The US 10-year Treasury yield continues to consolidate just under the 4.5% mark, currently down slightly from Friday’s close at 4.48%.  The 2-year rate is also down slightly to 4.85%. European yields are little changed. Equity markets don’t show much movement either, with the US S&P500 flat and the Euro Stoxx 600 index unchanged (up 0.02% to be precise).

Currency markets have slightly more of a pulse, but not much more, with all movements in the majors against the USD contained to within plus or minus 0.3%. The NZD has traded about a 30pip range and is currently flat near 0.6020, consolidating the recent move to just over 0.60. The AUD is slightly higher, just over 0.66. There was little reaction to news that China would soon launch 1 trillion yuan of ultra long-dated government bonds, a step to delivering on the 2024 Budget, which included increased spending. However, this news offset the negative data release over the weekend showing weaker money and credit growth, with the first drop in monthly new aggregate social financing since 2005.

USD/JPY continues to push higher, up 0.3% to 156.20 despite JGB yields pushing up – yesterday the 2-year rate rose to a fresh 15-year high of 0.32%, the 10-year rate rose to 0.93%, just shy of the high late last year, and the 30-year rate reached 2% for the first time since 2011. The BoJ reduced the amount of bonds bought at its regular operation for the first time this year, by ¥50b compared to last month, although within the planned range set out at the start of the month. Less QE, higher bond yields and Governor Ueda’s more hawkish comments last week have seemingly done nothing over recent days stem selling pressure in the yen.

GBP is modestly higher at 1.2560, recovering last week’s loss where the market fully anticipated the more dovish BoE policy update, seeing NZD/GBP slip back below 0.48.

In the local rates market, yields opened higher on global forces, before slipping in the afternoon, encouraged by lower NZ inflation expectations (see below).  NZGB yields were down 1bp across the curve while swap rates were down 1-2bps. The various NZ economic data released continued the recent theme of an economy going backwards and inflation pressure receding. The performance of services index fell to a more than two-year low of 47.1. The RBNZ 2-year inflation expectations survey figure continued to trend lower, falling 27bps to a fresh 2½-year low of 2.33%.  The monthly pricing indicators didn’t change our forecast of Q2 CPI rising by 0.6% q/q, which would take annual inflation down to a three-year low of 3.6%.

In the day ahead, NZ card spending and migration data are released. Tonight, the key releases will be UK labour market reports and US PPI data, the latter more important this monthly cycle as it comes ahead of the US CPI report on Wednesday night. Both releases could influence the timing of BoE and Fed rate cuts this year. Fed Chair Powell will be speaking at a banking event in the Netherlands, with no associated text but there will be some Q&A.